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The tax they're not talking about [Editorial]

Laws and LegislationElectionsPersonal IncomeTaxationGovernment

With varying degrees of aggressiveness and specificity, all seven candidates for governor are pledging to change Maryland's tax code. The ideas range from eliminating the income tax altogether (Republicans David Craig and Charles Lollar) to raising taxes on millionaires and multi-state corporations to pay for cuts for small businesses and most individuals (Democrat Heather Mizeur). But for all the talk among the Republicans and at least one Democrat (Douglas F. Gansler) of the dozens of tax and fee hikes approved under Gov. Martin O'Malley, there has been little attention paid to the tax that has gone up the most during the past eight years: the sales tax.

At Mr. O'Malley's urging, the General Assembly approved an increase in the sales tax from 5 percent to 6 percent during a special legislative session in 2007. Today, that accounts for about $700 million in revenue for the state, a far bigger hit for taxpayers than Mr. O'Malley's second-term income tax increase, and more even than the recent gas tax increase will be when it's fully phased in. The sales tax increase generates more revenue in one year than the state's casino gambling program has produced for the Education Trust Fund since its inception.

Del. Ron George, an Annapolis Republican, has proposed to allow Marylanders to file on their income taxes for a 20 percent sales tax rebate for goods purchased in the state, and Mr. Lollar has said he would roll back Mr. O'Malley's sales tax increase. But those proposals have gotten less attention — and are talked about less by the candidates themselves — than their plans to lower corporate taxes and individual income taxes, in Mr. George's case, or to eliminate the income tax altogether in Mr. Lollar's. In general, the Republicans have talked far more about eliminating the stormwater remediation fees being imposed in Baltimore City and nine counties than the sales tax.

The Democrats, though, aren't talking about it at all, which is particularly curious given its regressive nature. An analysis by the Institute on Taxation and Economic Policy found that Maryland's sales tax falls much more heavily on lower-income residents than any other major levy. The poorest 20 percent of Marylanders — those who earn on average $12,600 a year — spend 2.4 percent of their income on the sales tax in 2013, whereas the top 1 percent, with an average income of $1.4 million, spend 0.4 percent of their income on it.

Maryland's sales tax isn't particularly high — even after Mr. O'Malley's increase, it's about average for the region — and it isn't as regressive some states' sales taxes because it exempts groceries. But it's also not nearly as progressive as it could be either because it exempts nearly all services, which tend to be more heavily used by those with higher incomes, and focuses instead on goods.

Governor O'Malley sought in 2007 to extend the tax to a handful of services, but he ran into strong opposition from each of the affected industries. In the end, he extended the levy only to computer services, a sector that did not have a large lobbying presence in Annapolis at the crucial moment, a deficiency that was quickly rectified. That tax was repealed shortly thereafter.

Still, the idea of broadening the sales tax base has cropped up from time to time, most recently in a 2012 bill by Del. Sheila Hixson, the chairwoman of the Ways and Means Committee, that would have extended the levy to dozens of new services, from tax preparation to steam baths. Legislative analysts estimated at the time that it could generate as much as $667 million a year. That would be roughly enough to offset a reduction of the sales tax back to 5 percent or to cover reductions in other taxes to make the system more progressive, to make Maryland's job climate more attractive, or both.

It's an idea worth considering, but it's not one the gubernatorial candidates are discussing. In general, the tax talk on the campaign trail is of the all-cake, no-spinach variety in which the trade-offs in terms of spending cuts or increases in other revenues are rarely discussed. There are some exceptions, notably proposals by Attorney General Gansler and Delegate Mizeur to close a tax loophole for multi-state corporations and by Ms. Mizeur to levy a tax surcharge on income over $1 million. But in terms of suggesting comprehensive reforms to make the state's tax code serve the causes of both fairness and competitiveness, the best we've got is Lt. Gov. Anthony Brown's underwhelming promise to establish a task force to study the issue.

If this election is, to some extent, a debate about Mr. O'Malley's fiscal policy, his largest tax increase and the state's second biggest revenue source ought to be part of the conversation.

To respond to this editorial, send an email to talkback@baltimoresun.com. Please include your name and contact information.

Copyright © 2014, The Baltimore Sun
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