The Ehrlich Administration at Mid-Passage

Two of the four legislative sessions of Governor Ehrlich’s first term have passed, rendering appropriate an interim assessment of the administration’s performance on major issues facing state government. This review will necessarily pass over some important subjects such as the environment, where the administration has major successes to its credit. It will focus on four core functions of government: Transportation, Health, Crime and Justice, and Education, and on overriding Budget issues generally.


In this area, the Administration has taken hold rapidly, and has begun carrying out nearly all the reforms that might be expected of it. It has made progress on the financing and planning of the ICC, for which both it and the new Montgomery County government have clear mandates. It has embraced tolling as the primary source of revenue for new roads, which parallels action in Congress to relax restrictions on tolling of interstate highways. It has sought and obtained the first new revenue sources for transportation provided in many years. It has imposed long-overdue toll increases on some, but not all, existing toll facilities. It has provided improved management for mass transit systems, so that wheels no longer fall off of buses. It has moved to relieve the dreary, East European character of airport concessions. It has begun exploring HOT lanes, and has reversed the Glendening administration’s policy.

It has not yet significantly implemented time-of-day pricing, although summer use of the Bay Bridge would be a good place to begin. (See the Calvert papers and symposium on Market Approaches to Congestion Control, available at Its rationalization of bus services is incomplete, and it has done little to promote greater employer use of the available federal tax credits, one of the last available back doors to the federal treasury. It does not yet have a long-term plan for express bus service, which might well include regional bus terminals, excess condemnation, and high-rise and mixed-use development in connection with them.

Criminal Justice

Here also the Administration, despite budget stringency, has made a good beginning, by emphasizing drug treatment in prisons, by reviving the judicious use of commutations, by obtaining authority for drug-diversion programs, by consolidating overlapping police forces, and by the largely symbolic enactment of medical-marijuana legislation. There are, however, some obvious measures that have been neglected.

The drug-diversion legislation will be ineffective in Baltimore City if defendants can still successfully bargain for unsupervised probation by praying jury trials and thereby clogging the Circuit Court. Prosecutors must be given the option of charging a greater number of nonviolent drug offenses as misdemeanors carrying not more than 90 day penalties, When substantially all drug offenses carry with them the right of jury trial (see Criminal law art.,secs.5-601,4-203(c)), gridlock ensues and treatment and diversion become impossible. The needed changes need not entail politically unpopular reduction of existing sanctions, but the creation of new minor offenses (possession of less than x grams, distribution involving less than x dollars), giving prosecutors the option of bring charges triable before a judge alone and therefore more likely to result in real sanctions, whether by conviction or plea bargain.(See the Calvert program The Baltimore City Criminal Justice System: The Judges Speak,

For similar reasons, Maryland’s version of the Rockefeller drug laws (Criminal law art.,secs.5-607, 5-612) subjecting repeat minor drug offenders to draconian punishments should be modified. These create a condition in which many charges are completely dropped without any diversion for drug treatment, while those cases that go to trial result in the prolonged incarceration of nonviolent offenders, at great cost to the budget, the correctional system, and even to race relations.

Maryland’s peremptory-challenge rules (Maryland Rule 4-313) have been overtaken by Supreme Court decisions and result in the calling of at least twice as many jury panelists as necessary, and in the degradation of the quality and representativeness of criminal juries. If the Rules Committee and Court of Appeals will not change them (and thus far they have dragged their feet in so doing), the legislature should be asked to do so.

The upgrading of the quality and age distribution of Baltimore’s police force is imperative. Counterproductive early retirement rules (Balt.City Code, Retirement Systems, sec.34(a)(1), e and f), together with the upheavals resulting from revolving-door Commissionerships have produced an inexperienced force which cannot be trusted to properly engage in the energetic stop-and-frisk street policing which was effective in reducing violent crime rates in New York. This may require coordination between state and city police, state assumption of traffic and crowd-control functions, or incentives for the short-term return of recently retired police.


Along with the Thornton Plan and pensions, the Medicaid program, particularly in its application to nursing homes, and the Health insurance program for state employees including retired state employees is one of the three major drivers of expansion in state budgets. Indeed, as pointed out by Donald Devine at a Calvert Institute symposium on January 6 (, at page 16) the $115 million annual increase in the cost of the employees’ health insurance program is the third largest annual increase in the state budget, invisible because spread over many agencies. Even these enormous increases understate the real increase; the retiree program is funded as a pay-as-you-go program in the state budget rather than on an actuarial basis as urged by State Treasurer Nancy Kopp and former Fiscal Services Director William Ratchford (id,at 16,20).Rapidly rising live expectancy causes the rate of increase in costs to exceed the rate of increase in state revenues, even without reference to medical inflation, The administration has made a beginning in reining in medicaid costs, but more must be done to discourage wealth transfers in fraud or medicaid, and to provide home and family-based alternatives to nursing home care and the growth of life-care insurance. The generosity of the health insurance program for medicare-eligible state retirees should be drastically reduced.

Higher Education

The administration has applied a sharp brake to increases in higher education budgets, taking the view that if the state is going to continue to offer four year residential college education on what virtually amounts to an open-enrollment basis, the costs cannot be borne out of the general fund without subjecting the flagship institutions to sharp cuts with each downturn in the business cycle. Accordingly, the administration has adopted policies increasing the contribution of tuition to university budgets. There is little evidence that the higher education institutions have done anything more than pass through budget cuts as tuition increases, notwithstanding huge increases in administrative cohorts in higher education. In the years 1999-2003, 484 administrative support positions were added to the state higher education system, an increase of 21.5%, as against 396 new instructional provisions, an increase of 6.6%. Put simply, five new administrators were added for each four new teachers; administrators proliferated at four times the rate of teachers. If one estimates the cost of each new administrative position at $60,000 annually, a low estimate, the new administrative positions added during a four year period cost the state $30 million per year, an amount equal to about two-thirds the budget of the highly regarded St. Mary’s College of Maryland. There should be a presumption against the continued existence of all higher education administrative positions added during Gov. Glendening’s second term.

The new administration has somewhat improved the state’s need-based scholarship programs, a measure needed to reduce high drop out rates, particularly at the historically black colleges. Beyond the decisions about tuitions and scholarships, it has not displayed a discernible strategy for higher education.

Three elements of such a strategy are here proposed:

A) There is need for a critical look at the state’s four historically black four-year colleges, a separate and unequal system that has been perpetuated solely because of vested political interests. The colleges’ six-year graduation rates range from 30% at Coppin to 48% at UMES compared with rates of 57 to 75% at the state’s other public colleges. The weaknesses at Coppin are especially dramatic, and were exposed by the Toll report’s description of the Coppin science programs:

Department of Natural Sciences

Shortages of faculty and staff members exist in several academic programs. Student research is not currently being implemented. Faculty loads are so high that faculty research and scholarly productivity are low. New faculty hires should include those able to integrate research capabilities into the baccalaureate curriculum in science. Report of Coppin Study Team – Many faculty members are ready for retirement. Strategies must be executed to recruit and retain younger faculty members. Such strategies would include competitive salaries, good working conditions, adequate research facilities, and more nearly optimum student/teacher ratios.

When the departments of biology, physics and chemistry were combined in 1981, the total operating budget other than salaries was $48,000 per year. Currently, the operating budget is only $6,000 or 1/8 of the 1981 science budget. As a result, the quality and quantity of the science program have seriously eroded.

Lack of funds for laboratory materials has resulted in biochemistry being taught by Michigan State University through distance education, no laboratory experience in the cell biology course, and the indefinite suspension of virology lecture-laboratory courses.

The existing animal laboratory is not usable; the tissue culture facility is too small for class use. The chemistry laboratories are too noisy and poorly lighted. Hoods in the organic laboratories are poorly constructed, making it difficult for faculty to observe students at work. The cage washer is not working; and autoclaves are not operable. Because equipment for biology, physics and chemistry laboratories has not been purchased since 1982, most of it is obsolete or in disrepair.

Department of Mathematics and Computer Science

Approximately 10 years ago, the Department had 14 full-time faculty members; currently, there are only nine. Three teach all of the computer science courses. One of the three computer science faculty members must teach a mathematics course each year. Faculty teach eight course preparations a year, including laboratory and classroom courses. Adjunct faculty members teach most of the developmental mathematics courses. Faculty do not take sabbatical leaves for renewal and retooling because the Department could not manage its teaching load in the absence of even one faculty member. Since there is no laboratory support staff for this department, faculty members must do all of the teaching. Enrollment in this department continues to grow as the demand in the workforce for computer science increases.

Financial resources are quite thin. New faculty members cannot be appointed. Modern and up-to-date equipment cannot be purchased. Laboratory support staff cannot be appointed.

Courses need to be added. For example, more prerequisite courses are needed that are designed for the computer science major. Courses in advanced databases, advanced visual basic, and computer architecture should be added to the computer science curriculum. However, scarce faculty resources prevent these improvements from occurring. The computer science networking courses are too crowded, with an enrollment of 40 students. During the fall 2000 term, 65 students enrolled in the Computer Science I course; in the spring of 2001, there were 72 in this course, which still had only one section.

Without UNIX workstations, Macintosh workstations, or other sophisticated computer platforms and software, graduates are not provided with a cutting-edge education, which limits their ability to be competitive in the workplace. Advanced computer science courses with as many as 40 students are too large. Classroom space is inadequate to offer other sections, which could relieve some of the overcrowding.

Laboratory print and e-resources are scarce and require upgrading. The mathematics program requires a laboratory, and would like to offer more mathematics laboratory courses; however, space and computer equipment are not available. There is only one laboratory to accommodate 500 students.

Twenty years of rhetoric about the unique role of these institutions has seen their enrollment stagnate. Except at UMES, non-black enrollment has sharply declined, at Coppin to one-fifth the 5% level of twenty years ago, at Bowie to one-third the 17% level of twenty years ago. See A Mac Gillis, “College Boom, Yet Seats to Spare”, Baltimore Sun, April 15, 2004. Bowie has also been distinguished by a revolving-door presidency. The principal role of these institutions at present is to inadequately train teachers for predominantly black schools. The geographic and programmatic disadvantages of Coppin and its limited appeal to faculty of all races renders it doubtful that the large new state appropriations, largely for bricks and mortar, are being well spent. Other than College Park, a large selective research university, the state effectively offers no four-year college opportunities to its Washington suburban residents. Virginia, with a population 40% larger than that of Maryland, has five traditionally black colleges as against Maryland’s four. The notion that these institutions are peculiarly supportive of black students is belied by their drop-out rates; exposure to new and uncomfortable perspectives, not nurturing and comfort, is also what higher education in important measure should be about. The new administration has not grasped this nettle, though the work of Freeman Hrabowski at UMBC indicates what a more sensible policy would look like. Bowie should cease to be a racially identifiable institution; Coppin’s programs should be narrowed and focused; and Morgan rendered the flagship historically black institution.

B) The new administration has taken no steps to improve public higher education in the Washington suburbs and Frederick County, where there are no first-rate state colleges other than College Park. Bowie State, which is under-enrolled, should be reorganized and no longer treated as a ‘historically black’ institution; this has taken place with respect to its evening programs but not its residential ones. Consideration should be given to creation of a new small state four-year college in Montgomery or Frederick Counties to aid in competition with the Virginia higher education system. This might involve state contribution of land, and a state commitment to the usual state subsidy of tuition rates, coupled with insistence that local government contributions and private sector fund-raising completely provide all construction, infrastructure, library, laboratory, and dormitory costs.

C) The Ehrlich administration has generously provided for community colleges, but has not laid adequate stress on the expansion of the distance-learning programs of University College, which possesses a top-heavy bureaucracy. There is significant advantage to such home-based programs, particularly for women who have temporarily left the labor force.

High School Teacher Recruitment: A Continuing Disgrace

In the last six years, the Calvert Institute has published three studies of Maryland secondary school education, A Common School for Baltimore, by Denis Doyle, Douglas Munro and others, and two studies by the present Executive Director, one on teachers’ union contracts and one on math and science education. The latter two studies were partially supported by the Abell Foundation. The Abell Foundation for its part has issued two important studies on teacher certification, A Matter of Principals by Hess and Kelly ( and Teacher Certification Reconsidered: Stumbling for Quality by Kate Walsh (

Two major themes of all these studies are the need for reform of teacher certification so that new teachers in scarce disciplines are not required to have completed 30 to 36 hours of education courses, a requirement imposed by Maryland’s certification board, a 25-member body 14 of whose members are designated by schools of education and teachers’ unions with an interest in perpetuating these barriers to entry into the teaching force and the need for extra pay for teachers in scarce disciplines, allowed by union contracts in only 2 or 3 of Maryland’s school districts. The effects of the certification requirements on high school teaching are almost wholly malign:

A study by the National Research Council of Science Ph.D’s showed that 44% of the sample would consider high school teaching if they could become qualified in an intensive summer education course, but only 14% would do so upon being informed of the one year of courses actually required. Of those who had affirmatively expressed interest in teaching, 67% were interested if able to qualify with a summer course, but only 22% where a one-year course is required.

As a result of these barriers, the MSDE Staffing Projections for Maryland Public Schools for 2002-03 showed that only 41 persons were training in Maryland colleges to teach physics or physical sciences, as against a projected need of 168 teachers, and only 17 in computer science against a projected need of 50 teachers. Teachers of chemistry and mathematics are also in short supply.

The barriers also infect special education. The staffing pool included only 8 teachers of the severely handicapped, against a projected need of 114 teachers, and 3 teachers of the blind against a projected need of 16 teachers.

Additional requirements of a year of graduate education courses for principals have two perverse effects: they exclude experienced teachers from qualifying as principals in their schools, and they create an incentive for teachers to take courses in “education” rather than subj4ect-matter.

The effect of the certification requirements is to exclude from the teaching force liberally educated housewives who wish to return to the work force when their children are no longer young.

Another effect is to exclude from the teaching force retiring military, police, foreign service, and civil service personnel, many with work experiences that would be invaluable in educating and disciplining adolescents. One consequence of this exclusion is an extraordinary ‘feminization’ of the teaching force.. In Baltimore City, 70% of the teaching force is female (76% statewide); 80% of Baltimore City’s Afro-American teachers are female (78% statewide)

In many districts, the result of the certification requirements is dominance of the schools by cohorts of education department alumni, not infrequently the weakest graduates of the weakest colleges. More than half of the Baltimore City teaching force are Afro-American females, an overwhelming percentage of them education graduates from Coppin and Morgan. This does not produce a diverse educational experience, or an atmosphere receptive to new teachers with new ideas.

Maintenance of certification requirements, when coupled with the union emphasis on reduction of class size, operates to insure that huge infusions of new Thornton money will not increase the economic attractiveness of teaching as an occupation, or the quality of teachers. Hiring will be effectively limited to graduates of education programs, and the new money will only result in scraping deeper into the barrel of inadequately trained education-school graduates.

The State Education Department has been hostile to alternative certification programs or the grant of education credits for work experience. While New Jersey draws 25% of its new teachers from liberal arts graduates, the corresponding Maryland figure supplies less than 1% of Maryland’s new teachers

Maryland’s seniority-based compensation systems which victimize teachers with five to ten years’ experience who are deciding whether to remain in teaching, and seniority-based ‘bumping’ systems which add to the instability of school faculties, victimize young teachers, and assure that the least experienced and least rewarded teachers are concentrated in the neediest and most difficult schools.

The ‘No Child Left Behind” legislation contains no provisions requiring education courses, but encourages the states to require courses in the subject matter taught..Certification requirements including elementary education courses do not appear to prevent the state from recruiting adequate numbers of elementary school teachers, and American educational results at the elementary level are above average. At the high school level, American results are a disaster, particularly in math and science, and the certification barriers to recruitment of qualified teachers are an important part of the explanation. Among 21 countries, American students are 16th in general science and 17th in mathematics at the 12th grade level; special immigration laws were enacted to provide visas for 300,000 foreign computer workers between 1998 and 2002.

A recent thoughtful article illuminates these issues.

Two Ways Maryland Can Attract Teachers by Tom Neumark
Washington Post
Sunday, January 18, 2004; Page B08

Maryland recently reported that Baltimore City and all 23 of the states counties have a shortage of certified teachers in seven critical subject areas as well as a shortage of male and minority teachers.

To rectify this situation, the state’s Visionary Panel for Better Schools has recommended instituting a statewide salary schedule, improving on-the-job support, creating a more comprehensive system for teacher certification and establishing “teacher development academies.” None of these suggestions, however, addresses the real roots of the problem: unnecessary barriers to the teaching profession in Maryland and local jurisdictions’ outdated approach to compensation.

Current certification rules keep many good candidates from applying for teaching positions in Maryland. For example, a person holding a doctorate in mathematics who has decades of teaching experience in college is not considered qualified to teach high school algebra in Maryland because the state’s rules do not allow college teaching experience or private school experience to count toward certification. Yet the state considers a below-average student with a bachelor’s degree in math education and one semester of student teaching fully qualified.

Under these irrational rules, Gov. Robert L. Ehrlich Jr., who has a degree from Princeton and obvious legislative experience, is not considered qualified by his own state to teach an introductory course in government. First, he would have to complete 36 hours in education course work.

Does this make sense?

Little evidence is available to show that education courses make teachers more effective, and the time and expense of such coursework discourages many good candidates from becoming teachers. Further, many students in traditional teacher programs are ranked academically in the bottom third of their class. If Maryland wants more and better teachers, it should expand its applicant pool to include highly qualified candidates who happen to come from outside the realm of education.

The problem of Maryland having an artificially small applicant pool is compounded by its local jurisdictions paying teachers according to a rigid salary scale that considers years of experience and number of credit hours earned but not subject-matter expertise or classroom performance.

Maryland is short of teachers in some subject areas because local districts do not offer higher pay for these harder-to-staff positions. The availability of teacher candidates varies widely by subject — from almost three applicants for each history vacancy, for example, to only one applicant for every two computer science positions. Raising salaries for subject areas that have shortages obviously would encourage more potential teachers to pursue those disciplines.

School districts also have difficulty retaining good teachers because their salary scales do not take into account classroom performance. An effective teacher with five years of experience makes less than an ineffective teacher who happens to have 10 years of experience. Until schools find a way to differentiate pay based on performance, many talented people will leave teaching or avoid the profession.

Think about it. Would you consider a career that is difficult to enter, pays a salary lower than your market value, requires coursework of questionable value regardless of your knowledge and experience and offers no opportunity for advancement based on performance?

Obviously, until Maryland changes its approach to teacher certification and until local districts change their approach to teacher pay, the state’s teacher shortage is doomed to continue. ”

— Tom Neumark is a former candidate for the Montgomery County Board of Education.

Budget and Taxation

The Ehrlich administration, for the second consecutive year, has been able to avoid income or sales tax increases, even in the absence of slot machine revenues. Since there have thus far been virtually no layoffs of state employees, and little scrutiny of such vulnerable areas of the budget as the higher education boards, the administrative cohorts of universities, the State Department of Education, food service and janitorial functions in state hospitals, the failure to raise court-related fees, and health insurance for state retirees, it is not unlikely that the administration will be able to repeat this feat in a third year, even without slots revenue, particularly if teachers’ retirement costs are returned to local governments.

Even if this is achieved, a permanent structural deficit, though of more modest proportions than that sometimes estimated, will remain. This is due to the fact that, on the expenditure side, the next several years of Thornton will explode education costs at a far greater rate than inflation, while the same is true of medicaid and pension costs and the costs of the health insurance programs for both current and retired state employees. Medical inflation and increases in life expectancy will continue to increase budgets, unless benefits to medicare-covered state retirees are curtailed, eligibility for medicaid nursing home care tightened, and retirement programs gradually converted to defined contribution rather than defined benefit programs so the state is not penalized by increases in life expectancy.

On the revenue side, the income tax has ceased to be a growth tax, virtually all taxpayers now being in the top bracket as a result of ‘bracket creep’. The state’s business taxes, notably the corporation income tax and the business personal property tax are both riddled with exemptions, both of federal and state origin, and bear heavily on declining manufacturing industries and scarcely at all on service industries.

The need for restoration of some element of progression to the income tax is needed if its character as a ‘growth tax’ is to be restored. This might include restoration of the two temporary ‘superbrackets’ eliminated in the 1990s. At the same time, the volatility of the tax’s yield might be somewhat diminished if a partial capital gains exemption, at least for five-year assets acquired after the date of new legislation, was provided for. At present, since capital gains are fully taxable in Maryland at ordinary income rates, income tax yield is heavily influenced by the stock market. A limited capital gains exemption would limit this effect, could be structured to avoid immediate impact on revenues, and would render reimposition of the ‘superbracket’ taxes more palatable.

Rational business tax reform might take the form of imposition of a variant of the New Hampshire Business Enterprise Tax, in exchange for reductions in business personal property taxation, corporate income taxation, or both. A discussion of the New Hampshire tax is accordingly provided below:

Excerpts from National Tax Journal:

Vol 49 no. 3 (September 1996) pp. 381-399

The BET is levied on the “business enterprise value tax base,” which consists of wages and other compensation, interest, and dividends, at a one-quarter of one percent rate. Businesses with gross business receipts less than $100,000 and with a business enterprise value tax base less than $50,000 are exempt from the tax. The BET did not replace the state’s existing business profits tax (BPT); instead, it serves as a supplement to the BPT. The BET tax payments are credited against BPT tax liability. Partnerships, proprietorships, corporations, and nonprofit corporations other than 501(c)(3)s are subject to the tax. The BET is a simple tax; the basic form fits on about half of a page.

Because the BET does not subtract capital expenditures from its tax base, it is clear that the BET is closest in nature to a pure VAT of the income type. The differences are that the BET omits rent and retained earnings from its base. How important are these omissions?

Statistics on U.S. national income show that rental income of persons and retained earnings (also called undistributed profits) are very small as a proportion of total national income. In 1994, rent accounted for 0.5 percent and retained earnings accounted for 2.1 percent of total national income. Contrast that with the importance of wages and salaries which accounted for 60 percent of national income. Compensation, which includes wages and salaries and supplements to wages and salaries, accounted for 73.4 percent of national income in 1994 (U.S. Bureau of Census, 1995).

It is important to note that because the BET is not a direct tax on persons, but is paid by businesses, it has none of the personal exemptions or deductions that can modify personal income tax burdens to better reflect a household’s ability to pay tax. It also taxes all income at the rate of one-quarter of one percent.

This brings us to our final comparison between the BET and other taxes. The BET has also been likened to a flat tax The recommendations of the Kemp Commission, proposal of House Majority Leader Dick Armey, and the Presidential businesses have typically been allowed to adjust reported compensation in order to zero out profits reported on the BPT return. Thus, in 1988, partnerships, fiduciaries, and proprietorships accounted for 66 percent of the BPT returns filed, but only 11 percent of the BPT taxes paid . Peat Marwick concludes that “application of the business profits tax to all business taxpayers has not prevented the tax from becoming in essence a corporate profits tax on a fairly small fraction of the corporations doing business in New Hampshire. Corporate income taxes by their nature contribute a volatile revenue stream, campaign of Steve Forbes have brought the Flat Tax (or various versions of a flat tax) to the public’s attention. The basic Flat Tax imposes a business and an individual tax. The business tax base is receipts less wages, purchases from other businesses, and the cost of new plant and equipment. The individual tax base is wages and pension distributions. Both businesses and individuals are taxed at a single flat rate, with no other deductions or credits . The Flat Tax is a variation on a consumption-type VAT. Because the BET levies a single tax rate with no personal deductions, it can be considered a flat tax of the income type.

Although the BPT nominally taxes unincorporated businesses and corporations, in fact, corporations have paid the bulk of the BPT. The reason for this is the following. Both corporate and noncorporate businesses are allowed to deduct compensation to labor from gross business revenues to determine. One reason for enacting a business enterprise tax and reducing slightly the state’s reliance on the BPT was to increase the stability of the state’s revenues. Probably the most important reason for the business tax reform was the perceived unfairness of the tax system which imposed the vast majority of business tax payments on a small fraction of the businesses in the state. When Governor Merrill presented the BET proposal to the legislature, he said, “Is it fair that one-half of one percent of the businesses in New Hampshire pay 70 percent of the tax?” One way to examine the degree of concentration of business tax payments among businesses is to look at the percentage of taxes paid by the highest liability firms. In 1988, 58.7 percent of business profits tax collections were derived from the 0.8 percent of corporations with highest BPT liabilities . A preliminary look at BET data indicates that tax liability is not as concentrated. In 1994, 58.7 percent of business enterprise tax payments were derived from the 2.01 percent of businesses with highest BET liabilities.

Another way to look at concentration of business tax liability is to divide businesses by sector. Under the BPT, 33.6 percent of tax collections are derived from the manufacturing sector and 9.2 percent from the service sector. The BET, examined as a stand-alone tax, also taxes the manufacturing sector more heavily than the service sector, but the imbalance is not so great as under the BPT. The BET derives 24.5 percent of its collections from manufacturing and 18 percent from service businesses . The marginal impact of the BET, net of BPT credit, is clearly to raise the relative burden of the service sector. The service sector bore 27.3 percent of the additional tax burden, and the manufacturing sector, 16.3 percent.

In sum, relative to the BPT, the BET does tend to spread the business tax burden more broadly. In particular, relative to the BPT, the BET tends to spread tax liability to firms other than corporations in the manufacturing sector. However, the BET still derives the bulk of its revenue from a small fraction of New Hampshire business firms-over half of total BET revenue is collected from two percent of all filers. Furthermore, the BET derives the bulk of its revenue from corporations and a greater proportion of its revenues from the manufacturing sector than from the service sector.


It is often asserted that the VAT is a more stable revenue source than a corporate profits tax. This section attempts to test the truth of that assertion for New Hampshire. By any of the three measures, then, the BET base is more stable than a corporate profits base. Thus, adopting a BET and reducing the rate of the BPT will tend to make the state’s revenues more stable. Since the BET now brings in only about one-fifth of total business tax revenues, the added stability will not be great. Policymakers could consider reducing the BPT rate further and increasing the rate of the BET to further increase the stability of the state’s revenue stream.


Probably the most touted advantage of a VAT is its efficiency relative to most other taxes. Indeed, the BET is bound to be a more efficient tax than the BPT for the following reasons. First, the BET taxes a broader range of business organizations (as shown in the section above on equity), so it doesn’t present the same disadvantage for the corporate form of business as does the BPT. A second reason for the BET’s greater efficiency is that the BET’s base is much broader than the BPT’s. Instead of taxing profits, it taxes wages and other compensation, interest, and dividends. Using simple algebra, based on 1995 tax revenues and tax rates, the BET can be shown to have a base that is approximately six times that of the BPT, surely a much broader base. In general, the larger the tax base and the lower the tax rate, the less a tax distorts otherwise efficient economic decisions.


There are a number of ways in which the BET is a simple tax. By collecting an income-type tax from businesses, rather than imposing a personal income tax, the number of taxpayers is kept small. The tax base is a simple one, involving no complex tax laws on depreciation, for example, and the basic tax form fits on one half page. Those who crafted the tax law put simplicity high on their list of objectives. In writing the law, they explicitly excluded 501(c)(3)s from taxation, in part, because it would have added many more taxpayers to the system and increased complexity. They also omitted rent from the tax base partially in the interest of keeping the new tax law simple.

From 1976 to 1994, corporate profits increased at an average annual rate of 6.3 percent, while the pseudo-BET base increased at an annual rate of 7.8 percent. If in this case history is a guide to the future, these data imply that growth of the BET is likely to exceed growth of the BPT. Another consideration is the extent to which adoption of the BET is able to capture revenue from the service economy that the BPT is unable to capture. Given that growth of the service sector has outpaced growth of the manufacturing sector in New Hampshire since the mid-80s and is projected to exceed growth of the manufacturing sector until the end of the century, any tax that captures more of the service sector and less of the manufacturing sector will increase the state’s revenue elasticity Thus, examination of both historical U.S. data and trends in growth of the service sector versus the manufacturing sector provides evidence that adoption of the BET and reduced reliance on the BPT are likely to increase future growth of New Hampshire state revenues.

As a complementary tax, the BET can add stability to the state tax base; can help capture growth in the service economy; and, by taxing businesses other than corporations and using a broad base, can have a less distorting effect on the economy than sole reliance on a corporate income tax. Two taxes that states sometimes use to supplement their corporate income taxes are a corporate franchise or stock tax and a minimum tax. The BET compares favorably to both these alternatives on a number of grounds. The BET has a broader base and applies to a wider range of businesses than the corporate franchise tax, making it less distortionary, more stable, and apparently fairer. The BET appears less arbitrary than a minimum business tax. Further, the BET rate could be raised considerably in the future depending upon revenue needs, whereas a minimum business tax has less revenue potential.

Political acceptability is a further reason to consider a mini-VAT rather than sole reliance on a VAT for business taxation. First, taxpayer resistance to a new tax is likely to be less if that tax does not collect a great deal of revenue. Second, to the extent that taxpayers perceive it to be unfair to impose business taxes when a business is experiencing losses, adoption of a mini-VAT is less likely to stir up taxpayer backlash than a move to a business tax system based primarily on the VAT.

Not all states need jump on the consumption tax bandwagon; that is, an income-type VAT is also a viable tax. Although the VAT is generally considered a consumption tax, New Hampshire’s BET shows that adoption of an income-type VAT is also an option. This might be particularly appropriate for states without an income tax should they seriously consider enacting a new tax to raise revenue, or simply consider shifting their tax structure to reduce their reliance on consumption taxes.

An additive VAT need not be complex. Because Michigan’s SBT, an additive VAT, is quite complex, policymakers may consider an additive VAT to be inherently complex. New Hampshire’s BET shows that this is not necessarily so. The BET has few bells and whistles: a statutory exemption for small businesses, a temporary transition credit, and a temporary credit for contribution to a development authority. The basic BET form is simple; it fits on half a page. Given the current high level of public interest in tax simplification, the BET is worth considering when looking at tax options.

It is politically possible for even a state with a strong antitax climate to adopt a new tax. There are many reasons why adoption of the BET has not been controversial in New Hampshire. The BET is levied at a low rate and raises a modest amount of revenue. The business tax reform was explicitly designed to be revenue neutral, a legislative provision was enacted that purports to make it quite difficult to raise the rate of the BET, the tax package was widely perceived to improve business tax equity, and the new tax is a simple one to comply with and to administer.

NOTE: As a result of revenue demands resulting from school finance reforms, the New Hampshire BET has been increased to 3/4 of 1%.

Its yield in 2003 was $ 100 million. New Hampshire has a bit less than one-fourth the population of Maryland.

Posted in: Judiciary and Legal Issues, Report