Maryland is too reliant on income taxes, one group says

By Len Lazarick
[email protected]

While the governor has touted Maryland’s comparatively low tax burden on its high income populace, some groups are concerned that the income tax hikes proposed for next week’s special session will harm Maryland’s national rankings on taxes and business climate.

Gov. Martin O’Malley on Wednesday cited various national rankings for Maryland’s income, sales and corporate taxes to show they were not as high as some opponents portray. But Larry Hogan, chairman of the pro-business Change Maryland, said the legislature’s own fiscal analysts say the state already has the second highest income tax burden in the nation.

In its 2012 Issue Papers (page 27), the Department of Legislative Services says Maryland ranks No. 2 in the nation on its reliance on the personal income tax, according to 2009 Census data.

Hogan said, “This report raises red flags about Maryland’s over-reliance on the income tax to support state spending, and our top elected officials are on the verge of making the problem even worse.”

Rates going up 5% to 10%

The proposed tax hikes raise income rates 5% to 10% on single taxpayers making $100,000 a year or more and on couples earning $150,000, generating over $200 million in new revenues next year. (The actual percentage rates on taxable income go up .25% to .50% to a maximum of 5.75% depending on the income bracket. O’Malley says the top one-sixth of taxpayers will be paying more.)

The DLS report does confirm O’Malley’s assertion that Maryland taxes by some measures are not that high.

“Maryland ranks twenty-third and eighteenth, respectively, in total state and local government revenues and spending measured on a per-capita basis and fifty-first and forty-eighth, respectively, in revenues and spending as a percentage of
personal income of residents,” the report says. “However, Maryland relies more on tax revenues than most states and less on nontax revenue sources.”

“Generally, Maryland ranks in the bottom half of all states with respect to property taxes, corporate income taxes, and sales taxes measured on a percentage of income basis,” the report says. “Total state and local government spending and revenues in Maryland are not generally high compared to other states.”

Relying on the income tax

“We ought to be proud” of the state’s reliance on the income tax, said Neil Bergsman of the Maryland Budget and Tax Policy Institute, which advocates a “balanced approach” of tax hikes and spending cuts to balance the state budget. “The income tax is the one that is most related to ability to pay.”

“The main reasons that Maryland ranks so high on income tax reliance is because we allow local governments to share in the income tax,” Bergsman said. According to Senate President Mike Miller, Maryland is the only state that allows all its counties to share in the income tax, adding a piggyback tax of up to 3.2%, which the state collects for the local governments.

This is mainly used to fund the school systems, which receive half or more of the local budgets in most jurisdictions. School systems in most states rely on the more regressive property tax.

“This is also a fairer system,” Bergsman said.

The tax hike, which will get hearings on Monday in Senate and House committees, “is a compromise,” Bergsman said. “It is not anyone’s first choice. I liked the Senate plan better,” which raised taxes on a broader group. “It would have put us in a better position in coming years.”

Hogan disagrees, citing a January Gonzales poll that found 96% of Maryland voters thought they were taxed too much or just enough. “If our elected officials won’t listen to the 96% of Marylanders who are opposed to higher taxes,” Hogan said, “maybe they should at least listen to their own budget analysts who are raising red flags about over-reliance on the income tax.”

Business groups opposed

Maryland Business for Responsive Government, Americans for Prosperity and Republican lawmakers are all opposing the proposed income tax hikes, while groups such as Progressive Maryland are backing even higher tax increases, particularly on high income taxpayers.

Don Fry of the Greater Baltimore Committee writes in Center Maryland that the income tax proposal “would impose substantial tax increases on major segments of the state’s taxpayers.”

“These days, people with these kinds of income levels aren’t poor, but they are far from wealthy. And many are small business owners and job generators,” Fry says.

“In this economy does anybody deserve an income tax increase of 10 percent or more? A second pertinent question: is this kind of tax structure good for our business climate?

“It would appear to violate a core pillar of a competitive state environment for economic growth and job creation: ‘A tax structure that is fair and competitive,’” Fry concludes.