Save it, spend it or give it back? Future online sales tax windfall stirs debate in Maryland

A U.S. Supreme Court decision that could give Maryland $100 million or more in unexpected tax revenue is likely to present state elected officials with a welcome but difficult choice next year: Spend it, save it or give it back to taxpayers.

The court’s decision, which allows states to require out-of-state online retailers to collect sales taxes, is all but certain to set up a political clash over how to use the money when the General Assembly convenes in January, experts say.

Optimistic Democrats look at the money and envision it flowing into schools and other programs. Pessimistic Democrats see it as a hedge against a downturn. And Republicans see revenue that could let them cut other taxes.

Donald F. Norris, professor emeritus of public policy at the University of Maryland, Baltimore County, said he expects a tussle over the money, especially if Republican Gov. Larry Hogan is re-elected in November.

“We have the makings of a political donnybrook,” Norris said.

The governor’s office did not respond to messages seeking a comment.

Recalling this year’s dilemma over what to do about a potential revenue windfall for Maryland because of President Donald J. Trump’s new tax law, lawmakers say unexpected revenue can bring as much contention as a shortfall.

“It’s blood in the water,” said Sen. Andrew Serafini, a Western Maryland Republican who is one of his party’s leading experts on budget issues.

At this point state officials are not sure precisely how much extra money will flow into Maryland coffers as online retailers that do not have a Maryland presence begin collecting sales tax on items they ship to the state.

The comptroller’s office has estimated around $100 million a year. The federal Government Accountability Office projected last year that Maryland could gain as much as $252 million annually.

Amazon, the dominant force in online sales, already sends sales taxes to Maryland on the items it ships directly because it has a Baltimore distribution center. But under the ruling it would have to do the same for third-party retailers it represents. Smaller online retailers that have so far escaped the tax also would have to collect and remit sales taxes.

For people who patronize exempt out-of-state retailers, the Supreme Court’s ruling means a tax increase. No longer will they be able to escape the 6 percent tax Maryland levies on sales of most products that aren’t food or medicines.

Serafini, who sits on the powerful Senate Budget & Taxation Committee, would like to give the additional tax revenue back to Marylanders.

“Any federal action that creates additional revenue we should not treat as a windfall,” he said. “We should look for ways to give it back to the taxpayers.”

The tricky question is which taxpayers to give it back to. The most obvious way to give it back: don’t implement such a tax by writing the former loophole into state law. But that would benefit the out-of-state companies at the expense of in-state, bricks-and-mortar retailers that have labored under a tax disadvantage for decades.

“They would raise holy hell — as they have been,” Norris said.

Serafini agreed that that’s a bad way to go. “There should be more general tax relief,” he said.

But $100 million — if that’s the amount — doesn’t provide much relief. It wouldn’t, for instance, let the state lower the sales tax by a point.

“You could give a modest tax cut,” Norris said.

General Assembly Democrats differ over how to use the money.

Sen. Richard S. Madaleno Jr., vice chairman of the Senate budget committee, has pushed for legislation aimed at challenging the out-of-state loophole for the past two legislative sessions. Now the Montgomery County Democrat is a member of a commission headed by former University of Maryland System Chancellor William E. “Brit” Kirwan that is expected to propose more funding for the state’s schools when it submits its report later this year.

“That would help with the funding for the Kirwan Commission,” said Madaleno, a candidate for governor in Tuesday’s primary.

Another possible use, he said, would be to make college more affordable for young Marylanders.

His budget committee colleague, Sen. Nancy King, said she is skeptical about spending the money or giving it back as tax cuts. The Montgomery County Democrat recalled a briefing earlier this year from a Moody’s Corp. economic analyst in which he warned a recession could be around the corner in 2019 or 2020.

The state needs to be better prepared for a downturn than it was before the recession hit in 2008, she said.

“I’m pretty cautious about spending large amounts of money at this point,” King said.

If the state were to spend it, King prefers funding early childhood education and putting social workers in schools.

Norris said he expects many lawmakers, especially Democrats, to propose ideas about spending the money. But he cautions that it’s not much in the context of the overall budget.

“What is $100 million out of $45 billion?” Norris said.

Warren Deschenaux, who until late last year was chief budget analyst at the Department of Legislative Services, said he doesn’t see the money going to either new programs or tax cuts.

Deschenaux said the state faces big future expenses, especially if voters approve a constitutional amendment this November restricting the use of casino revenue to education. If they do, he said, the state will have to find $100 million a year for five years to keep all its other programs running.

At the end of the five-year phase-in period, a $100 million windfall would make up one-fifth of the revenue lost to those programs, Deschenaux said.

“We need the money to pay for what we’re committed to,” he said.

mdresser@baltsun.com

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