A proposal to bring back Maryland's small businesses

Originally published in the Baltimore Business Journal

Much has been made in recent weeks about Maryland’s sputtering economy. Politicians and media are quarreling about the meaning of our 0.0 percent job growth, rising unemployment rate and ballooning budget deficits.

But there’s a more sinister threat in Maryland and around the country. It concerns the weakening of the backbone of our economy: American small business.

Mounting evidence indicates that America’s centuries-old passion for entrepreneurship is wavering. Small businesses historically create two-thirds of new private-sector jobs in America, but as of June that share had declined to just 40 percent.

Even more troubling, the rate of small business creation has waned. Thirty years ago, about 15 percent of all firms in the U.S. were startups. In 2010, that number had fallen to 8 percent. Today, it has plummeted to a paltry 2 percent.

To jump-start small business formation in Maryland, our lawmakers should consider two proposals that will strengthen the smallest of Maryland’s businesses:

Create the Opportunity Bracket. The typical small business owner has a really big idea and a really small budget. Lack of funds deters many of our best and brightest from starting a business. Maryland can lower the barrier to entry by lowering the state tax obligation for the smallest of small businesses. The Maryland Public Policy Institute proposes creating the Opportunity Bracket — a 50 percent tax deduction on the first $100,000 of business income for small business owners, including partnerships, subchapter S corporations and limited liability companies.

This proposal would not only encourage entrepreneurs to “take the leap,” but it would also free up additional capital for them to hire workers, build out office space and invest in new products and services to benefit consumers.

Lower the personal property tax. Today, small businesses must pay a personal property tax on all real property they own, creating a disincentive for small businesses to invest in new equipment, real estate and workers. This obsolete tax is particularly harmful for manufacturers, who provide many of the middle-class jobs our politicians claim to want. Even a small, five-person office that doesn’t need heavy equipment must pay an annual property tax on office chairs, phones and other everyday items.

To invest in economic growth, lawmakers could exempt from personal property taxes any business that is created during that tax year or that relocates to Maryland. The state’s Department of Legislative Services estimates that the average decline in tax revenue would be a mere $1,500 per small business.

An even more ambitious proposal would be to permanently exempt small businesses from the personal property tax if they have less than $100,000 in revenue. Imagine the ripple effect as manufacturers invest in new equipment, professional services firms upgrade office furniture, restaurants invest in cleaner, safer kitchens and hardware stores build out inventory.

To offset the revenue loss for local governments, state lawmakers can start repaying the $1 billion in transportation funding they have siphoned away from local governments over the past decade. They can also dedicate a portion of the state’s use tax to local governments, a proposal that the governor of Michigan recently signed into law with bipartisan support.

Politicians can debate the merits of these proposals, but one fact is indisputable: There is no economic growth without small business growth. It’s time Maryland’s policy makers take actions that reflect that reality.

Christopher Summers is the president of the Maryland Public Policy Institute, a nonpartisan public policy research and education organization that focuses on state policy issues. He can be reached at csummers@mdpolicy.org.