The magic potion?

One little piece of Larry Hogan’s FY2017 budget proposal caught my eye, but I want to begin with a little reaction to the State of the Union show from my favorite manufacturing advocacy group, the Alliance for American Manufacturing and its president Scott Paul:

President Obama cited economic progress in his State of the Union address, and he also noted the need to address income inequality. If he wants to address this, he need look no further than manufacturing, which had its worst year in 2015 since the Great Recession.

While the president was right to highlight economic progress, he missed an opportunity to address some of the core concerns that are holding back manufacturing. Yes, manufacturing has added nearly 900,000 jobs over the past six years, but that represents less than 40 percent of the factory jobs lost over the recession. Only 30,000 jobs were created in 2015.

Keep that in mind as you read on, particularly the income inequality part. So I noticed a particular piece of news today, and after a bit of searching I found that Baltimore Sun writer Erin Cox included this in a story on Hogan’s tax plan:

Hogan also proposed granting a 10-year corporate tax income break for manufacturing companies new to the state who open in Western Maryland, Baltimore and the lower Eastern Shore, areas where unemployment is dramatically higher than the rest of the state.

“We’ve lost 28 percent our manufacturing base because other states were stealing our manufacturers,” Hogan said. “It was like spearing a fish in a barrel. It was too easy. We’re trying to bring back the manufacturing base because there are a lot of hard-working people in the heartland of Maryland who want to work.”

Hogan’s manufacturing tax amnesty would extend to employees of those businesses. Workers¬†earning less than $65,000 a year would be exempt from state¬†income taxes for a decade.

So let’s say XYZ Widgets opens a manufacturing plant in Salisbury. Not only would they get a tax break from the state of Maryland for a decade, so would the workers who make less than about $30 an hour be exempt from paying Maryland state income tax. (This would probably come as a refund once the taxpayer files his or her return.) I will cheerfully admit this goes against my grain of not supporting targeted tax cuts – particularly since it’s micro-targeted to maybe a few thousand taxpayers at most over the ten-year period – but it is an idea for the hopper that could be successful.

In fact, it extends a practice of states and municipalities granting a tax abatement to chosen entities to convince them to set up shop there. We have enough of a knowledge base now to see how these programs work for large-scale employers such as automotive assembly plants – here is one example from South Carolina, where BMW set up shop over two decades ago.

The other fly in the ointment, though, is determining what happens when the decade is up. Surely it’s the hope of Hogan and his economic development team that these companies would stay, but if not it’s the problem of his successor. My suspicion is that this program will maintain the exemption for the workers, because let’s say you’ve put your ten years in at XYZ Widgets and have become accustomed to that big state refund check. When those sands run out there will be a lot of upset taxpayers who just saw their state tax bite increase by up to $3,000 depending on income and deductions.

There’s also the question of timing. If we are to assume that the 10-year clock begins to tick for a company when they set up shop, we may see a cottage industry of new employers taking advantage of workers who are on the eighth or ninth year of their term of employment and hiring them on. Not only does the new employer poach skilled labor from the older competitors, the older companies won’t have the incentive of being able to work tax-free anymore. Conversely, a blanket starting date means that the program will work well for years 1 through 5, then begin to peter out unless extended.

And then there’s the job creation aspect that Scott Paul and AAM touch on above. Oftentimes with the use of tax incentives a manufacturing job isn’t so much created as it is transferred from somewhere else, and this particular proposal is specific to companies new to the state. So we may see a zero-sum game being played, particularly in Western Maryland and the Eastern Shore as companies simply move a few miles from Delaware, Pennsylvania, or West Virginia to take advantage with many of the same workers staying on. Locally, we will see this in reverse as Perdue moves some of its operations in the next few years just across the state line to Delaware – it makes Delaware’s bottom line look a little better and takes a little bit from Maryland, but the workers are just driving a different distance and will stay in this area. (Those who live in Maryland and work in Delaware, though, will have the joy of filling out two state tax returns.)

Overall, this is an interesting idea but there are a number of ways I’ve already found to play devil’s advocate with it. Lord knows ours is a region of the state which could use an economic shot in the arm, though. I still think the complete elimination of the corporate tax (which is also discussed briefly in the South Carolina study I referred to earlier) is the better play as a job creator overall.

And lastly, I’m sure Democrats will be whipping up their base in the Capital region by pointing out they’re not included in this deal. I guarantee that if this program works for the areas with high unemployment there will be a bill within the first year or two adding the rest of the state to the mix (in the interest of fairness, of course.)

Since it’s not clear what the vehicle for attempting to bring about this change will be, I can’t track this proposal to see just what progress it makes. Perhaps it will create a split in the majority party since Baltimore City will be a beneficiary and they’ll back the Republicans who follow the governor to see this through with a narrow victory.

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