O'Malley details cut in income tax

The Baltimore Sun

Seeking to make the first changes in 40 years to Maryland's income tax structure, Gov. Martin O'Malley unveiled a plan yesterday that he said would lead to an income tax reduction for most people but would cost top earners thousands more a year.

The proposal is the first that O'Malley has discussed in detail from his plan to close a projected $1.7 billion budget gap next fiscal year and add hundreds of millions in new spending. He called it a measure that would cut taxes for 95 percent of Marylanders, but he has not released enough specifics to calculate the total impact of his proposals -- which include increases to the sales tax and other levies.

The measure would transform Maryland's income tax from a system in which effectively everyone is in the top bracket of 4.75 percent into one in which the rates are steeply graduated by income. The governor said that change would make the system more progressive and benefit most taxpayers.

"If you're a billionaire, you're [now] paying the same 4.75 percent rate that the woman who comes in and cleans your office at night as a second job pays," O'Malley said in a campaign-like appearance at a Baltimore County family's home.

"Under this component of our budget reconciliation plan, working families will be treated much more fairly than they have been."

Critics said O'Malley's overall tax plan will look a lot worse when all the details come out.

"What the governor is not emphasizing is that the combination of the other tax increases he is proposing, including dramatic increases in the sales tax and the corporate tax ... collectively will swamp whatever benefit the average Marylander gets from that small cut in the income tax rate," said Del. Steve Schuh, an Anne Arundel Republican.

The Democratic governor's income tax proposal would generate about $163 million more for the state treasury, a relatively small fiscal component of O'Malley's plan to erase the budget deficit and boost spending for roads, mass transit, health care and the environment.

But politically, it could be key.

O'Malley centered his 2006 campaign on a promise to help "working families," and he stressed yesterday that he wanted to revamp the income tax to help people who have been "taking it on the chin" with stagnant incomes and higher college tuition and fees.

Maryland's current income tax brackets were set in 1967 at $1,000, $2,000 and $3,000 and have not changed.

Under O'Malley's proposal, individuals would pay lower rates on their first $15,000 in taxable income and couples on their first $22,500 before the 4.75 percent rate kicks in.

He would add two brackets for top earners, at $200,000 and $500,000 for couples and $150,000 and $500,000 for individuals. Income in the new brackets would be taxed at 6 percent and 6.5 percent.

According to figures from the governor's office, 95 percent of Maryland taxpayers would see their income taxes reduced, 1.3 percent would see their income taxes unchanged and 3.7 percent would pay more.

For example, a single filer with a gross income of $75,000 would save $90 a year. A married couple making that much would save $176. Single filers would pay more if they earn above $157,200 a year in taxable income, and married couples would pay more if their taxable income is greater than $214,100.

By making the income tax proposal the first element of the plan he has discussed in detail, O'Malley was able to begin his conversation about potential new revenues by talking up a tax cut.

Many of the other components -- an increase in the sales tax rate from 5 percent to 6 percent, higher corporate and vehicle titling taxes, and legalizing slot machine gambling -- will likely be a tougher sell, O'Malley said.

Changes in the income tax could prove controversial, too. Maryland's income tax rate is relatively low by national standards, but the state is one of just a few that allow county governments to levy income taxes. Those add, on average, about 3 percentage points, making the state and local income tax burden in Maryland one of the highest in the country.

"Any way you cut it, this is a massive tax increase that will severely hamper Maryland's competitiveness," said Curtis Dubay, an economist at the conservative-leaning Tax Foundation.

Del. Anthony J. O'Donnell, the minority leader from Southern Maryland, said that if O'Malley cared about taxpayers, he would rein in spending, not increase the top income tax rate.

"This to me is a march on the working families of Maryland," O'Donnell said. "This governor is bludgeoning Maryland families with his tax baton."

Former state Sen. Barbara A. Hoffman, now a lobbyist in Annapolis, said that although it will hurt top earners, O'Malley's proposal -- which also includes an expansion of the earned income tax credit for the working poor -- will increase tax fairness.

"You have to be honest and look at the local and state tax rate together because they come out of the same person's pocket," said Hoffman, a Democrat. "But it is important to make it more progressive. It is related to the ability to pay."

O'Malley released the details of his plan during a campaign-style "kitchen table" event in the Anneslie home of Sarah Achenbach, Jason Knott and their two sons. (Actually, it was in the dining room.) Achenbach said she voted for O'Malley but got picked for the event through her neighborhood association and has no connection to him.

She and several other Baltimore County residents who heard the governor's pitch were receptive to his plans for the income tax, though they had mixed opinions on other elements of his plan.

Jane Santoni, a consumer lawyer from West Towson, said she's not thrilled at the idea of a 1-cent increase in the 5-cent sales tax, and Achenbach said she doesn't like slots. But they said they agree with the governor that cutting state services, particularly for health care and public safety, would be a mistake.

"As a parent and a mother, it is particularly important to me that police departments aren't cut," Achenbach said. "And I would hate to see public education cut. ... It's important that we continue to have good teachers and that our buildings remain up to date."

andy.green@baltsun.com james.drew@baltsun.com

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