Unless state leaders step in, more than a quarter of Maryland taxpayers will owe more in state and local taxes because of the federal income tax cuts — a cost of more than $400 million next year, according to an analysis unveiled Thursday by Comptroller Peter Franchot.
Hours later, Gov. Larry Hogan released his plan to return the unexpected windfall to taxpayers, largely by allowing Marylanders to take the newly increased standard deduction on their federal taxes while still itemizing deductions on their state tax bills.
Franchot’s report will play a crucial role as the Republican governor works with lawmakers on both sides of the aisle to attempt to insulate Maryland residents from a huge, inadvertent state tax hike. General Assembly Democrats proposed their own set of solutions last week.
The comptroller's detailed analysis adds clarity to the fuzzy calculations that lawmakers have been using since President Donald J. Trump signed the $1.5 trillion tax cut into law Dec. 22. The earlier estimates had been dire, suggesting that Marylanders’ state tax bills could grow by as much as $1 billion if state leaders did not adjust tax laws, as they have pledged to do.
Franchot’s report says the federal reforms would not affect about 69 percent of Maryland state tax bills, while increasing 28 percent and lowering 4 percent of bills. Meanwhile, more than 70 percent of Marylanders are expected to see an average of $1,700 in cuts to their federal tax bills — a total savings of $2.8 billion for state taxpayers.
Factors likely to determine how an individual taxpayer might be affected include whether they have children, whether they typically itemize their deductions, and whether they have business income or losses.
“Every taxpayer needs to examine their situation,” said Andrew Schaufele, director of the state Board of Revenue Estimates. “It’s going to impact every single taxpayer, and everyone’s situation is going to be different.”
Maryland stands to collect extra revenue because it calculates tax bills using residents’ federal adjusted gross income -- and under tax reform, the government has significantly limited the deductions and exemptions that can be applied to reduce taxable income. At the same time, the new federal law significantly increases income tax breaks for having children and for having business income.
Hogan is proposing to allow Marylanders to take advantage of the benefits in the federal law while preventing the measure from affecting their state tax bills. Current state law requires taxpayers to use the same deductions on state returns as on federal returns, but the governor is introducing a bill that would allow residents to minimize their state tax bills by itemizing deductions even if they take the standard federal deduction.
State economists expect many residents who previously itemized their deductions will be tempted to start taking the newly higher standard deduction.
“Under our proposed legislation, Marylanders will not pay one cent more in state taxes as a result of actions at the federal level,” Hogan said.
Hogan also endorsed a legislative change that Franchot urged lawmakers to adopt — clarification of a state law that says residents can only take certain deductions on their state tax returns if they have included them on their federal returns. Many of those deductions won’t exist any more at the federal level, but Franchot’s office calculated its report based on the assumption that taxpayers could still take those breaks on their state returns.
Schaufele called that interpretation “ambiguous” and said it could be open to a challenge. If Hogan and state lawmakers do not step in to resolve that confusion, state tax bills could rise by another $1.2 billion, officials said.
“The legislature must work with us right now to find a solution that creates certainty rather than ambiguity for Maryland taxpayers,” Hogan said.
Last week, a group of more than 60 Democrats in the General Assembly unveiled a plan to allow Marylanders to continue to take personal exemptions on their state taxes. They also proposed creating a state-run fund dedicated to education spending and allowing taxpayers to make donations that they could count as charitable deductions on their state taxes.
However policymakers address the issues with state tax law, Franchot expressed optimism over the windfall Marylanders are expected to receive on their federal tax bills. He said that while he was “incredibly disappointed” that the federal legislation was produced without any public hearings, he hopes that it will stimulate the state and national economies, as Republicans say it will.
“I think it’s irresponsible for any elected official to root against the success of this law, which is heavily tied to the success of our nation’s economy,” Franchot said. “I will be cautiously optimistic this will inject a much-needed boost into the arm of our state economy, which continues to recover over the last eight years at a very sluggish rate.”
But Franchot and Schaufele warned that the federal tax reform could make it harder for Maryland charities to raise money. For taxpayers taking the standard deduction, there is no financial incentive to donate to charity.
“We would hope that everyone would continue their level of altruism, but it’s just not going to be there at the current level,” Schaufele said. “People respond to economic incentives.”
Here are some factors expected to drive tax bill changes for individual taxpayers:
- Many more taxpayers are expected to choose the standard federal deduction, which has been nearly doubled to $18,000 for heads of household and $24,000 for joint filers. The comptroller’s office expects about 600,000 taxpayers to lose $6.7 billion in federal deductions because of the change, most of them earning from $100,000 to $500,000 a year. It predicts 1.8 million taxpayers, most of whom earn less than $100,000, to gain $10.8 billion in deductions.
- A loss of itemized deductions -- including a $10,000 cap on federal deductions that can be claimed for state and local tax payments --is expected to hit mostly high earners. For earners of more than $1 million, the average loss is expected to be $216,000 in deductions.
- Personal exemptions for dependents have been suspended on federal tax returns through 2025. That is expected to cost 2.4 million Maryland taxpayers an average of $7,700 in exemptions.
- The amount being offered for child tax credits has been doubled, and is being offered to higher earners. It is expected to produce $1.3 billion in non-refundable credits, an average of $2,000, for 633,000 taxpayers.
- Newly broadened and mostly reduced tax brackets will decrease federal tax rates for nearly all Maryland earners. Among married joint filers, for example, rates are rising only for those earning between $400,000 and $416,700, from 33 percent to 35 percent.
- Many small-business owners will be able to deduct 20 percent of “qualified business expenses” from their taxable income. The comptroller’s office expects this to create an average of $9,700 in new deductions for about 93,000 taxpayers.