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Report: Md. economy reliant on federal jobs, lacks private-sector growth

But they say that state's reputation for high business taxes is a myth

ODENTON — Maryland’s economy has become increasingly dependent on federal jobs and has failed to grow the private sector or increase venture capital funding, according to a report by Moody’s Analytics.

The report, which was presented Friday afternoon to the Maryland Economic Development and Business Climate Commission, notes this reliance has allowed the state to more easily ride out tough economic times but that the “inability to build or maintain businesses that rely on demand from the private sector for growth holds back the state in times of recovery, and it is similarly this dynamic at work in hollowing out the middle of the state’s labor market.”

But authors of the report say one popular conception —  that business taxes are excessively high in Maryland — may be more of an urban legend.

“Contrary to popular belief, Maryland stacks up very well,” said Dan White, a senior economist for Moody’s Analytics.

The report compared Maryland to what White said were the state’s “economic peers,” including Georgia, Massachusetts, New Jersey, North Carolina, Pennsylvania and Virginia. Among those, only Virginia had a lower rate. But White said for most small businesses the personal income tax rate is more important.

White said the “biggest red flag” on growing jobs and business in Maryland is the personal income tax.

“Personal income tax, the combined state and local rates, is substantially higher than almost everywhere else,” White said. “Only Washington, D.C., and Oregon are higher as a share of the local economy.”

White said the state’s personal income tax is higher than its peers and the national average.

Residents in Maryland pay 3.5  cents in combined state and local personal income taxes for every dollar earned — higher than the national average of 2.1 cents and the 2.5 cents on average paid by the state’s peer group, according to the report.

The report finds that higher costs and infrastructure disadvantages in Maryland take on more importance when it comes time for companies to commercialize research technology. As a result, the report found, many of these companies “move somewhere else more amenable to manufacturing.”

The panel that was provided the report, known as the Augustine Commission, is tasked with looking at ways to reform the state’s tax code to encourage private-sector growth.

The commission was formed last spring by House Speaker Michael E. Busch and Senate President Thomas V. Mike Miller Jr. Earlier this year, the legislature enacted several of the panel’s recommendations for regulatory reform, including the transformation on Oct. 1 of the state Department of Business and Economic Development into the newly minted Department of Commerce.

Other findings of the report include:

  • Maryland is a high-cost state in which to live or do business, and state taxes coupled with local taxes “put a much higher burden on individuals.” Businesses are “less burdened by taxes than commonly perceived” but are hurt by higher than average costs, including electricity and other utilities.
  • Despite a well-educated workforce, a high quality of life and easy access to nonprofit research facilities, Maryland has not been able to capitalize on private-sector spinoffs. Venture capital investment is flat and trails competitor states, including Virginia, Pennsylvania and Massachusetts. “While in the game nationally, this clearly demonstrates that Maryland’s competitiveness with its peers is ebbing. Maryland is standing still while other states on the East Coast are pushing ahead.”
  • Maryland is falling behind other states with deep-water ports at a time when expansion of the Panama Canal is expected to boost demand on the East Coast. Other states have invested billions of dollars in upgrades but Baltimore lags behind, especially as it pertains to ground connections. The lack of infrastructure could create “a chokepoint should any substantial increase in business come Maryland’s way.”

The report calls on the state to reduce costs that hold businesses back — some of which can be done through changes to the tax code. The report also calls for more government encouragement of the private sector.

“The alternative is a continuation of the status quo, in which Maryland keeps its economy tied to the public sector,” the report notes. “This scenario will benefit the state in times of economic distress by flattening out turns in the business cycle, but it will also keep the state from growing at as dynamic a pace as its peers over the long run.”