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Md. commission: No combined tax reporting in 2011

ANNAPOLIS — A state commission recommended Tuesday that lawmakers not implement combined reporting for corporate taxes in 2011 but left the door open for the years beyond.

Combined reporting, one of the top issues debated by the Business Tax Reform Commission over the last two years, would require businesses to take into account out-of-state income and that of subsidiaries when calculating their Maryland tax obligations.

“Down the road we could do it. We’re getting such negative economic news, we’re in a holding pattern,” said Del. Sheila E. Hixson, chairwoman of the Ways and Means Committee, which handles tax legislation.

The House of Delegates approved combined reporting in 2007, but after the measure was stonewalled by the Senate, the two chambers compromised by forming the tax commission.

Business advocates have fought hard against the measure in recent years, arguing that it unfairly creates winners and losers in the business community, giving breaks to some sectors while piling the burden on others.

And, as a recent report from the state comptroller’s office showed, it would cause greater swings in the state’s tax receipts.

“We have a tax code that is already volatile … and [combined reporting] would exacerbate that,” said House Majority Leader Kumar P. Barve, the Montgomery County Democrat who made the motion to recommend that the General Assembly stay away from combined reporting next year.

According to the report, combined reporting would have boosted tax revenues by up to $136 million in 2007 but would have cost the state as much as $60 million the year after.

In both years, utility companies would have paid about $25 million less in taxes, while retail and manufacturing firms would have paid more. Banks and other financial institutions would have paid more in good economic years, and less in down years.

“It’s not at all certain to me that the right people [would be] winning and losing,” Barve said.

Supporters argued that combined reporting would make the state’s tax system more fair by stopping large corporations from shuffling revenue between subsidiaries in Maryland and other states to hide profits in low-tax states.

“It prevents companies from gaming the system,” said Michael P. Ettlinger, a gubernatorial appointee to the commission. “It’s not like it would put Maryland out of the mainstream. There are a large number of states that do this.”

Commissioners voted 13-4 in favor of recommending no combined reporting in 2011, with Barve, Hixson and Department of Business and Economic Development Secretary Christian Johansson among those in favor.

But, the decision does not mean combined reporting won’t rear its head in 2011.

“There’s no question” it will, said Sen. Richard S. Madaleno Jr., D-Montgomery and a member of the commission. Madaleno said he will co-sponsor combined reporting legislation in next’s session.

Patrick Donoho, president of the Maryland Retailers Association, said the state’s fiscal straits will make talk of combined reporting tough to avoid.

“This is just a commission,” he said after the meeting. “They don’t enact laws and we’re staring down the barrel of a $1.6 billion deficit.”

The report, due to the governor Dec. 15, will offer legislators little in way of mechanisms to tackle the budget deficit. The subject of extending the sales tax to services was not even broached during the voting session.

“There’s not the will to do that,” Hixson said afterward.

The commission did succeed in recommending that the Legislature convene a group of lawmakers, economic development officials and business representatives to discuss transparency and reporting requirements for state business incentives.

“I think it would be really naive of us to think that all businesses do what they say they’re going to do [with the incentives],” said Sen. Verna L Jones, D-Baltimore.

Motions to urge lawmakers to examine the flexibility of economic development incentives and tax credits against local income taxes for out-of-state earnings in partnerships and limited liability corporations were voted down.