With next year's $1.5 billion budget shortfall drawing ever closer on the horizon, Gov. Martin O'Malley has recently been launching some tax-related trial balloons of note. The latest two are certainly worthy of consideration - adding greater progressivity to the state's personal income tax and collecting more money from some of the state's largest tax-avoiding corporations. As far as solving the deficit goes, however, they are destined to run out of gas.
Let's start with income taxes. Maryland's rates are below average - until you add in the local piggyback taxes; then they are considered high. That's not necessarily a bad thing - financing local government with income taxes is far fairer than through property taxes, the usual alternative.
The trouble is, the income tax rate isn't sufficiently progressive. After $3,000 of income, everyone pays the same rate. The federal income tax doesn't work that way; the state's shouldn't, either.
But adding a point or two on the wealthiest tax-filers isn't going to raise all that much money - perhaps $200 million or so. It might be substantially less if the state simultaneously reduces the tax rate for middle- and low-income earners, as it should.
Meanwhile, the flatness of Maryland's 7 percent tax on corporate profits isn't the problem, but the fact that more than half of the 130 largest companies in the state don't pay a dime of it is. Corporations have become expert at shielding income - usually by creating a state-based subsidiary.
That's a problem not easily corrected. The most commonly discussed solution is so-called combined reporting, which would allow the state to look past the subsidiary and judge a corporation by its parents' finances as well. Other states, particularly in the West, have taken this tack.
But combined reporting has its own problems (a parent corporation's losses, for instance, might reduce tax payments in some instances). Estimates of how much more Maryland could collect vary widely, but $20 million is the current best guess from the legislature's budget analysts.
Raising the corporate tax to 8 percent would produce substantially more - about $84 million in new revenue each year. That's probably a better option, and it still leaves Maryland with a lower corporate tax rate than neighboring Delaware, Pennsylvania, Washington, D.C., or West Virginia.
This much is certain: Making the income tax more progressive, enforcing the corporate tax or even raising it - none of these measures will by itself come anywhere close to solving the looming budget deficit. But all would make the tax code a little more fair. As trial balloons go, that's moderately uplifting.