Maryland’s economy is not healthy. It has been undergoing major restructuring and downsizing for the last ten years, and prospects for the immediate future are not bright. Maryland’s manufacturing sector continued to decline in the first half of the 1990s — at twice the rate of manufacturing nationally. Cuts in federal employment ripple through the state’s economy and federal research facilities in the state are vulnerable to future federal budget cuts. Firm restructuring and downsizing affects the state’s traditionally strong industries such as transportation, utilities, finance, business services, and health services. According to one analyst there has been no real job growth in Maryland for more than a year.
In response to challenges presented by these trends, Governor Glendening created the Maryland Economic Development Commission to develop a strategy for overcoming the state’s anemic economic performance. Their report, Strategic Directions for Increasing Maryland’s Competitiveness, documents the state’s economic problems and proposes a comprehensive strategy to promote job growth in the state. One element of that strategy, reducing the state personal income tax in Maryland, has received substantial attention in the press and the 1997 session of the General Assembly. In short, the report concludes that Maryland’s high personal income taxes create a red flag that is deterring both existing and out-of-state firms from investing in the state and state personal income taxes should be lowered by 15 percent by 1999 and another 10 percent after that.
The purpose of this paper is to examine these propositions more thoroughly. Once the facts are presented it becomes clear that Maryland’s state personal income tax is not out of line with other states and the more serious threat to future economic development may be the ability of state and local governments to provide the level and quality of services necessary to support that development. The report discusses in depth a number of myths and realities.