What the GOP should be saying (Part II)
A Baltimore Business Journal report from July 2008 indicates that Maryland slipped two places on Forbes’ list of best states to do business. The state ranked 40th in the country for business costs, which include the price of energy, labor and taxes to employ workers in Maryland.
And a Business Week report published October 3rd, indicates that Maryland faces a projected 7.7% budget gap, roughly $1.1 billion dollars, which places the state in the top ten states unable to pay for themselves. According to the report, which cites data released at the end of September from the Center on Budget and Policy Priorities, Maryland may well join California in going to Washington for a bailout to help pay salaries for firemen, teachers and other state employees.
We are living in difficult economic times.
But living in Maryland under the current administration is going to become more difficult. Just look at the last two years to see the trends begin.
Since Martin O’Malley took office, nearly 8,000 jobs have been lost. The state legislature passed a $1.4 billion dollar tax hike that failed to produce expected revenues when the economy and housing market took a nose dive.
And tax hikes on certain consumer goods, like cigarettes for example, increased so much that consumers drive across state lines to purchase them in quantity, in direct violation of the state law that permits state residents to carry no more than two packs into Maryland from other states.
New taxes are unquestionably on the horizon, both at the state and federal levels, to try to cope with the current economic turmoil sweeping across the world.
But raising taxes right now is precisely the wrong approach to resolving the fiscal problems facing government at all levels.
And that is what the GOP should be screaming.
The Democrats do not seem to realize that people who have resources take extraordinary means to protect their assets in times of economic turmoil.
And one means available is to withdraw their capital entirely from the system.
On a recent Fox News broadcast noted broker and CEO Muriel Siebert was asked if she was seeing this trend among her clients of her New York brokerage firm. She told the story of one client who pulled $33 million in assets, promising to return them when the market calmed down.
Another means is to relocate businesses that are not geographically dependent to areas where business costs are significantly smaller, like Delaware. Many businesses are relocating to international locations taking both jobs and capital out of the US economy.
And Wall Street is also a part of this growing trend.
Earlier this month, the New York Times reported that the
big investment banks are moving some key employees to increasingly influential hubs of finance in Asia, the Middle East, Europe and Latin America, regions where the banks had already been building up business to tap rising growth potential. This trend is happening alongside another that is funneling jobs from traditional financial centers like New York and London. Because of price pressure, jobs lower down the corporate ladder are moving overseas, especially India.
For many bankers, moving abroad is an experience they had always wanted. For the banks, the relocations are a way to retain skilled workers who might otherwise be caught in waves of layoffs that have already claimed 80,000 finance jobs globally.
“Banks like Morgan Stanley and Merrill Lynch are playing musical chairs,” said Gustavo G. Dolfino, president of the WhiteRock Group, a finance hiring firm. “Why are they doing this? They want to keep the talent.”
In order for the US, and Maryland for that matter, to attract and to retain quality businesses and employees, there must be incentives to attract new businesses to invest capital and human resources.
According to the Tax Foundation
America’s political leadership is finally waking up to the fact that the tax rates businesses face in the U.S. are way out of step with our major economic competitors. Last year, for example, Ways and Means Chairman Charles Rangel proposed cutting the federal corporate tax rate from 35 percent to 30.5 percent. While a 5 percentage point cut in the federal corporate tax rate may sound significant, it may not be sufficient to meaningfully improve the competitiveness of the United States.
Currently, the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, second among OECD countries to Japan’s combined rate of 39.5 percent.1 Lowering the federal rate to 30.5 percent would only lower the U.S.’s ranking to fifth highest among industrialized countries.
More recently, other members of Congress—including Sen. John McCain and Congressman Eric Cantor—have released proposals to cut the corporate rate even deeper to 25 percent. While this lower rate would improve the U.S.’s international ranking and competitiveness, that improvement would be mitigated by the high corporate tax rates imposed by many states.
Many states impose state corporate income taxes at rates above the national average of 6.6 percent. Iowa, for example, imposes the highest corporate tax rate of 12 percent, followed by Pennsylvania’s 9.99 percent rate and Minnesota’s 9.8 percent rate. When added to the federal rate, these states tax their businesses at rates far in excess of all other OECD countries…
The emerging low-tax countries in Europe and Asia benefit from the U.S. remaining a high-tax country.
In just the past two months, at least six countries have announced plans to cut their corporate tax rates: Canada, Hong Kong, Korea, South Africa, Spain and Taiwan. In an interview in the Korea Times, Choi Kyung-hwan, a member of the new Administration’s Presidential Transition Committee, said, “The corporate income tax reduction is not a matter of choice, but a matter of life and death for Korea in an increasingly globalized business environment….”
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A growing body of academic research indicates that foreign direct investment (FDI) can be quite sensitive to the corporate tax rates imposed by a state or country. One recent study of the effects of corporate income taxes on the location of foreign direct investment (FDI) in the United States found a strong relationship between state corporate tax rates and FDI—for every 1 percent increase in a state’s corporate tax rate FDI can be expected to fall by 1 percent.
Currently, Maryland taxes its corporations at 8.3%, but the state could be a trend setter if it slashed its corporate tax rate and aggressively marketed itself as a business-friendly environment for foreign and domestic investors who might otherwise view Delaware as a more attractive business climate.
Since the recent survey by the Kauffman Foundation found the top threat to “your own economic situation” is higher taxes, shouldn’t we expect the same threat at the national and state levels?
The GOP, across the nation and in Maryland, should unite with firm resolve to market itself as the party of fiscal solvency, and focus on solving the current financial crisis through solid, free market principles and tax cuts. We need to keep our human capital, our jobs and our dollars right here in America…and in Maryland.
Forget the bailouts.
What the GOP should be saying to people is this:
It’s your money: You earned it.
The GOP wants you to have it, and the GOP is going to help you keep it.
