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Rise in sales tax is sought

The Baltimore Sun

Gov. Martin O'Malley said yesterday that he plans to raise $730 million by increasing the state sales tax and extending it to health club memberships, property management and other services. But he said his proposed changes to the state income and property tax rates would mean that most families would still come out ahead.

Sitting around a middle-class family's dining room table for the second day in a row, O'Malley acknowledged yesterday that increasing the sales tax from 5 percent to 6 percent would run counter to his goal of making Maryland's tax system more progressive. But the Democratic governor said the move is necessary to balance the budget and that he designed his overall tax package to minimize the impact on working families.

"With a fairer and more progressive income tax, an increase in the sales tax and a reduction in the property tax, the vast majority of Marylanders will be paying less," O'Malley said during the Ellicott City appearance.

His contention that four-fifths of the state's taxpayers would see an overall tax cut takes into account only part of his plan for erasing a $1.7 billion budget shortfall and adding hundreds of millions of dollars in new spending. The calculation does not include his plans to double the cigarette tax and increase the car titling tax or cover the potential impact of higher corporate taxes on prices, wages and employment.

Critics say his promises to protect the middle class are disingenuous.

"I'm calling this the O'Malley traveling magic show," said Republican Sen. Allan H. Kittleman, the minority whip from Howard County, who attended O'Malley's news conference. "With one hand, he's getting your attention with all these wonderful things he's doing, and with the other hand, he's picking your pocket."

Republicans have long criticized O'Malley's assertion that tax increases are necessary to balance the budget, saying that reductions in the rate of spending growth combined with the legalization of slot machine gambling would do the trick.

Some fellow Democrats are also questioning the plan. Montgomery County Executive Isiah Leggett expressed concern yesterday that O'Malley's income tax plan would drive top earners - who shoulder much of the cost of government services - across the border into Virginia or Washington, D.C.

"I accept that we paid more in the past and will continue to pay more in Montgomery County. That's a reality," Leggett said. "But at some point, we have to understand the unintended consequences."

Progressive Maryland, a liberal advocacy group, issued a statement yesterday saying that "the wealthiest [Montgomery County] residents have never had it so good." The group quoted data from the comptroller's office suggesting that fewer than 15 percent of the county's taxpayers would be affected by the two new income tax that O'Malley is proposing for top earners.

Others question the idea of raising the state sales tax and legalizing slot machines, saying that doing so would have a disproportionate effect on the poor.

"The rate is going up, essentially, 20 percent," said Curtis Dubay, a researcher at the Tax Foundation, a conservative-leaning group. "Everybody in Maryland is going to be paying 20 percent more. Rich, poor, everyone."

Some say that the state's sales tax is not as regressive as it might seem. Researchers at the Cato Institute and the Urban Institute said the fact that Maryland does not tax food or medicine is a major mitigating factor.

The O'Malley administration released figures showing the total impact of the proposed changes to the income tax structure, the property tax cut and the sales tax increase. According to those calculations, individuals earning up to $75,000 a year would pay less, as would married couples earning up to $250,000 with two children.

"If you make more than $700,000 a year, you smoke, you go to the tanning salon every day, you have a gym membership and you're a renter, you'll probably pay more," O'Malley said.

The governor has proposed expanding the state sales tax to cover health club memberships, massages, tanning salons, saunas, steam baths and real estate management services. Haircuts, shoe repair, cable television bills and most professional services would continue to be exempt.

The estimated impact of O'Malley's income tax proposal is a straightforward calculation. Projections for the impact of the sales tax are based on Bureau of Labor Statistics data. But the projected property tax savings that the governor uses to support his statement that 83.5 percent of taxpayers would pay less relies on an estimate of the value of a home that a household can afford based on income, not on actual data.

O'Malley proposes to reduce the state property tax rate by three cents per $100 of assessed value over three years, which officials say would save the average homeowner anywhere from an estimated $28 in Baltimore City to nearly $126 in Howard County.

Business groups say the governor is underestimating the impact of his proposals.

A study released yesterday by the Maryland Chamber of Commerce said businesses now pay 40 percent of the sales taxes collected in the state, and that they would continue to do so if the rate were increased from 5 percent to 6 percent, with households paying the rest.

The report, conducted by Ernst & Young on behalf of several business groups, including the Greater Baltimore Committee, was completed before O'Malley began rolling out details of his tax proposals this week. Ernst & Young projected that the proposed sales tax increase would lead to Maryland losing 950 jobs in 2008.

But the study projected a much greater impact from other proposals supported by O'Malley. The study says the state would lose 2,002 jobs if the state increases the corporate income tax rate from 7 percent to 8 percent and adopts "combined reporting" - a tax law change aimed at preventing large companies from hiding profits in other states.

O'Malley has told legislators that he will propose increasing the corporate income tax rate by that amount and that he will attempt to change tax laws to ensure that more companies pay their share.

"The corporate income tax increase results in a larger share of job losses in higher-paying occupations, including business management, professional and legal services, and production workers," said Karen T. Syrylo, a certified public accountant and the chamber's state taxation consultant.

O'Malley's proposal to expand the sales tax would generate about $74 million a year in new revenue. He said he designed his plan to focus on luxury services rather than essentials.

Previous attempts to broaden Maryland's sales tax, which was designed for an industrial-era economy, have withered under lobbying barrages from interest groups that would be affected.

Lesa Noblitt Hoover, vice president for governmental affairs for the Apartment and Office Building Association of Metropolitan Washington, said expanding the sales tax to property management almost certainly would result in higher rents, hurting low-income families.

Opinions on the sales tax expansion were mixed at the Downtown Athletic Club in Baltimore, a home away from home for O'Malley during his years as mayor.

Donyel Hood, marketing director for Merritt Athletic Clubs, said a group of health club chains is lobbying against the proposed increase. In fact, she said, the group has been trying to get a tax break for gym members as a way to encourage people to exercise.

All or most of O'Malley's proposed tax increase would likely be passed on to customers, she said.

"We're completely against it," Hood said.

But some gym members weren't bothered by the idea. Rick Ratigan said he'd rather have the state impose a tax on his gym membership than raise money through other mechanisms such as slot machines.

"I'm one of those people willing to pay taxes for services," said Ratigan, 57, of Charles Village. "You've got to pay taxes for services."

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

Sun reporter Sumathi Reddy contributed to this article.

The proposal

The O'Malley sales tax proposal would:

Increase the rate from 5 percent to 6 percent

Expand the tax to cover health club memberships, massages, tanning salons, saunas, steam baths and real estate management services

Maintain exemptions for haircuts, shoe repair, cable television bills and most professional services

[Source: O'Malley administration]

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