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The limits of short-term relief

carol-park-col-sigWhenever an economic crisis breaks out, it is always easier for government to respond with a short-term solution than come up with a long-term remedy.

Perhaps this attitude describes the approach that the U.S. federal and state officials have taken in fighting the COVID-19 recession. Since the pandemic hit, both national and local policy conversations have focused on the size of government relief packages, which are just short-term solutions. In fact, government cash relief is similar to putting Band-Aids on deep economic wounds with long-term side effects.

Let’s take a look at Maryland as an example. COVID-19 shutdowns have left over 700,000 Marylanders unemployed. Maryland restaurants have lost a total of $1.4 billion and at least a quarter of them may end up closing permanently. The state government is predicting up to several billion dollars of lost tax revenue over the next three years.

So while it is nice that Maryland’s small businesses were approved for $6.5 billion worth of federal coronavirus relief and another $175 million in state grants and loans, one must remember: These short-term reliefs will only bring short-term results.

According to a recent survey jointed conducted by the Maryland Public Policy Institute and the University of Baltimore, two out three Maryland businesses feel that they are being negatively impacted by Maryland taxes. In addition, almost a quarter of businesses responded that they are negatively affected by the state regulations.

Here’s a wake-up call: Government cash relief will do nothing to fix these inherent problems plaguing Maryland’s economy. Unfavorable business conditions will slow down pandemic economic recovery and prevent businesses from rebounding.

In fact, with the current downturn, it is likely that the negative effects of high taxes and regulations could be exacerbated, becoming the reasons for the state businesses deciding to shut down permanently.

Long-term solutions

Therefore, Maryland’s leaders need to do a lot more than provide businesses with cash relief. They need to encourage business owners to reopen, rehire, grow, and remain in the state by promising long-term improvements in the state’s business climate in terms of both tax and regulation.

To get Maryland’s economy moving again, first and foremost, lowering the state’s corporate income tax rate of 8.25 percent is a necessary step. A high state corporate tax rate increases business costs of operating in that state, which could become a life-or-death matter for pandemic-struck businesses.

Historically, Maryland has lost many companies to neighboring states, due to its uncompetitive business tax environment.

Maryland should also seek to eliminate or at least temporarily relax business regulations that would disproportionally affect businesses that were hard-hit by the pandemic. Onerous state business regulations, such as the scheduled $15 minimum wage, Styrofoam ban, and mandatory paid-sick leave law, will make it more difficult for businesses to rehire and recover.

Similarly, local restrictions such as Baltimore City’s plastic bag ban and food truck regulations do more harm than good for local economies.

Even more importantly, Maryland business leaders need assurance that new taxes and regulations won’t stand in the way of recovery. During this year’s legislative session, a number of new taxes that were proposed to fund the state’s $32 billion education reform were vetoed by Gov. Larry Hogan. Overriding these vetoes would be a mistake that could cost Maryland’s economic recovery.

Maryland’s fragile and cash-strapped businesses can hardly afford to pay existing taxes until they have recovered from the crisis, let alone, pay additional taxes.

Excessive taxes and onerous regulations, new or old, will penalize the state’s business owners trying to pave the way for Maryland’s economic recovery. But if the state’s elected leaders are willing to acknowledge that short-term government relief packages are poor substitutes for comprehensive policy reforms, Maryland may have a chance at improving its business and tax competitiveness in the long run, and economic recovery should be on its way.

Carol Park is a senior policy analyst at the Maryland Public Policy Institute.