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Competing tax plans

The Baltimore Sun

The Maryland Senate and House of Delegates charted divergent courses yesterday for closing a $1.7 billion budget gap, with the Senate approving a plan that increases the sales, tobacco and corporate income tax rates while House leaders pushed an alternative that more heavily taxes the wealthy and corporations.

The Senate voted 24-23 yesterday to approve a plan that would raise more than $1.4 billion in new tax revenues a year.

The measures now go to the House, where a committee approved alternate versions of the legislation yesterday. Many of the elements of the plan being considered by the House are identical to what the Senate approved, but the two chambers remain divided over how progressive to make the individual income tax and how to ensure that corporations pay their fair share of taxes.

The Senate's close vote reflected the unease of many conservative Democrats, particularly those from the Baltimore suburbs, with the tax package championed by Democratic Gov. Martin O'Malley.

Nine Democrats joined all 14 Senate Republicans in voting against the plan. Critics decried the tax proposals and called for more spending cuts. They said the tax measures would be a burden on lower-income and middle-class families, and would drastically affect spending habits, inhibit business and even discourage people from living in the state.

"It's clear that every Marylander is going to pay more, significantly more," said Sen. David R. Brinkley, the minority leader from Frederick County.

Sen. Bobby A. Zirkin, a Baltimore County Democrat who voted against the tax bill, said many elements did not seem well thought-out. "To throw things against the wall and see if they stick is not the way to do this," he said.

But the Democratic-controlled chamber voted to limit debate, ending any hopes for a lengthy filibuster, and the legislature appears headed toward compromise on a package that raises taxes, curtails some spending and boosts health care programs and transportation projects.

"We have lots of work to do, but we are finding common ground - recognizing that the cost of delay is too high, and failing to act now will cost us another $500 million that should go to our schools or health care or public safety," O'Malley said in a statement yesterday.

Under the Senate tax bill, the sales tax would rise from 5 percent to 6 percent, the tobacco tax would double to $2 per pack of cigarettes and the corporate income tax would increase from 7 percent to 8 percent - all measures sought by O'Malley. The chamber jettisoned O'Malley's proposed reduction of the state property tax and largely rejected his proposals for making a flat personal income tax structure more progressive.

A late addition to the bill was the so-called "snowbird" provision. It would define a Maryland resident as someone who lives in the state for more than three months, instead of six months under current law, and subject them to the state income tax.

Supporters say that it would ensure that residents who spend most of the year outside of Maryland in lower-tax locales, mostly in the Sun Belt, carry their share of the tax burden. They contend it could raise as much as $60 million. Opponents, however, say the bill unfairly targets retirees, including some on fixed incomes, and would prompt residents to abandon Maryland entirely.

The Senate rolled back O'Malley's efforts to shift the income tax burden to high-wage earners, establishing new top brackets of 5 percent and 5.5 percent, instead of the 6 percent and 6.5 percent the governor favored. The Senate also eliminated some of the governor's efforts to provide income tax relief for low- and middle-income families.

But a House committee voted in favor of three new top income tax brackets and an increase in personal exemptions for lower- and middle-class families. The Senate included a much smaller increase in personal exemptions.

"This plan, unlike the Senate plan, actually makes the tax code more progressive, which means it actually gives more relief to people at the lower end of the income range," said Del. Kumar P. Barve, the majority leader from Montgomery County.

Under the House proposal, the 5.25 percent rate would apply to net individual income above $125,000 a year and joint filers' income above $175,000 a year. The 5.5 percent rate would kick in at $150,000 for individuals and $200,000 for couples, and the 5.75 percent rate would apply to individual incomes above $200,000 a year and joint incomes over $250,000 a year.

The House plan would provide a break for individuals earning less than $100,000 a year and for couples earning less than $150,000 by increasing the individual exemption to $3,200. The exemption is currently $2,400. People with higher incomes would see their exemptions shrink.

The House and Senate also are at odds over proposed changes to corporate taxes.

A House committee endorsed increasing the corporate income tax to 8.75 percent, and the House included in its legislation a corporate tax law change known as "combined reporting" aimed at preventing big companies from hiding profits out of state.

Business leaders quickly criticized the corporate tax measures. A study commissioned by the Maryland Chamber of Commerce and other groups found that increasing the corporate income tax to 8 percent and implementing combined reporting would cost more jobs than any other tax changes the legislature is considering. Business groups point out that Virginia's rate is 6 percent and North Carolina's is 6.9 percent.

Karen Syrylo, a tax consultant for the chamber, said combining the two - and increasing the corporate tax rate to 8.75 percent - would be "very, very, bad." She added: "Underline 'very.'"

"It's a huge detriment," Syrylo said. "Our biggest competitors are Virginia and North Carolina."

But Sean Dobson, the director of Progressive Maryland, said the House is moving in the right direction. "The corporate income tax has not nearly kept pace with robust corporate profits, so it seems to us the corporate community can do more to help us get out of this deficit," he said.

Although the two chambers appear to agree on O'Malley's plan to increase the sales tax rate, they are targeting different services for an expansion of that levy.

The Senate would extend the sales tax to computer services and arcade games, while dropping a proposal to add landscaping services. The House would extend the sales tax to auto repair and to parking garages, while doubling the hotel tax.

"We seem to be so concerned about, as the governor calls them, the working poor, and it seems to me they're going to be the people who are going to own cars that are 10 or 12 years old and break down more often," said Del. D. Page Elmore, an Eastern Shore Republican. "This will be a tax on the working poor."

The Senate also approved a measure yesterday intended to cut spending by more than $500 million. The bill envisions savings by freezing inflation increases in the state's Thornton education funding plan and by not filling about 1,000 vacant jobs at state agencies. The House is debating cuts of its own, and leaders there also say they hope to identify $500 million in spending reductions.

"The governor is trying to fix this problem once and for all," said Sen. Ulysses Currie, chairman of the budget committee and a Prince George's County Democrat.

But Republicans said the bill was a hollow gesture because the governor is not required to follow the spending guidelines. "We're pretending that we're making significant cuts in the budget to set up the tax increases," said Sen. E.J. Pipkin, an Eastern Shore Republican.

On Thursday, the Senate approved a plan to hold a referendum in November 2008 on whether to allow up to 15,000 slot machines at five locations around the state, which now also goes to the House for consideration.

House leaders expect preliminary and possibly final votes on their tax plans today and to begin Monday debating a proposed referendum on slot machines.

laura.smitherman@baltsun.com andy.green@baltsun.com

Roll call

The state Senate voted 24-23 yesterday to approve $1.4 billion in tax increases to help close the state's budget gap. Here is how senators voted:

FOR

Gwendolyn T. Britt, D-Prince George's County

Joan Carter Conway, D-Baltimore City

Ulysses Currie, D-Prince George's County

Nathaniel Exum, D-Prince George's County

Jennie M. Forehand, D-Montgomery County

Brian E. Frosh, D-Montgomery County

Robert J. Garagiola, D-Montgomery County

Lisa A. Gladden, D-Baltimore City

Verna L. Jones, D-Baltimore City

Edward J. Kasemeyer, D-Baltimore County

Delores G. Kelley, D-Baltimore County

Nancy J. King, D-Montgomery County

Michael G. Lennett, D-Montgomery County

Richard S. Madaleno Jr., D-Montgomery County

Nathaniel J. McFadden, D-Baltimore City

Thomas M. Middleton, D-Charles County

Thomas V. Mike Miller, D-Calvert County

C. Anthony Muse, D-Prince George's County

Douglas J.J. Peters, D-Prince George's County

Paul G. Pinsky, D-Prince George's County

Catherine E. Pugh, D-Baltimore City

Jamie Raskin, D-Montgomery County

James N. Robey, D-Howard County

James C. Rosapepe, D-Prince George's County

AGAINST

John C. Astle, D-Anne Arundel County

David R. Brinkley, R-Frederick County

James Brochin, D-Baltimore County

Richard F. Colburn, R-Eastern Shore

James E. DeGrange Sr., D-Anne Arundel County

George W. Della Jr., D-Baltimore City

Roy P. Dyson, D-Southern Maryland

George C. Edwards, R-Western Maryland

Janet Greenip, R-Anne Arundel County

Larry E. Haines, R-Carroll County

Andrew P. Harris, R-Baltimore County

J. Robert Hooper, R-Harford County

Nancy Jacobs, R-Harford County

Allan H. Kittleman, R-Howard County

Katherine A. Klausmeier, D-Baltimore County

Rona E. Kramer, D-Montgomery County

Alex X. Mooney, R-Frederick County

Donald F. Munson, R-Western Maryland

E.J. Pipkin, R-Eastern Shore

Bryan W. Simonaire, R-Anne Arundel County

J. Lowell Stoltzfus, R-Eastern Shore

Norman R. Stone Jr., D-Baltimore County

Bobby A. Zirkin, D-Baltimore County

three different tax plans

Gov. Martin O'Malley and both chambers of the General Assembly have come up with different plans for making Maryland's flat income tax structure more progressive. Maryland's current income tax brackets were set in 1967 at $1,000, $2,000 and $3,000 and have not changed; those making $3,000 a year or more are subject to the top rate of 4.75 percent. Here's a look at the plans:

O'Malley's plan

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.

Increase the earned income credit, which helps the working poor, and provide rebates of $50 for families earning less than $30,000 a year in an effort to offset his proposed sales tax increase.

Add two brackets for top earners. Income over $150,000 for individuals or $200,000 for joint filers would be taxed at 6 percent, and income over $500,000 would be taxed at 6.5 percent.

Senate plan

Leaves the current 4.75 percent rate in place for most families and creates new top brackets at the same income levels as O'Malley's proposal, but at rates of 5 percent and 5.5 percent.

Increases the personal exemption for all taxpayers by $200 to $2,600, which would save a family earning $75,000 a year about $37.

Includes O'Malley's expansion of the earned income credit and allows people who don't list dependents on their taxes to claim the benefit. The Senate rejected the $50 rebate.

House plan

Adds three new brackets.

Leaves the 4.75 percent rate in place for most families and creates three new top brackets. Individual income greater than $125,000 or joint income greater than $175,000 would be taxed at 5 percent; income over $150,000 for individuals and $200,000 for couples would be taxed at 5.5 percent; and income over $200,000 for individuals and $250,000 for couples would be taxed at 5.75 percent.

Increases the individual exemption to $3,200, which could save middle-class families more than $100 a year.

Keeps the Senate's earned income credit provisions and would also reject the $50 rebate.

Developments

The state Senate approved increases in the state sales, tobacco and corporate income taxes to raise $1.4 billion toward the elimination of a projected $1.7 billion budget shortfall.

House leaders announced a plan to create three new income tax brackets that require high-end earners to pay more. The House also wants corporations to pay more.

The Senate approved a plan to expand health care coverage for uninsured Marylanders, though the plan is largely tied to revenue from slot machine gambling.

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