By John Fritze, The Baltimore Sun
3:13 PM EST, December 15, 2012
Regardless of whether the president and Congress strike a deal or take the nation headfirst over the "fiscal cliff," federal taxes for some Marylanders will increase next year — and under some scenarios the pain could be worse than in other states.
Even if the White House and Republicans find middle ground by the end of the month, an agreement that includes higher tax rates for top income brackets — as the Obama administration has insisted — would likely have a disproportionate impact on wealthy Maryland.
Lawmakers have struggled for months to avert the nearly $600 billion in automatic spending cuts and tax increases that will take effect in January if nothing is done. Although the fight has hinged on tax rates for taxable income of more than $250,000, experts note that bills for families at all economic levels will be affected by whatever Washington delivers.
"Taxes are going to go up," said Kathy Snyder, president of the Maryland Chamber of Commerce, adding that many business owners are resigned to the reality of the nation's latest financial showdown. "People are just [asking] what the level will be so they can plan appropriately."
If Washington fails to reach an agreement, middle-class families nationwide would pay on average about $2,200 more in taxes. Because of its mix of both low and high incomes, the Baltimore metropolitan area would be the 15th-hardest hit in the nation, according to an analysis released last week by the nonpartisan Tax Foundation.
A family of four earning the area's median household income of about $105,000 would pay nearly $7,000 more, according to the group's analysis.
Low-income families also could pay significantly more as a percentage of their earnings if no deal is struck. The Earned Income Tax Credit and the Child Tax Credit were both expanded under the 2009 economic stimulus, but those more generous benefits are set to expire at the end of the month.
If they do, the poorest 20 percent of taxpayers would see their taxes go up by more than $200, according to the independent Tax Policy Center.
"There's a lot of debate about the rich, but one thing that doesn't get talked about is there are a lot of things in there that disproportionately affect low-income families," said Nick Kasprak, a Tax Foundation analyst.
On the other hand, avoiding the cliff would likely involve raising top income tax rates that had been lowered during the administration of George W. Bush — a change the White House insists must be included in any deal.
The extent of a possible federal income tax rate increase is not yet clear — the Obama administration has left itself room to negotiate on both the rate and the $250,000 threshold. But any change to the rates paid by top earners would disproportionately affect Maryland, which has a higher share of households earning more than $200,000 than any state but two, Connecticut and New Jersey.
Nearly 168,000 Maryland households — about 8 percent — earn more than $200,000, according to the Census Bureau.
A federal rise would come in addition to state income tax increases imposed this year by the General Assembly. When local "piggyback" income taxes are included, Maryland has one of the highest income tax rates in the country.
Count Baltimore entrepreneur Brian Le Gette among those who do not mind paying a bit more in federal taxes if it keeps social programs solvent and ultimately leads to a healthier economy. Le Gette, 47, would be affected by higher tax rates on family income over $250,000.
"At some point, there's got to be a give here for those who can give if the country matters, if the community we're in matters," said Le Gette, who co-founded a Sykesville-based company called ZeroChroma that makes cases, stands and other accessories for mobile devices such as Apple's iPhone and iPad.
"This doesn't seem like a massive give," he said, adding that the debate "seems to be hyperbolic in some ways."
That doesn't mean Le Gette doesn't want to see changes in the federal government. But instead of fighting over a relatively small tax increase, Le Gette said, he'd prefer that lawmakers look for "intelligent, large, structural" reforms to the way government works.
"If you fix the broken machine," he said, "I'll make more and everyone will make more."
But businessman Eric Maynard of Pasadena noted that whatever additional tax he sends to Washington is money he can no longer invest in expanding his small business. Maynard, 49, said he would prefer to see structural changes to the way Washington spends money first, before he pays more in taxes.
"Personally, I don't have a lot of confidence that the choices we're making at the federal level are necessarily going to be the way out" of the nation's sour economy, said Maynard, who owns a Curtis Bay event production company called Event Tech. "I'm now a little more risk-averse."
Income taxes have received the most attention in the fiscal cliff debate, but are only a piece of the tax problem facing lawmakers. Capital gains taxes, payroll taxes and tax breaks for dozens of industries, including developers of low-income housing, are also at stake.
Among the most important yet least understood tax issues for middle-income families is the alternative minimum tax. The current AMT was created in the 1980s to prevent the wealthy from avoiding taxes, but because the definition of "wealthy" was not tied to inflation, up to 25 million middle-class families will pay the higher rate if lawmakers do not act.
Despite a series of meetings and phone calls between President Barack Obama and Republican House Speaker John A. Boehner last week, hopes are slim for a broad deal that would not only avoid the cliff but address systemic budget deficits. The focus increasingly is on a smaller agreement that would put off significant decisions on taxes and spending until next year.
Gauging the economic impact of potential tax increases on the state's economy is difficult. In the view of Neil Bergsman, director of the Maryland Budget and Tax Policy Institute, lawmakers would best help the economy by not raising taxes and not cutting spending. But given the focus on deficit reduction, lawmakers are likely to do both, he said.
But Bergsman is more concerned about spending cuts than tax rates for the rich.
"When economists look at a bang-for-the-buck calculation, what causes the most harm are cuts to programs like unemployment insurance and food stamps," he said.
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