A Taxing Ordeal Will Force Local Businesses to Walk

In his popular book published over a decade ago, Malcolm Gladwell defines the term “tipping point” as “the moment of critical mass, the threshold, the boiling point.”

If my conversations with business owners throughout the region are indicative of a larger consensus, these entrepreneurs and executives have reached a tipping point with respect to taxation in Maryland.

The increases beginning this tax year add up. The top federal income tax rate increased by 4.6 percent for income more than $450,000, self-employment taxes increased, a new Medicare tax on “net investment income” of 3.8 percent went into effect and Maryland followed suit by increasing the state income tax rate yet again. After factoring in the lower state and local income tax rates during the 1990s, the current rates are not a return to the Clinton-era rates but instead reflect an increase of about 5 percent.

For some reason, business owners grudgingly accepted an aggregate federal and state income tax rate (including payroll taxes) of about 40 percent without allowing tax rates to drive their decision making. Now, with aggregate income tax rates approaching 50 percent, these same individuals are beginning their transition plans, to states like Florida, Nevada and Texas. While the primary cause of the tax squeeze results from federal tax increases, the effect will be felt in state tax receipts.

Those very taxpayers and job creators whom Maryland needs to incentivize to stay here are instead incentivized to live anywhere but here. Indeed, businesses and business owners that are exceptionally successful — making many millions of dollars per year — have an even larger incentive to relocate.

With Maryland tax rates approaching 9 percent (before taking into account a deduction for state taxes paid), and Florida rates at 0 percent, I do understand the desire to move. For older taxpayers, Maryland death taxes come into play since Maryland imposes a 16 percent estate tax (on estates of more than $1 million) and inheritance taxes on non-descendant transfers as well.

In the 1990s, it was common for retired taxpayers to leave high-tax jurisdictions for the relative comforts of Florida or Texas. Today, technology allows people to work from just about anywhere. Moreover, opening a new office, or hiring staff in a different state or different country is nowhere near as challenging as it used to be.

In a different time, management required the owner or executive to have an office down the hall. Now, portable devices and new technology have allowed for mobile management to become a reality. In the Internet era, many successful businesses have already begun to operate across state borders. Companies that create products operate across the country or the world. From that vantage point, choosing a lower tax jurisdiction just makes sense.


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