Michael McDonough has run the numbers for his Maryland taxes, and they don’t look good.
If the retired Catonsville man takes advantage of the new federal tax cuts next year, his refund from the U.S. government will be $1,400 bigger. But federal tax changes will drive his Maryland taxes up by $900, erasing nearly two-thirds of his federal windfall.
“That’s pretty bad,” said McDonough, 79, a former account manager who earns a six-figure income. “That’s not the way it’s supposed to work, is it?”
More than one Maryland taxpayer in five will be in a similar situation next year, according to the state’s Bureau of Revenue Estimates. The state’s tax code is linked to the federal code. Federal changes — particularly the elimination of deductions used widely in Maryland to reduce the amount of income that’s subject to taxation — have caused state taxes to increase.
About 22 percent of state taxpayers are expected to see their state and local income tax bills go up, on average, by an estimated $730.
The tax relief plan nearing final passage in the Maryland General Assembly Monday, the last day of the 2018 legislative session, would reduce that average increase by $40.
While state lawmakers have carved out more relief for younger taxpayers, the working poor, military retirees, small businesses and retired corrections officers, they decided they had to delay more relief for all taxpayers until they could see precisely how much state tax bills increase as a result of the federal changes.
In the meantime, they’ve approved a plan to spend about $300 million of the estimated $400 million in new state revenues generated by the higher state tax bills, setting aside most for education and the rest for a rainy day.
“They’re getting a $300 million windfall on the backs of 22 percent of Maryland,” said McDonough, who says he votes for both Republicans and Democrats. “That’s ludicrous. It’s unfair. It’s not immoral, but it’s an insult.”
Lawmakers from both parties said they didn’t have good options as they decided how to mitigate state tax increases.
“In every bracket along the way, there will be people who will lose and who will win,” Sen. Andrew A. Serafini said. The Western Maryland Republican, a financial planner, helped negotiate the tax relief plan.
About 75 percent of the people who will see higher bills earn less than $150,000 a year. Their bills are expected to increase between $448 and $578 a year, on average, according to the state’s forecasters. Those earners are targeted for the $40 in tax relief.
“Clearly, could we have gone further? Yes,” Serafini said. “We’re worried about [education funding], we’re worried about an economic downturn.”
High-tax states such as Maryland, California and New York are scrambling to respond as accountants and financial planners try to figure out what the federal shifts mean. The uncertainty and complexity made Maryland’s lawmakers cautious.
“The federal tax bill is so hastily drafted, and then people wanted us to hastily fix it, and that’s a recipe for disaster,” said Del. Anne R. Kaiser, the Montgomery County Democrat who chairs the House Ways and Means Committee.
Kaiser was one of the architects of the $156 million tax relief plan that will be up for final approval Monday, the final day of the 90-legislative session.
There’s no way to accurately predict how the federal changes will affect each of Maryland’s 2.7 million taxpayers. The estimated impacts of the federal changes, lawmakers from both parties say, are too squishy and have changed every few weeks.
Higher tax bills are expected to hit people with small and large incomes, in minor and major ways, depending on many variables. Lawmakers said it’s too complicated and irresponsible to figure out a solution based on guesswork.
“While it was our goal to make taxpayers whole, it also became clear that becomes impossible,” Kaiser said. “And not impossible politically — impossible mathematically.
“We can come back next year and we can do more when we have better numbers,” she said. “There’s a lot of reasons for us to be cautious, for us to give some tax relief to everyone, some targeted tax relief, and to otherwise be cautious.”
Sen. Edward J. Kasemeyer, chairman of the Budget and Tax Committee, also worked on the tax relief plan. The Howard County Democrat said lawmakers were frustrated to discover the higher state income tax bills hit different people for different reasons, so there was no way to tailor narrow tax relief.
“There were was a not a common denominator that we could target,” Kasemeyer said. “There weren’t the resources to fix everybody’s problem.”
The $156 million package of 10 bills includes a $250 increase in the standard deduction for single people and a $500 increase for couples, the first increase in three decades. Those changes are expected to return $87 million to 58 percent of taxpayers. It amounts to about $40 for married couples.
The plan also gives $7.5 million to low-income people under 25 who have jobs but not children, expanding the Earned Income Tax Credit to younger people who would see an additional $100 refund.
Military veterans and corrections officers would see more of their retirement income exempted from taxation, delivering a total of $6.5 million in tax relief. Small businesses that offer certain benefits to their employees could take advantage of $5 million in tax credits. Corporations could file their taxes differently thanks to a change in something known as the “single sales factor,” a change legislative analysts said would save businesses $38 million in state taxes next year. The plan also would set aside $10 million for a film tax credit and a $50,000 tax benefit for recycling oyster shells.
Politicians might face backlash in an election year when taxpayers realize they did not stop many people’s state tax bills from going up.
“On one hand, people won’t feel the brunt of this until after the election,” said Mileah Kromer, a political scientist at Goucher College. “However, this will be a front-and-center campaign issue.
“It’s going to be a battle over taking blame,” Kromer said.
She doubted the debate would have as much impact as a similar one had in the 2014 election, when Republican Larry Hogan ran on a platform of rolling back tax increases passed by Democratic Gov. Martin O’Malley.
“This involves a lot of moving parts and is more complex than just ‘Maryland raised my taxes,’ ” Kromer said. “People are motivated by their pocketbooks, but it doesn’t mean that every resident understands the nuances of the tax code.”
The Hogan administration supported the plan to set aside $200 million for education and the governor introduced a bill that would have given back $900 million beyond the $400 million expected to flow into state coffers from higher tax bills.
Amelia Chasse, a spokeswoman for Hogan, said the plan before the General Assembly “made progress in the right direction” but “falls short” of what the governor pushed.
“Ultimately, the fact that the conversation this session has been about tax relief shows the impact the governor’s focus on common-sense fiscal policies,” Chasse said. “In past years it simply would have been about how to spend the additional revenue.”
Benjamin Orr, executive director of the nonpartisan Maryland Center on Economic Policy, said state policy makers were smart to avoid giving back all the new additional tax revenue before they know exactly which taxpayers will be paying how much more — and before they know whether the federal government plans to reduce state aid.
“Yes, it’s a small fix. I also think it’s an appropriate fix,” Orr said. “It’s a huge tax bill, and all of us are trying to still figure out all the ins and outs about what it does.”
With the possibility of future federal budget cuts to state programs that many Maryland residents care about — funding for the Chesapeake Bay, for example — Orr agreed it was prudent to take a wait-and-see approach.
“We just have no clue what President Trump and Congress are going to do in terms of budget cuts,” he said. “We need to plan ahead for these potentially drastic changes in support we get from the federal government.”
McDonough said he’s not buying any of that. He says state lawmakers shouldn’t blame Congress, shouldn’t blame complexity, and shouldn’t come up with a way to spend new revenues instead of giving it back.
“It’s a lame argument they’re making,” he said. “Maybe Maryland could have TurboTax handle it for them.”