Piggyback tax: former reform gone awry?


The last time Maryland set out to make its tax system fairer, it created the "piggyback" tax -- the local income tax of up to 2.5 percent.

This time around, tax reformers point to the piggyback tax as one of their biggest problems.

While the tax was part of a 1967 plan intended to help equalize revenues among jurisdictions, critics say it now is the single greatest source of disparity in what local governments have to spend. It benefits high-income counties such as Montgomery, but it leaves Baltimore, with far more poor people and far fewer middle-income and upper-income residents, lagging behind.

In 1989, for example, the local income tax produced an average of $276 for every taxpayer in the state. By comparison, Baltimore was getting only $147.

When the piggyback tax was enacted in 1967, Baltimore got additional state grants designed to help equalize city revenues with those of other jurisdictions. The piggyback tax became the political trade-off for areas that got little or no benefit from those state grants.

On top of that, the piggyback tax also initially brought millions of dollars to the city, with its population of well over 900,000.

"We bought it hook, line and sinker. But it was a very shortsighted thing," said Sen. Julian L. Lapides, D-Baltimore, who was then a member of the House of Delegates.

The swelling of the suburbs -- and the dramatic population loss in Baltimore -- during the next two decades changed everything."At the time, we knew a county like Montgomery would realize more from piggyback," said former Gov. Harry R.Hughes, who as an Eastern Shore senator spearheaded the tax reform.

"But I don't think anyone could foresee the real estate boom and growth in Charles, Howard or Montgomery, for instance. I don't think anyone anticipated the disparity would be what it is."

The current reform panel -- the Maryland Commission on State Taxes and Tax Structure -- considered freezing the amount of piggyback revenues and redistributing any future increases more according to need, but it ultimately rejected the idea.

It would be "unrealistic, impractical and probably unfair," said R. Robert Linowes, the Montgomery County lawyer who heads the commission.

He didn't add that the notion might be politically impossible. Nothing is considered a more sacred source of money by legislators, whobelieve piggyback taxes belong to the counties in which they're raised.

As a compromise, the Linowes commission recommended holding the local income tax rate at 2.5 percent, even though the state rate would rise. Along with distributing the anticipated $100 million in new revenues to poorer areas, capping the piggyback could keep the disparity from getting worse.

But critics say capping the local rate, rather than allowing it to increase with the state's rate, would make the piggyback a regressive tax.

"This disparity argument on piggyback is totally insane," said Blair Lee IV, a Montgomery County developer. "Montgomery can't tax its own people just because it has a higher ability?"

But Mr. Linowes defends his proposal, saying it preserves a major source of revenue for the counties. He said a basic tenet of tax restructuring should be to reduce the difference in what jurisdictions have available to spend.

"If we don't do something like this, I don't know what the result will be," he said. "Some action has to be taken, not just for the welfare of a jurisdiction but for the welfare of the entire state."

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