A consensus is emerging among Maryland Republicans that a top priority for the state's economic development is to reduce the state's income tax rates or even to eliminate the tax entirely. They argue that Maryland's taxes have gone up far too much during the administration of Gov. Martin O'Malley and that the income tax in particular is driving people, businesses and jobs to other states.
Unspoken in this line of reasoning is that the individual income tax is the most progressive levy we have and that eliminating it would disproportionately benefit the wealthy while diminishing the availability of services that the public broadly depends on.
Republicans in the House of Delegates are backing a plan that would cut income tax rates by 10 percent over three years, and this week, Harford County Executive David Craig, a Republican candidate for governor, pitched a proposal to drop the top rate to 4.25 percent and increase the personal exemption from $3,200 to $5,000, as the first phase in an eventual elimination of the tax. (Republican gubernatorial candidate Charles Lollar has also called for the elimination of the income tax, but he has not yet provided the details.) They are pitching their plans as a means to provide relief to the beleaguered middle class, with Mr. Craig dubbing his the "vote yourself a raise plan" and House Republicans saying their proposal would mean families would struggle less to make ends meet or maybe even afford a weekend getaway to Ocean City.
The truth, though, is that for the average taxpayer, the relief they're talking about is much more modest. According to statistics from the comptroller's office, the median net taxable income on Maryland returns in 2012 — that is, the amount after all deductions, exemptions, etc. — was $16,086 for single filers and $40,267 for joint filers. That means a typical single filer would save $71 and a typical joint filer $186 under the House plan. Savings under the Craig plan would depend on the size of the household, with a typical single person saving $116 and a typical family of four saving $365. Even in the dead of winter, you'd be hard pressed to manage a weekend in Ocean City under any of those scenarios. Meanwhile, the annual savings for top earners would run into the thousands.
The House plan would cost the state about $775 million in annual revenue, according to the Department of Legislative Services. Mr. Craig estimates that the first phase of his plan would cost $600 million. Eliminating the income tax entirely would blow an $8.5 billion hole in the budget.
Neither Mr. Craig nor the House Republicans have offered many details for how they would offset that lost revenue. The delegates merely point to the fact that the state's overall budget is projected to increase by about $2 billion next year and suggest that covering the tax cut would require no more than slowing the rate of spending growth. But the majority of that increase comes in special budget funds that are not supported by the income tax, and most of the rest is tied to things like increased school enrollment, not new programs.
Mr. Craig promises "zero-based budgeting" — a tactic that was used during Republican Gov. Robert L. Ehrlich Jr.'s administration but which did not result in drastic changes in the trajectory of state spending — and a review of state agency operations. Mr. Craig also promised to eliminate the governor's coordinating offices, a move that would save less than $15 million, unless he intends also to eliminate the more than $100 million in grants those offices distribute, most of which pays for additional police officers in city and county departments.
Mr. Craig also posits that his tax cut will at least partially pay for itself because of the increased economic activity it would spark. But the extent to which that would come to pass is unclear. The vast majority of the money Maryland collects in taxes is spent in the state in the form of salaries, payments for health care, grants and procurement of equipment and supplies. Would small businesses, which often pay taxes under the individual income tax code, have more money to invest and create jobs under Mr. Craig's plan? Perhaps so, but they would also find they had fewer potential customers as a result of state budget cuts.
What's most remarkable about the focus on the income tax is this: For the price of either the House or Craig tax plan, the state could roll back the 1-cent increase in the sales tax Mr. O'Malley championed — a tax that is borne disproportionately by the poor and middle class. If we are going to enact tax reform, it should be focused on making the system more progressive, not less.
But given the uncertainty of the economic recovery, continued pressure to cut federal spending and the persistence of state budget shortfalls, lawmakers should be cautious about any tax cuts at the moment. The last time Maryland cut its income tax, in 1997, it contributed to the fiscal imbalance that prompted Mr. O'Malley's first round of tax increases a decade later. That's an experience we need not repeat.
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