Tax Justice Digest stories about Maryland

Maryland Governor Martin O’Malley signed a temporary income tax increase on millionaires this week to make up a portion of the revenue lost by the repeal of a recently passed 6 percent sales tax on computer services that had not yet taken effect.  Originally intended to be part of a service tax increase on about six different services, the computer services tax ended up being singled out after its lobbying presence was demonstrated to be much weaker than that of the other services legislators were thinking about taxing.  That quickly changed as the sector set up a formidable lobbying presence in only a matter of months.

Though the tax on millionaires is a more progressive option than the computer services tax, this story ultimately has to worry those who appreciate the merits of expanding the sales tax to include services.  What lessons can be learned from this failed attempt to carry out a much needed expansion of Maryland’s sales tax base?

The failure of this service tax may have been a result of its narrow scope.  By going after only one type of service, rather than trying to comprehensively expand the base as Hawaii, New Mexico, and South Dakota have done, Maryland set its sights too low.  The debate was focused on an issue much less important than the broader issue of taxing the state’s enormous and growing service sector.  The position of tax fairness advocates was weakened as a result of this narrowing of the debate.  By focusing on only one type of service, advocates of the tax were also left vulnerable to criticisms that they were unfairly singling out certain businesses to pay more.  And even if Maryland had succeeded in expanding the sales tax base to include computer services, it would ultimately be only a small step towards the bigger goal of modernizing the sales tax base.

Fortunately for Marylanders, though, the progressive income tax change the legislature enacted was much better than most alternatives.  But it certainly would have been nice to get the ball rolling on service taxation in Maryland.

New York is no different than most states in at least one respect – it too must confront a major budget deficit, estimated at $4.7 billion for the fiscal year starting April 1.  It may, however, follow a much more responsible path than Georgia and other states attempting to cut taxes in the midst of dire financial straits.  The state Assembly has approved a plan that would levy a temporary income tax surcharge on people with incomes over $1 million and that would yield roughly $1.5 billion per year.  The plan is opposed by the Senate, but new Governor David Paterson has yet to rule it out.

Maryland faces a situation similar to New York and is also considering an increase in personal income taxes for some of its wealthiest residents. But rather than devote that additional revenue to current appropriations, lawmakers want to use it to repeal a change in tax policy that isn’t scheduled to take effect until this summer.  Recent tax projections in the Free State are now $333 million lower than previously expected and, just this past week, the Maryland House adopted a FY 2009 budget that reduces spending $250 million below Governor Martin O’Malley’s initial request. 

Yet, one topic that continues to dominate conversations in Annapolis is the extension of the state’s sales tax to computer services.  Enacted as part of a larger tax package during last fall’s special session, the tax change isn’t slated to take effect until July 1, but is the target of a major lobbying campaign by the computer industry.  The Governor recently threw his weight behind a Senate plan to repeal the computer tax and replace the lost revenue with an increase in the personal income tax:  specifically, the creation of two new tax brackets with rates of 6.0 percent and 6.5 percent for taxable income above $750,000 and $1 million respectively.  Such a move would improve the progressivity of Maryland’s tax system, but could be a step back for sustainability. Maryland – like most states – needs to expand its sales tax base to include more services or be left with a tax system that is poorly matched to today’s economy.

Read ITEP press release.

Victory for Tax Adequacy, Missed Opportunities on Tax Equity and Essential Reforms

The tax plan approved by the Maryland General Assembly on Monday will help provide the revenue necessary to fund vital public services in Maryland, but, according to the latest analysis from the Institute on Taxation and Economic Policy (ITEP), working families will bear the brunt of the tax changes contained in the plan. All told, taxes for the poorest Marylanders will rise, on average, by more than 0.7 percent of their incomes under the Assembly’s plan, while taxes for the wealthiest one percent of Marylanders will climb by just over 0.5 percent of their incomes.

Read the ITEP press release.

Governor’s Plan Much More Fair than Bill Backed by Key Senate Committee

A new analysis of the tax legislation approved by the Senate Budget and Taxation Committee
on Tuesday shows that the Senate’s tax changes would impose the largest tax hikes, as a share
of income, on low- and middle-income Marylanders. The analysis also shows that the Senate
plan’s regressive impact is in sharp contrast to the plan proposed by Governor Martin O’Malley
late last month, which would make Maryland’s tax system less unfair overall.

The Maryland General Assembly last week began a special session to consider Governor Martin O'Malley's $1.7 billion deficit reduction package, holding hearings on each of the key elements in the package.  ITEP staff testified on a number of the tax policy changes the Governor has recommended, including a more progressive personal income tax rate structure, an expansion of the sales tax base and an increase in the sales tax rate, and efforts to close corporate tax loopholes through the adoption of combined reporting.  The Center on Budget and Policy Priorities has also released several helpful reports on the Governor's tax proposals, detailing ways to generate additional tax revenue in Maryland and to protect low-income taxpayers from regressive tax increases.  Progressive Maryland and the Alliance for Tax Fairness will hold a statewide Town Hall Meeting on Tuesday, November 6 in Annapolis to give concerned citizens an opportunity to express their support for a more equitable tax system.  As the Washington Post opines, the fate of Governor O'Malley's proposal is uncertain, but the need for action - and for important reforms like a more progressive income tax and a more robust corporate income tax - are clear.