Recently, James Hohman and I argued that Maryland should stop using special tax incentives to encourage specific businesses to enter or expand in Maryland, and instead adopt broad business tax reform that would help all Maryland businesses. A new audit report of the Maryland Department of Commerce reinforces our argument.     

The department is responsible for overseeing the state’s tax incentive programs and ensuring that they yield the promised job creation. The new report presents the results of an audit of those programs for the period between July 2014 and December 2017. Chief among those findings is that the agency appears not to have provided sufficient oversight for those programs.   

For example, Maryland government may have issued up to $5.5 millions in tax credits for a project that wasn’t eligible for the One Maryland Tax Credit program. Auditors also found that the Department of Commerce didn’t verify the employment and ownership information for five Biotechnology Incentive Program recipients before handing out $8 million in credits.

These findings should not come as a surprise. A comprehensive study by General Assembly legislative analysts, had already recommended terminating the Biotechnology Investment Tax Credit. The study found no evidence that the credit has led to increased biotechnology investment in Maryland.

Rather than criticizing the Department of Commerce for lacking oversight, it is time for Maryland lawmakers to question the design and nature of the state’s tax incentive programs.

For instance, Del. Julie Palakovich Carr (D – Montgomery County) is planning to propose a bill next year that seeks to eliminate some of the state’s tax credit programs that have been controversial.

Terminating expensive programs that do not work is the right first step for Maryland government to take to reduce the state’s fiscal burden. It is a way to ensure that taxpayer dollars be used more efficiently and productively. However, this is not all that lawmakers should do.

Legislation to eliminate ineffective tax incentive programs must be accompanied by measures to ensure that businesses that move to Maryland are not penalized by the state’s high tax burden. "Maryland has some of the highest taxes in the country," acknowledged Del. Nic Kipke, the minority leader in the House. "Before we make a decision to jump into sunsetting these tax credits, we need to make sure we have a thoughtful process that does not disrupt the growth of this emerging industry and do harm to our economy."  

If Maryland successfully manages to reduce the state’s corporate income tax rate of 8.25 percent to 7 percent, or even better, match Virginia’s rate of 6 percent, the state would not need to rely on targeted tax breaks to attract businesses and jobs. That said, passing such measures have been historically difficult. Over the years, various legislators have proposed bills that would improve the state’s business climate, but few have become law.

Some legislators believe that the Commerce Department’s failure to properly oversee the tax incentive program is due to understaffing. If Maryland can attract jobs to the state with a more competitive tax rate and eliminate the tax incentive programs, this would make it unnecessary to have staffers monitor the special tax programs. The administrative costs associated with maintaining the tax incentive programs would be freed up for more essential services.

From both budgetary and economic competitiveness perspectives, eliminating ineffective tax incentive programs and replacing them with a more competitive overall tax rate is the right policy response to the findings of the Commerce Department audit. Maryland legislators cannot afford to wait for another disillusioning report to take the actions necessary to ensure that the state is on the right path to higher economic growth.