Legislators appeared poised to pass nearly $1.3 billion in tax increases early this morning as part of Gov. Martin O'Malley's plan to eliminate the state's projected budget shortfall, coming quickly to a compromise yesterday on a plan that could affect the pocketbooks of all Marylanders.
The package would establish higher income-tax rates for top earners but include breaks for lower- and middle-class workers; increase the state sales tax from 5 percent to 6 percent; and expand that levy to cover computer services, a step that business groups contend will be difficult to enforce.
The business community won some concessions with a scaled-back increase in the corporate income tax - the rate will be 8.25 percent, not the 8.75 percent favored by the House of Delegates - and with the rejection of a change in the way corporate tax burdens are calculated.
The compromises on tax increases and spending cuts were reached in a meeting yesterday of the General Assembly's fiscal leaders. Democrats were able to fend off Republican attempts to amend the plan, and each chamber had passed components of the legislation early yesterday morning.
Yesterday's debates marked the final stage of an end to an intense, three-week special session of the General Assembly. Once the two chambers agreed to O'Malley's plan for a slots referendum, it took fiscal leaders less than 90 minutes yesterday to reach agreement on taxes and spending cuts, though moving the legislation through both chambers took hours.
"We're finding revenues, we're reducing spending significantly, and we're permanently fixing the structural deficit," said Del. Kumar P. Barve, the majority leader from Montgomery County.
Republicans continued to object to the tax increases, though they knew by last night that theirs was a lost cause in a legislature where they are outnumbered by 2 to 1.
"We're going to go down to the bitter end of this special session fighting for the taxpayers of Maryland," said Del. Christopher B. Shank, the minority whip from Western Maryland.
The legislature was poised to approve $887 million in tax increases to help address the general fund budget shortfall and a directive for O'Malley to cut $550 million from the expected spending in next year's budget.
Another $404 million a year in new taxes would go toward transportation projects, and $50 million would be dedicated to Chesapeake Bay cleanup.
Those measures, combined with earlier cuts O'Malley made through the Board of Public Works, should be sufficient to balance the budget, provided O'Malley actually makes the cuts, said Warren Deschenaux, the General Assembly's chief fiscal analyst.
If slot machines are approved by the voters next year, they would generate another $650 million a year for the state when fully phased in. That revenue would help fund a program to expand health care coverage to uninsured Marylanders, which the House of Delegates approved last night, as well as school construction, education and other expenses.
The proposed sales tax on computer services drew significant objections from lawmakers and business groups who predicted avalanches of lawsuits over what they considered vague and difficult-to-enforce provisions. The Senate approved the levy more than a week ago, but the House had rejected it.
Yesterday, though, the Senate presented a more-detailed list of which computer services would be covered and which would not.
The tax would apply to facilities management and operation; custom computer programming; systems integrators; systems consultants; computer disaster recovery services; and hardware or software installation, maintenance and repair.
But Internet access, computer training, telecommunications, banking services and business management would be exempt.
The measure would raise about $200 million a year. When it became clear that that funding was crucial to balancing the budget, House fiscal leaders agreed to the measure but secured a sunset provision on the tax that will cause it to expire after five years.
Another area of compromise between the two chambers was in the individual income tax. The current levy is essentially flat, with all taxpayers qualifying for the top bracket of 4.75 percent.
Under the proposed new structure, individuals would pay 5 percent on taxable income above $150,000 a year, and couples would pay that rate on taxable income over $200,000 a year. A 5.25 percent bracket would apply to income greater than $300,000 a year for individuals, and $350,000 a year for couples. All income above $500,000 a year would be taxed at 5.5 percent.
O'Malley had proposed a new top rate of 6.5 percent, and the House had adopted a top bracket of 5.75 percent, but the Senate refused to accept anything higher than 5.5 percent. Legislators from Montgomery County had lobbied against the higher tax brackets.
But Senate leaders agreed to a House plan to increase by $800 the individual exemption for taxpayers earning up to $150,000 a year. Others would get the current exemption of $2,400 or less.
"People don't realize it, but for a low-income family, that's a big deal," said Progressive Maryland Director Sean Dobson, who advocated for shifting more of the tax burden to high earners. "Working families are better off today than they were yesterday."
Karen Syrylo, a tax consultant for the Maryland Chamber of Commerce, said corporate income tax provisions could have been worse, but they will still put Maryland at a competitive disadvantage, particularly when coupled with the business impact of all the other tax increases.
"The situation for Maryland employers is one ... we are concerned about," Syrylo said.
Environmental activists came out big winners yesterday when negotiators adopted the House's plan for a new $50 million-a-year program to clean up the Chesapeake Bay. The Senate's plan would have partly funded the program by shifting local Program Open Space funds, which would have amounted to robbing one big cleanup program to pay for another, said Kim Coble, the Maryland director of the Chesapeake Bay Foundation.
The House plan reallocates some current funding and adds money from rental car taxes to pay for the program, which is dedicated to mitigating stormwater and agricultural run-off.
"The legislature has just taken a giant step forward in bay restoration," Coble said.