Negotiators reached a deal late Tuesday to alleviate by $100 million an expected $500 million state income hike tax for Maryland residents next year.
The agreement in principle between top negotiators in the House of Delegates and the Maryland Senate requires final approval by committees Wednesday, but includes 10 different tax cuts and credits designed to dampen the impact of rising state tax bills.
Federal tax cuts approved in December inadvertently triggered higher state taxes here because Congress eliminated many of the deductions that benefit residents in wealthy, high-tax states such as Maryland, New York and California. Without those federal deductions, Maryland residents will pay state tax on a greater amount of income.
Although the federal tax breaks pressed by President Donald J. Trump and enacted by Congress would lower federal tax bills for most people in Maryland, state tax bills are expected to go up and swell state coffers.
The deal reached Tuesday would increase Maryland’s standard deduction for the first time in more than 30 years and index it to inflation, which would allow the tax benefit to grow over time. That break amounts to about $40 for joint filers and $20 for single filers next year.
“It is a good compromise,” said Sen. Ed Kasemeyer, a Democrat from Howard County who is chair of the Budget and Taxation Committee.
House Ways and Means Committee Chairwoman Anne Kaiser confirmed the deal in principle. Kaiser, a Montgomery County Democrat, said it was “good policy” to help insulate taxpayers from inadvertent tax increases.
“It’s an opportunity to reduce the impact that the federal changes had,” she said.
Although the state expects to collect as much as $500 million more in state taxes if legislators don’t find a way to reduce state taxes, tax negotiators say the effects of the federal tax changes are too unpredictable to pass a package of tax cuts that large.
Instead, they focused on tax cuts that disproportionately benefited middle- to low-income people, as well as retired military veterans and corrections officers.
“It’s impossible to identify each and every taxpayer and how the federal tax cut impacted them,” Kaiser said. “It’s not a simple magic trick to do that calculation, so we’re looking at a mix of tax cuts.”
The biggest tax cut — about $56.6 million next year — comes from increasing the standard deduction. Roughly half of Maryland’s 2.7 million taxpayers already take the standard deduction and would see lower bills if it is increased. As many as 700,000 more filers are expected to take the standard deduction on state taxes next year.
The deal would raise the standard deduction for single filers by $250 to $2,250 and by $500 to $4,500 for joint filers. Maryland only allows taxpayers to itemize if they do so on their federal return, and state analysts expect many more people to choose the much larger standard deduction on their federal taxes.
Another $6 million in tax credits would expand the Earned Income Tax Credit to all low-income people who qualify. Currently, only poor people with children or poor single people over 25 years old can claim the benefit, which amounts to about a $100 cash refund, analysts said.
Other tax credits included in the package would exempt from state taxes some of the retirement income of corrections officers and military veterans. Republican Gov. Larry Hogan had championed such credits for years.
The deal also includes another Hogan priority: $5 million for a tax break for businesses with fewer than 15 employees who provide paid sick leave to their workers.
The package also includes an extra $3 million for the state’s film tax credit, bringing the state’s investment in the program to $8 million next year and increasing it by $3 million every year until it reaches a $20 million annual investment.
Maryland state lawmakers already voted last month to keep $200 million generated by higher state tax bills as a way to invest more in education. Another $100 million will be set aside as a reserve in case the state’s economic fortunes change.
Budget and tax analysts say they are not confident enough that the entire estimated $500 million will materialize, and they are taking a conservative approach to tax cuts.
Earlier this session, lawmakers passed another bill to stave off a separate and much bigger potential tax increase that would have cost taxpayers $800 million a year because the federal tax plan eliminated personal exemptions that helped drive down the amount Maryland taxpayers owe. Under legislation that has already passed, state taxpayers will still be able to take those deductions.