Maryland Democrats sketched out a three-part tax relief plan Tuesday that they say will lower state tax bills for 92 percent of taxpayers and save them as much as $1 billion in unintended tax increases.
Within hours, Republican Gov. Larry Hogan said he’d push a competing tax proposal — which he has not detailed — to accomplish the same goal.
The dueling proposals will attempt to insulate state taxpayers from an inadvertent tax increase prompted by changes to the federal tax law enacted late last year.
State leaders across the country — especially in high-tax states like Maryland, California, New York and New Jersey — are grappling with how to adjust state tax laws to make sure individual residents don’t see their state bills increase by hundreds or thousands of dollars next year.
Hogan first broached the need to avert a tax hike in December. On Tuesday, more than 60 Maryland state lawmakers, all Democrats, announced part of their plan to mitigate that tax increase, saying that their proposal is just a starting point.
“We’re going to flesh this out,” House Speaker Michael E. Busch, a Democrat, said during an Annapolis news conference. “We’re out here in front. … We want to have a solution on how we can help Marylanders retain their tax dollars.”
Hogan said he is waiting until the Maryland comptroller completes a review of the impacts of the federal tax changes before he introduces his plan. But he said he was “thrilled” the Democrats were talking about the idea now.
“I’m ready to throw a party,” Hogan said.
A Hogan spokesman later added that the governor would submit his own plan to rewrite Maryland’s tax code to avert a tax increase.
Hogan also previewed his $44 billion budget on Tuesday, saying it has no new tax increases and will hold state college tuition increases to 2 percent. The full budget will be released Wednesday, and debated alongside the competing ideas about to revamp Maryland’s tax code and how much money — if any — the state should keep to fund programs.
The biggest piece of the Democrats’ tax plan would allow taxpayers to continue to take personal exemptions on their state taxes even though such exemptions are eliminated under the federal tax code. Unless state law on exemptions is uncoupled from federal policy, lawmakers said, Maryland taxpayers will pay out an additional $680 million in state and local taxes next year.
For example, a single mother of two children who earns less than $100,000 a year would see her Maryland taxes increase by $762 next year if she cannot continue to claim those exemptions, according to a state analysis. A family of five who earns less than $150,000 a year would see their state income taxes go up by $1,270 next year unless state law is changed.
Preventing that would represent “the biggest tax cut in the history of Maryland, as far as I’m concerned,” said Senate President Thomas V. Mike Miller, a Democrat who has served in the General Assembly since 1975.
Hogan offered no details on his plan but said his mission is to avoid higher tax bills for residents.
“Our goal will be to leave all of that money in the pockets of hard-working Marylanders,” Hogan said.
The second piece of the Democrats’ plan uncouples Maryland’s estate tax from federal policy so that inheritances of $5 million or more are subject to Maryland taxes. Unless state law is changed, Maryland would be able only to tax estates worth $11.2 million or more, the same threshold set in federal law. Maryland stands to lose about $60 million a year in estate taxes if it adopts the federal threshold.
“We cannot afford to lose this revenue,” said Del. James “Jimmy” Tarlau, a Democrat from Prince George’s County who is sponsoring the estate tax change. “We’re going to need this revenue.”
The third part of the Democrats’ plan creates a way for taxpayers to make a charitable deduction to a state-run fund dedicated to education spending and, in turn, take that donation as a tax credit on their state taxes.
The federal bill caps the amount of state and local taxes that can be deducted from federal income taxes at $10,000, but donations to a charitable fund for education would not be subject to that cap, lawmakers said.
The complicated proposal for the education fund would not necessarily lower state tax bills for residents who donate to it. But the charitable deduction could lower residents’ federal tax liability in a way that other state tax payments would not.
Busch emphasized that the legislature did not yet have a comprehensive understanding of all the ways federal tax changes will affect state tax bills. But he said General Assembly leaders need to start acting now to develop a resolution in the remaining 85 days of the annual legislative session.
Busch and Miller said they were relying on outside tax experts as well as staff in the Department of Legislative Services to analyze the effect of the federal tax legislation. An aide to Sen. Ben Cardin was also helping state leaders figure out how to hold down Maryland residents’ tax bills, Busch said.
The proposal announced Tuesday is the first specific plan to address how to mitigate the impact of the federal tax changes.
Legislative leaders said they did not work with the Hogan administration to develop their plans but said they’d welcome his input.