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Md. tax giveaways divert billions with largely unknown impact

Robert L. Higgins plucked four coins from a refrigerator-size safe in the basement of the Baltimore Convention Center and fanned out a small fortune in his hands.

While the face value of the coins would be just enough to buy a sandwich — a cheap one at that — Higgins priced the coins and their 803 combined years of U.S. history at just shy of $1.2 million.

Selling just one piece at the Whitman Coin and Collectibles Expo would be a healthy windfall for Higgins. But due to a little-known 1990 law, the state of Maryland wouldn’t see a dime of the $70,800 in sales tax it would otherwise collect.

That giveaway to coin enthusiasts is just one of 341 tax breaks woven into Maryland’s tax code that divert billions in revenue every year from the state’s coffers with little, if any, oversight by lawmakers, auditors and budget writers.

Click to see an interactive chart of Maryland tax expenditures in 2010.

Click to see an interactive chart pricing Maryland’s tax breaks.

Click here to see a full list of all 341 Maryland tax breaks (pdf)

Those tax preferences, also called tax expenditures, are financial incentives that are supposed to do things like spur investments in biotech companies, reward military veterans and make it cheaper to install solar-powered water heaters.

But in most cases, the state doesn’t know how well the tax breaks work. And even in this age of austerity, the state isn’t sure how much 157 of them cost.

“It is, in some sense, surprising how little data is available on a whole lot of things,” said David Roose, director of the comptroller’s Bureau of Revenue Estimates, which monitors most of Maryland’s tax breaks.

Unlike budgeted spending on schools, roads and other state priorities, tax preferences are not reviewed, debated and voted on every year.

They traditionally have flown under the radar for everyone save the small but vociferous constituencies that benefit from them. But now, as the state faces a string of billion-dollar deficits, support is building in Annapolis to bring these tax giveaways out of the shadows.

“The sentiment is that the tax code is too riddled with holes and favors for special interests,” said Del. Bill Frick, a Montgomery County Democrat who has pressed for more oversight and accountability for tax preferences.

There are 325 credits, exemptions, subtractions, refunds and deductions on the books. Some individual preferences can be applied to more than one tax, bringing the total to 341 holes in the state’s tax code.

They cost an estimated $6.5 billion in fiscal 2010, nearly as much as the state spent on education that year.

The most-used preferences benefit individuals and households, such as the sales tax exemptions for food and medicine, cost the state an estimated $675 million in 2010. Some other tax breaks are essentially budgetary housekeeping.

But the biggest, some $3.7 billion worth, are targeted at industries and businesses.

One tax break sends credits to utilities if they buy coal mined in Maryland. Others give breaks to buyers of used mobile homes, businesses that operate snow-making machinery and researchers working on cellulosic ethanol technology, a credit that has been on the books for three years but has found no takers.

A sales tax exemption for seafood harvesting equipment cost Maryland $2.5 million in 2010, according to state estimates. Partial fuel tax refunds for concrete mixers and solid-waste compactors cost a total of $600,000.

Fuel tax refunds for fuel delivery trucks, well drillers and agricultural spreaders, and a sales tax exemption for certain bakery equipment, cannot not be estimated, according to the state.

“They’re the ultimate trophy for corporate lobbyists,” said Greg LeRoy, executive director of Good Jobs First, a Washington nonprofit that analyzes state economic development incentives.

“Tax expenditures have become a lot more popular because corporate lobbyists have figured out [tax expenditures] are easier ways to get subsidies from the taxpayers,” he said. “They kick the can down the road in terms of the harm they do to the budget. The costs associated with them fall on the next governor, the next legislature.”

‘Our bread and butter’

The coin collectors at the Whitman show have a company called Deak International to thank for their tax break.

Fresh out of bankruptcy, the currency and precious-metals trading firm vowed in 1990 to bring as many as five Deak offices, 20 employees and annual operating expenses of at least $1 million to Maryland if lawmakers approved the giveaway. State economic development officials also lobbied for the tax break.

Deak’s precious-metals business was sold twice in the months after the law was passed and the promised offices, employees and spending never came.

But a little coin show grew in Baltimore.

Whitman holds four expos a year — three in Baltimore and one in Philadelphia. Baltimore, with its favorable tax break, “is our bread and butter,” said David Crenshaw, Whitman’s general manager.

Walking the floor during the November show, Crenshaw said the event attracts 1,200 dealers over four days. An auction brought in some $15 million. While dealers don’t report their sales, he estimated 80 percent of the transactions are large, wholesale deals.

Higgins said his Baltimore sales were about $1.5 million.

Visit Baltimore estimates the three Whitman shows this year totaled 8,000 attendees and pumped nearly $4 million into the local economy.

Murky estimates

What about the other side of the ledger? According to the state, the coin and precious-metals tax break reduces sales tax revenue by $1.25 million each year.

But that estimate is murky. The state doesn’t know much of the total can be attributed to Whitman, and even the total itself is just a guess.

“The sales tax numbers, you could fairly characterize them as soft because there’s no form that anybody fills out and sends in to us that would let us add everything up,” Roose said. “It’s just exempt at the point of sale. If a farmer buys a combine or bailer twine for the hay, we just have no reason to know that any of that goes on.”

Neil Bergsman, a former state budget analyst and now the director of the Maryland Budget and Tax Policy Institute, said Maryland needs more data to determine which tax breaks to cut, which to keep, and which to keep the public informed of.

“I don’t think big, multistate corporations can feel shame, but we should make it public information and see if they can be shamed,” said Bergsman.

Information, however, is in short supply.

Maryland has “no reliable estimate” for how much 142 of its tax breaks cost, according to the state’s biannual tax expenditure report. Another 15 are listed as “negligible.” There are estimates for the other 184, but many of those are guesses distilled from census data, projections done in other states and forecasts of policy analysts.

“Reasonable people may disagree about the value of a program,” said LeRoy. “But if you don’t have good information about the costs, it’s impossible to compare them to the value.”

Even the tax preferences that taxpayers record on their annual returns are difficult for the state to monitor. Roose’s staff has to comb business tax returns by hand to record which companies claim credits and how much.

A valuable tool?

The Department of Business and Economic Development monitors eight of the major business tax credits. Those include breaks for businesses that hire new workers, invest in plant upgrades, and conduct research and development in Maryland.

DBED’s Mark Vulcan, who oversees the credit programs, says they are a valuable tool for the state. As an example, he cited the research and development credit, a $6 million program that he said helps keep $1 billion worth of research activity in Maryland.

“R&D is portable and companies look to those credits,” said Vulcan. “All states have it. Unfortunately, Maryland isn’t as generous as some states.”

DBED certifies that the recipients of the credits qualify for them and monitors the benefits of some, including the Biotechnology Investment Incentive Tax Credit, one of the state’s most popular.

Marty Zug called that credit “critical” to the success of Sequella Inc., a Rockville firm developing treatments for infectious diseases.

“It takes risk off the table for an investor,” said Zug, the company’s chief financial officer. “At a time like now, or the past three years, when investors have become much more risk-averse, it shakes money out of places that wouldn’t have invested otherwise.”

‘Manna from heaven’

Sen. Edward J. Kasemeyer, chairman of the state Senate’s powerful Budget and Taxation Committee, said tax preference oversight could be on lawmakers’ packed to-do list in 2012.

“It’s something we have to definitely look at, and probably this year, to see what’s really working to get the feedback we want and what’s not getting the desired results,” said Kasemeyer, D-Howard and Baltimore counties.

There was an effort to do just that last session. Del. Frick, who heads the House of Delegates’ subcommittee that handles tax credit legislation, pushed a bill that would have required regular reviews of 29 tax credits.

More divisive was a provision that would have set five-year expiration dates for those credits unless lawmakers voted to extend them.

Frick’s bill passed the House but was killed 10-2 in Kasemeyer’s committee on the last day of the General Assembly session.

Kasemeyer, who voted against the bill, said senators did not have enough time to consider such sensitive legislation, particularly the piece that would have set expiration dates for tax credits.

Business interests cheered.

If put to a vote, Zug said the credit programs they hold so dear could fall victim to legislative horse-trading or simply be lost in the shuffle.

“You’re creating an uncertainty where one doesn’t need to exist,” Zug said of Frick’s bill. “They already have the ability to cut these tax credit programs.”

Frick said he will try again in 2012 to pass a bill that would require oversight of a broad range of tax credits.

“It’s probably not a good idea to start picking out individual programs with the tax code,” he said. “It needs to be more of a systemic thing.”

Del. Dana M. Stein, D-Baltimore County, learned that the hard way this year.

The coin and bullion tax exemption caught his eye before the legislative session and he drafted a bill to end it.

Coin collectors and a lobbyist hired by Whitman fought to preserve the little-known tax break. Baltimore City delegates and Mayor Stephanie Rawlings-Blake sought a carve-out for the coin shows.

Stein’s bill failed in committee.

“The whole idea that [tax breaks are] manna from heaven, that you’re inducing activity that wouldn’t otherwise be happening and therefore it’s free money, has been drilled into people’s heads,” said LeRoy. “Now it’s really hard to get it out.”

Indeed, coin collectors and the organizers of the Whitman coin convention said the loss of the tax break would likely spell the end of the show and its reported economic benefits to the city.

“You want to have a 6 percent sales tax here, I’ll just go back to my little place in Wilmington, Delaware,” Higgins said. “And we all know about Delaware. There’s no sales tax on anything there.”