House and Senate negotiators are poised to hammer out the differences between the tax cut packages Republicans in both chambers muscled through this fall. Some significant differences remain between them, and the ultimate details remain in flux. But enough is known to begin to predict how whatever legislation emerges might impact Maryland.
The Bureau of Revenue Estimates has crunched the numbers based on the parameters of the House bill, and the big picture conclusion is that Marylanders would pay less in taxes to the federal government overall. The analysis has some limitations, notably where changes to pass-through income are concerned, and thus understates the benefits to the wealthy, but in general it shows that about 60 percent of the state’s taxpayers would get a tax cut equivalent, on average, to 1.9 percent of income.
But neither the House nor the Senate bill is a simple tax cut. Both include substantial re-writing of the tax code in ways that create losers as well as winners, and many of the bills’ provisions are distinctly worse for Maryland than they are for other states. About 22 percent of the state’s residents would see their taxes go up under the House bill, and in some cases the impact could be significant. Here are five ways in which Marylanders could get whacked by the legislation.
State and local tax deduction
Both the House and Senate tax bills eliminate the ability to deduct state and local income or sales taxes, and Maryland happens to be No. 1 in the nation in the percentage of filers who take advantage of that provision. As of the 2015 tax year (the last for which IRS statistics are available), 43.1 percent of the state’s filers did so, far higher even than other high-tax states like Connecticut, New Jersey, New York and California. The state’s residents shielded about $12.5 billion from federal taxation using that deduction, and for many of the state’s residents, the reduction in individual income tax rates (whether it’s the four-bracket system in the House plan or the seven brackets of the Senate plan) won’t offset the cost of losing it.
And lest you think there might be a silver lining in the House vote to repeal of the alternative minimum tax — a levy designed to prevent high-income filers from racking up so many deductions that they pay too little in taxes — think again. True, those subject to the AMT aren’t able to deduct state and local taxes anyway, and Maryland ranks sixth in the percentage of filers hit by the AMT (4.9 percent). But the Tax Policy Center, a joint effort of the Urban Institute and Brookings Institution, crunched the numbers and found that three-quarters of current AMT filers would pay more if both the state and local deduction and the AMT are eliminated.
Graduate school tuition waivers
One of the most senseless pieces of the House tax legislation is a provision that would subject to income taxes the tuition that universities waive for graduate students. Frequently, such students earn a modest stipend for teaching classes or assisting professors with research (which is taxed now) and also get free tuition (which is not). The tuition is usually substantially greater in value than the stipend, and if they are forced to pay taxes on it, graduate students could see their tax bills double, triple or worse. (Grad students, check out what it means for you via this calculator developed at U.C. Berkeley.) Maryland is No. 2 among the states in the percentage of its residents who are enrolled in graduate school, a tenth of a point behind Massachusetts at 1.9 percent. (Washington, D.C., gets really socked here; a whopping 3.8 percent of District residents are grad students.) In a state like this one, where so much economic activity in areas like the biosciences and cybersecurity is related to basic research, a change that makes graduate education unaffordable for most people would be devastating.
Neither version of the tax bill does away with the popular home mortgage interest deduction altogether, but the House legislation applies stricter limits to the benefit. If that provision prevails, mortgages in excess of $500,000 would no longer be eligible for the deduction. For the vast majority of homeowners, that’s not an issue. But it’s certainly a bigger one in Maryland, which ranks seventh among the states with 7.2 percent of mortgages exceeding that threshold, according to 2012-2014 data compiled by the National Low Income Housing Coalition. In Montgomery County, the figure was nearly 20 percent. And once again, bad news for D.C.: More than 27 percent of mortgages there exceed $500,000.
Meanwhile, both versions of the tax package limit the amount of state and local property taxes that filers can deduct to $10,000. Based on the combination of high property values and high local tax rates, particularly in places like Baltimore City, a substantial number of households will lose out because of that.
Because of those factors and others, the National Association of Realtors predicts the tax bill will cause property values to decline in every state, but more so here than in most places. It lists Maryland in the top five in terms of losses, behind New Jersey, Connecticut, Illinois and New Hampshire.
The good news for non-profits is that both the House and Senate bills preserve the deduction for charitable donations. The bad news is that the deduction only comes into play if filers itemize their deductions, and both bills are designed to encourage fewer people to do so. Maryland is No. 1 in the nation both in the percentage of filers who itemize (45.9 percent) and in the percentage who claim deductions for charitable contributions (38.5 percent). Taking away that incentive is not good for Maryland-based charities.
The ticking time bomb in the Senate version of the tax bill is the expiration of individual income tax cuts after 2025, a move that allows Republicans to make corporate tax cuts permanent while keeping the increase in the debt within the bounds of special Senate rules that allow the measure to pass on a party-line vote. The assumption is that a future Congress would never let that happen and that the cuts will be made permanent — which would provide the pretext for the GOP’s goal to radically shrink the size of the federal government. Should Republicans succeed in shredding the social safety net, that would have profoundly negative consequences in every state. But given the outsized role of federal spending on Maryland’s economy (and those of neighboring D.C. and Virginia), the effects here would be particularly acute. Economic growth ground to a halt here after the budget sequestration deal President Barack Obama struck with Republicans to avert a government shutdown. Another round of major federal budget cutting would doubtless be just as bad.
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