Sales tax rise wrong solution for Md.

The Baltimore Sun

After several years of budgetary sleight-of-hand that saw funds transferred from one pot to another to keep the state budget in balance, it is clear that something must be done to deal with an expected $1.5 billion shortfall in next year's spending plan. Despite Gov. Martin O'Malley's efforts to trim spending, it appears inevitable there must be revenue increases. But any tax increases must be distributed fairly and not fall too heavily on those who can least afford them. That means adjusting the income tax, not the sales tax.

We can all share a little guilt about the "structural deficit." We all want quality schools. In 2002, Gov. Parris Glendening and the General Assembly responded with the Thornton plan, which pumped $1.3 billion more in state funds for education. I did not hear any complaints when Governor Glendening and the legislature in 1998 reduced income taxes by 10 percent, adding $800 million to today's deficit. Throw in overwhelming public support to expand health care and hold down college tuition, and it is clear Maryland's present revenue stream cannot meet the priorities citizens want.

But how we got to this situation is not nearly as important as what we do about it now.

The Sun has reported that Maryland's top political leaders intend "to push a variety of revenue-increasing options, ranging from a penny increase in the sales tax to an increase in the gas tax to allowing slot machines at race tracks."

A penny increase in the sales tax sounds simple enough, and many legislators have told me they think it is a politically safe choice. Maryland political history does not bear this out, however. Consider Gov. William Preston Lane's re-election loss over a one-cent sales tax in the 1950s. Gov. Blair Lee III raised the tax in the 1970s and lost the next election, and Stephen H. Sachs ran on raising the sales tax in the 1980s and lost as well.

Bear in mind, a one-cent sales tax increase is a 20 percent increase in arguably Maryland's most regressive tax. Maryland should not solve its fiscal problem by putting a disproportionate burden on the backs of those least able to pay. And Marylanders who live paycheck to paycheck have less ability to avoid the increase by shopping online or taking a trip to the Rehoboth outlets.

Will a Democratic governor and an overwhelmingly Democratic legislature follow Republican orthodoxy by raising taxes on consumption but not wealth or income?

Here's an example of what the "20 percent solution" gives us: A domestic worker earning $8 an hour - already forced by the sales tax to pay a significantly higher proportion of her income in state and local taxes than her employer does - would then have to pay a 20 percent higher sales tax on her child's shoes and winter coat. But her employer, earning a healthy six-figure income, still would pay no taxes on her $300 monthly health and beauty spa services, nor any increased income taxes. Is that what we want in Maryland?

Maryland's sales tax is outmoded as a consumer tax because it covers a declining portion of consumer spending. When the sales tax was instituted in 1948, it covered more than 60 percent of consumer purchases. Today, it covers well under 40 percent, and the trend is expected to continue. The current sales tax fails miserably as a broad-based consumption tax, and raising the tax rate on a shrinking base does not make much fiscal sense. Increasing the sales tax, then, is just kicking the can down the road.

The structural deficit provides the opportunity to make our tax system fairer. The last time Maryland underwent such an exercise was 40 years ago with the Cooper-Hughes plan. Operating on the premise that Maryland's tax system was regressive and taxes "must bear a reasonable relationship to ability to pay," the Cooper-Hughes plan resulted in a more progressive, graduated income tax.

The legislature in 1967 approved a tax rate of 4 percent on the first $3,000 of income and 5 percent for amounts above that. But in 1998, the top rate was cut to 4.75 percent, making the rate less progressive. The legislature should restore the 5 percent rate for incomes over $3,000 and, in keeping with the Cooper-Hughes philosophy of a fairer tax system, add a new rate of 6 percent for incomes over $100,000.

These increases would be offset by 25 percent, on average, with increased deductions on federal income taxes. By adding a limited sales tax expansion to nonessential consumer services used predominantly by wealthier residents, and a 10 percent adjustment to the corporate income tax, we would address the deficit and make Maryland stronger, with a more equitable and modern tax system.

It's a question of fairness.

George F. Harrison, a former journalist and retail operator, served in the administration of former Harford County Executive Eileen M. Rehrmann and was county coordinator for the O'Malley gubernatorial campaign. His e-mail is geohpcinc@comcast.net.

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