March 18, 2012
Disinclined as we may be to pity the plight of those making more than $500,000 a year, the state Senate, in its attempt to raise more revenue from such top earners, has gone too far. The Senate has adopted a plan that appears to be unique among the 50 states and would violate a cardinal rule of income tax policy, which is that a dollar earned should not cost more than a dollar in taxes. When the House of Delegates takes up the budget, it will have some work to do to clean this mess up.
Gov.Martin O'Malleyproposed what remains the most sensible plan for raising new revenue through the income tax. Rather than changing the rates, his plan was to phase out some exemptions and deductions for the top 20 percent of Maryland earners. That had the benefit of being progressive (the amount it cost any family increased with their income) and of simultaneously providing new revenue for local governments as partial compensation for their adoption of some of the costs of teacher pensions.
But Maryland Realtors engaged in a highly effective public relations campaign designed to convince the public that Mr. O'Malley was seeking to eliminate the mortgage interest deduction. He was, of course, doing no such thing; his plan would have limited the total value of deductions high-income families could claim on their state income taxes to either 90 percent or 80 percent of their value on a federal tax return. Mortgage interest is, of course, only part of most tax filers' deductions, and in any case, most of the value of those deductions is on the federal, not state, tax return. The Realtors' contention that Mr. O'Malley's proposal would make it harder to own a home in Maryland was a major exaggeration, but it succeeded in destroying any support for the plan in the legislature.
Instead, the Senate Budget and Taxation Committee adopted a plan that would have raised income tax rates for most Maryland families. Currently, most Marylanders fall into the 4.75 percent tax bracket, with higher earners paying more, up to 5.5 percent for income over $500,000 a year. The Senate's plan created new brackets starting at $25,000 and $50,000 a year, and generally increased rates for most groups by a quarter of a percentage point. We have concerns about whether that plan would raise more money than is necessary to meet the state's policy goals, but it would at least make the system more progressive, and it would ask relatively little of those at the bottom end of the income scale. A married couple with two kids and a federal adjusted gross income of $50,000 would wind up paying less than $1 more per week.
Where things went seriously off the rails was with a floor amendment adopted on Wednesday that would create a new super-bracket for those who make more than $500,000 a year. The original plan would have raised the rate for that bracket to 5.75 percent. But the amendment called for that rate to apply to a taxpayer's entire income, not just earnings above that amount.
The upshot is this: Earning one more dollar to push your income from $500,000 a year to $500,001 a year would cost an extra $2,482 in state income taxes, or $2,752 if you file jointly. That makes no sense, and it gives the impression that Maryland tax law is hashed out on the fly, with little thought to the consequences. That, more than the fiscal impact on people making a half-million dollars a year, makes this bad policy. It also may well be unique; officials at the National Conference of State Legislators, the Federation of Tax Administrators and the Tax Foundation were unable to think of any other state that has a bracket like this one. That's not the kind of distinction we need to have.
We believe it is necessary for whatever plan the legislature adopts to include some new revenues, and for those revenues to increase the overall progressivity of Maryland's tax system. We just hope the House will come up with a plan that is better thought out.
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