Ben Wilterdink Testimony on Maryland Tax Reform

On February 18, 2014, Ben Wilterdink was asked to testify in front of the Maryland House Ways and Means committee in regards to House Bills 326, 328, and 330. His written remarks can be found below.

House Bill 326

Madam Chair, members of the committee, thank you for allowing me the opportunity to testify before you today and provide non-partisan research and analysis on House Bill 326. I currently serve as a Research Analyst for the Center for State Fiscal Reform at the American Legislative Exchange Council, the nation’s largest, non-partisan, individual membership organization of state legislators that share a common commitment to the principles of limited government, free markets, and federalism.

As the economic recovery from the great recession continues, economic growth is one of the most important goals that states can work towards. The vast majority of economic literature finds a strong relationship to lower taxes rates and higher rates of economic growth, with corporate income taxes and personal income taxes being the most harmful to economic growth. In a recent literature review on this topic, William McBride, Chief Economist for the non-partisan Tax Foundation, finds that of 26 peer-reviewed academic studies since 1983, only 3 fail to find a negative effect on economic growth from taxes [1]. ALEC’s annual economic competiveness index, Rich States, Poor States, rates state economic competiveness on 15 equally weighted policy variables. One variable is the top marginal personal income tax rate. In the latest edition of the study, Maryland ranked 44th in the nation for most competitive personal income tax rate [2].

A major theme of the Rich States, Poor States economic competiveness index is the recognition that states do not enact (or fail to enact) policies in a vacuum. Maryland is in competition with the rest of the states and the world to attract capital, investment, and jobs. Reducing the personal income tax rate would help Maryland in becoming more economically competitive. From 2001 to 2011, the 9 states that do not levy a personal income tax outperformed the 9 states with the highest personal income taxes (of which Maryland is one) in total economic growth, population growth, employment growth, and even revenue growth [3]. For example, the no income tax states grew their gross state product by 63.5 percent while their high tax counterparts only grew by 45.2 percent. Furthermore, the 9 no income tax states grew employment by 12.7 percent, more than double the 4.9 percent growth rate experienced by the 9 highest income tax states [4].

People and capital are increasingly mobile in our modern era. People vote with their feet and take their incomes with them. Maryland has experienced this firsthand; according to IRS income migration data, from 1992 to 2010, Maryland has lost more than $7 billion of wealth to other states in the form of domestic migration [5]. Over half of that amount has gone to no-income-tax Florida. Reducing the burden that taxes place on working, saving, and investing is an important step that Maryland can take on the path to increased economic growth.

Maryland cannot afford to stand still when it comes to pursuing economic growth. Today, Maryland has an opportunity to become more economically competitive and improve the climate for citizens and businesses alike. Thank you again for the opportunity to provide the findings of our non-partisan research and analysis relevant to HB 326.

House Bill 328

Madam Chair, members of the committee, thank you for allowing me the opportunity to testify before you today and provide non-partisan research and analysis on House Bill 328. I currently serve as a Research Analyst for the Center for State Fiscal Reform at the American Legislative Exchange Council, the nation’s largest, non-partisan, individual membership organization of state legislators that share a common commitment to the principles of limited government, free markets, and federalism.

Maintaining a stable level of services and having a predictable tax burden are cornerstones of good governance.  While personal and corporate income taxes are the least stable sources of state revenue, those with more progressivity are even less stable. The periods of economic growth and decline of the economy are magnified in progressive income tax structures. Revenues increase more than the real increase in incomes and revenues decrease more than the real decrease in incomes. This results in a highly volatile revenue source that makes budgeting, revenue forecasting, and baseline creation much more difficult than in a personal income tax system that only utilizes a single flat rate [6]. Predictability is one of the essential keys to good tax policy. A flat rate income tax not only makes predicting potential future tax liabilities easier for taxpayers, but it also allows government officials to more accurately predict growth or decline in income tax revenue.

Furthermore, a flat tax would greatly reduce the compliance costs associated with filing tax returns. Moving from a complex 8 bracket system to a single rate would greatly simplify calculating taxes owed. When paying taxes becomes easier there is less of an incentive to evade paying them. Paying an accountant or tax preparer becomes far less practical when the burden of compliance is reduced [7].

Economic studies show that creating a single flat rate for the income tax also would also boost economic growth. There suddenly becomes less of an incentive to migrate to another, lower tax jurisdiction with a rising income [8]. While competition will remain between Maryland and other low tax states, the incentive to leave Maryland will not increase as one’s income rises. Another reason flat taxes are associated with higher rates of economic growth is because while the disincentive to work still exists,  it does not increase. While all personal income taxes are a disincentive to work at some level, under a progressive tax structure that disincentive increases along with income. With a flat tax however, the work disincentive remains constant and therefore doesn’t penalize more work or more income growth [9].

For these reasons, less progressive income tax structures tend to result in higher rates of overall economic growth. In fact, income tax progressivity is one of 15 equally weighed economic variables examined in Rich States, Poor States, the ALEC-Laffer Economic Competitiveness Guide. This annual study examines policy variables most related to economic growth and rates the states’ relative outlook for economic growth. The more progressive an income tax structure, the lower their economic outlook ranking.

Overall, based on our non-partisan research and analysis, HB 328 doesn’t increase the tax burden on any income group but actually decreases the tax burden on all income groups, greatly decreases tax compliance costs, reduces the incentive to evade the tax burden, and provides an opportunity to increase the amount the citizens of Maryland can earn, save, and invest to grow the economy. Thank you again for allowing me the opportunity to testify before you today.

House Bill 330

Madam Chair, members of the committee, thank you for allowing me the opportunity to testify before you today and provide non-partisan research and analysis on House Bill 330. I currently serve as a Research Analyst for the Center for State Fiscal Reform at the American Legislative Exchange Council, the nation’s largest, non-partisan, individual membership organization of state legislators that share a common commitment to the principles of limited government, free markets, and federalism.

Mainstream economists and businesses understand that corporate income taxes serve as a barrier to economic growth. In fact, although all taxes have a negative effect on economic growth, the consensus of the research shows that corporate and personal income taxes negatively affect economic growth the most [10]. ALEC’s annual economic competiveness index, Rich States, Poor States, rates state economic competiveness on 15 equally weighted policy variables. One variable is the top marginal corporate income tax rate. In the latest edition of the study, Maryland ranked 35th in the nation for most competitive corporate income tax rate [11].

A major theme of the Rich States, Poor States economic competiveness index is the recognition that states do not enact (or fail to enact) policies in a vacuum. Maryland is in competition with the rest of the states and the world to attract capital, investment, and jobs. Reducing the corporate income tax rate would help Maryland in becoming more economically competitive. From 2001 to 2010, the 8 states with the lowest corporate income tax rates (CIT) outperformed the 8 states with the highest corporate tax in gross state product growth, employment growth, population growth, and even revenue [12]. For example, the 8 states with the lowest CIT rates experienced nearly a 5 percent rate in job growth, while the 8 states with the higher CIT rates experienced a job growth rate of less than 1 percent.  Furthermore, the 8 states with the lowest CIT rates had a population growth rate of nearly 12 percent, almost double the population growth in the 8 states with the highest CIT rate, which was just more than 6 percent [13]. Taxes matter, and people vote with their feet to the states with the best opportunities for jobs and growth. Maryland is in competition for people, jobs, and investment with states like Nevada, Wyoming, and South Dakota; all of which don’t levy a corporate income tax at all.

Another factor that must be considered when discussing corporate income taxes is the distinction between incidence of taxation and burden of taxation. While corporations remit corporate income taxes, the burden of those taxes is distributed between consumers (in higher priced goods and services), shareholders (in less value), and employees (through decreased pay and/or benefits). For example, according to a study from the Department of Treasury, a 1 percent increase in corporate tax rates is associated with almost a 1 percent drop in wages. Furthermore, the study also estimates at least 40 percent of the corporate income tax is passed on to workers in the form of lower wages [14]. While economists have not reached a consensus on exactly what percentage of the economic burden of the corporate income tax falls on whom, policymakers should bear in mind that the tax burdens consumers and workers as well.

Maryland has an opportunity to become more economically competitive, boost economic growth, and reduce the tax burden on businesses and citizens both. Thank you again for allowing me the opportunity to provide the findings of our non-partisan research and analysis relevant to HB 330.

 

Footnotes


[1] McBride, William. “What is Evidence on Taxes and Growth?” Tax  Foundation.  December 18, 2012. http://taxfoundation.org/article/what-evidence-taxes-and-growth

[2] Laffer, Arthur, Moore, Stephen, and Williams, Jonathan. Rich States, Poor States 6th Ed. American Legislative Exchange Council. 2013.

[3] Ibid.

[4] Ibid.

[5] IRS Domestic Migration Data and U.S. Census Data via http://www.howmoneywalks.com/irs-tax-migration/

[6] Laffer, Arthur, Moore, Stephen, and Williams, Jonathan. Rich States, Poor States 6th Ed. American Legislative Exchange Council. 2013.

[7] Ibid.

[8] Rhee, Tae-hwan. Macroeconomic Effects of Progressive Taxation. Samsung Economic Research Institute. 2012.

[9] Ibid.

[10] Arnold, Jens, Brys, Bert, Heady, Christopher, Johansson, Åsa, Schwellnus, Cyrille, & Vartia, Laura. Tax Policy For Economic Recovery and Growth, 121 Economic Journal F59-F80 (2011).

[11] Laffer, Arthur, Moore, Stephen, and Williams, Jonathan. Rich States, Poor States 6th Ed. American Legislative Exchange Council. 2013.

[12] Laffer, Arthur, Moore, Stephen, and Williams, Jonathan. Rich States, Poor States 5th Ed. American Legislative Exchange Council. 2012.

[13] Ibid

[14] Gentry, William. “A Review of the Evidence on the Incidence of the Corporate Income Tax.” Department of the Treasury. December 2007. http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota101.pdf

 

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