TAX NEWS - JUNE 2010

Maryland Tax: To help biz, Ehrlich should cut personal income tax

I understand why Republican gubernatorial candidate Bob Ehrlich is promising to cut Maryland's sales tax and corporate income tax. It's good politics. Gov. O'Malley's increase in the sales tax from 5 percent to 6 percent affects every Marylander, although I doubt many notice it until Ehrlich reminds them. Cutting the corporate income tax is a symbolic sop to business. Corporate income taxes don't raise much money. Cutting the rate wouldn't cost the state treasury very much, and whoever is governor a year from now will have big budget headaches.

But if Ehrlich really wanted to help small business, as he says he does, he would campaign to cut the individual income tax. Even after Maryland's "millionaire tax" surcharge expires this year, the state will have one of the highest personal income taxes in the country when you count the state rate combined with the local "piggyback" tax.

Why does the personal rate matter to business? Most small businesses are partnerships, S corporations or limited liability companies that pay tax at the personal rate of their owners. The tax is owed whether or not any money is taken out in the form of dividends. Numerous small-biz owners retain earnings inside the company to invest in growth, and yet they have to pay high taxes on the earnings out of personal funds.

The individual income tax is a much bigger challenge for Maryland's ability to attract and keep small businesses than the sales tax. The sales tax is basically irrelevant to small business.