Climbing to the roof of a downtown Baltimore restaurant with a view of the city's skyline and inner-city neighborhoods, Gov. Martin O'Malley vowed yesterday to close corporate "loopholes" that he said allow large companies to avoid paying millions of dollars in state and local taxes each year.
"Businesses that benefit from our state's services must be willing to invest in those services with their tax dollars, so that everyone is paying their fair share," O'Malley said.
The Democratic governor said the state should close a "glaring loophole" that allows large corporations to avoid real estate recordation and transfer taxes - a levy typically equal to 2 percent of sale prices.
O'Malley climbed a ladder from the upper story of Gardel's restaurant to the roof, where he pointed to the Alex. Brown office building, which was sold last year but, because of the loophole, was not subject to transfer taxes. Philadelphia-based Resource America Inc. sold the 30-story tower last year for $120 million and avoided paying $2.4 million in city and state transfer and recordation fees.
"You know what it paid in transfer tax?" O'Malley said. "Not a single dime. If one of these houses around us had sold for $200,000, that homeowner would have paid $4,000 in the local transfer taxes. ... That's not fair, and that's not right."
Yesterday's news conference was the third this week that the governor has held to roll out more details of his blueprint to close a projected $1.7 billion shortfall in the state general fund budget that begins July 1 next year.
O'Malley has outlined plans to make the state income tax more progressive, increase the sales tax rate from 5 percent to 6 percent and extend it to more services and to reduce the state property tax rate by 3 cents per $100 of assessed value over three years.
Business groups and Republican legislators rapped the governor's business tax proposals yesterday, saying that they would make Maryland less competitive in attracting and keeping jobs.
"It's totally irresponsible for the state to go off on these spending splurges and expect the public to accept it," said Senate Minority Leader David R. Brinkley, a Frederick County Republican.
Some corporations avoid paying transfer taxes by making their real estate part of a limited liability corporation. When the time comes to sell the building, they sell the LLC instead, thus avoiding the 0.5 percent levy that the state charges on property sales. Seventeen counties and Baltimore City levy a transfer tax on real property transactions, with the city and Baltimore County imposing a 1.5 percent tax.
The General Assembly has considered bills several times in recent years to close that loophole, but they have never succeeded.
House Speaker Michael E. Busch, an Anne Arundel County Democrat, has made prohibiting that practice a priority, but Senate President Thomas V. Mike Miller, a Southern Maryland Democrat, has not previously supported it.
However, Miller said recently that he would shepherd such a bill through his chamber if it were part of a budget-balancing package that includes legalized slot machine gambling.
Groups, including the Maryland Chamber of Commerce, Maryland State Builders Association, and Maryland Association of Realtors, have opposed bills closing the loophole.
"It would make Maryland commercial real property less attractive as a business investment, and the bill has been in 12 times since 1990 and defeated 12 times because it is not a good tax policy," said Ronald W. Wineholt, the in-house lobbyist for the Maryland Chamber of Commerce.
Closing the loophole would be worth about $14 million a year for the state, making it a relatively small part of O'Malley's efforts to balance the budget. Most of the money generated by the tax would go to local governments, about $50 million a year.
But the measure could be politically important for O'Malley for two reasons: Not only does it contribute to the governor's effort to pitch his fiscal package as a plan to make state taxes fairer, but it also could help ease the pain of local leaders who could see their finances hurt by the state's budget-balancing.
O'Malley has said that he hopes to avoid making cuts in state aid to local governments - money that helps support schools, public safety and other popular programs but that has often been subject to reductions in tough fiscal times. But Miller, Busch and others have said local governments will have to feel some of the pain. Giving local governments new revenue from the transfer tax could ease that burden.
Anne Arundel County Executive John R. Leopold, a Republican, said support for closing the corporate tax loopholes crosses party lines. He said closing the transfer tax loophole in particular would mean millions for Anne Arundel County that could prove crucial in its ability to maintain public services.
"My concern, of course, is that part of the budget-reduction package will ultimately include reductions in state aid to counties," Leopold said. "Any monies we can secure to counterbalance those cuts are welcome."
Loophole and tax law
Gov. Martin O'Malley called yesterday for closing corporate loopholes in his third event this week on his revenue-raising plan. Highlights include:
• Closing a "loophole" - referred to as "controlling interest" - that enables some corporations to avoid recordation and transfer taxes by making their real estate part of a limited liability company. When they sell the LLC, they can avoid the 0.5 percent levy that the state charges on property sales, and additional levies that 17 counties and Baltimore City charge. Because a deed never changes hands, the transfer tax is not triggered. The O'Malley administration says the change could bring the state an additional $14 million per year, with about $50 million flowing to local governments.
• Enacting a tax law - referred to as "combined reporting" - designed to prevent large companies operating in Maryland from hiding profits in other states. Wal-Mart and other large companies have used real estate investment trusts to shift profits to states with low or no corporate taxes. If Maryland approves "combined reporting," the state would receive an additional $25 million. (by James Drew, Baltimore Sun)
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