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The Baltimore Sun

Marylanders will feel a pinch in their pocketbooks every time they shop for clothes, buy a pack of cigarettes or get their computers fixed under the tax plan signed yesterday by Gov. Martin O'Malley.

When the Democratic governor first unveiled his budget-balancing plan, he said 83 percent of residents would pay less in taxes. But after the General Assembly made several changes and dropped a proposed property tax break, only about 45 percent would pay less or see no change, O'Malley said yesterday.

The first-year governor pushed through $1.3 billion in tax increases during a whirlwind special session that ended about 2:30 a.m. yesterday.

The Democratic-controlled Senate and House quickly passed tax and health care legislation after approving O'Malley's proposal for a voter referendum on legalizing slot machines. The governor said he was forced to seek more tax revenue to plug a budget shortfall projected to reach $1.7 billion in July and meet the state's needs.

Among the changes:

Beginning in January, consumers will pay an added penny in sales tax for every dollar spent in stores on most products. They'll pay $1 more for a pack of cigarettes. In July, a consumer facing $250 in computer repairs will pay an additional $15, and businesses needing custom computer programming will see a much higher bill.

Residents and small businesses that file individual tax returns and earn more than $150,000 in taxable income annually will be hit with higher tax bills. Lawyers will be required to be current on their taxes before being licensed to practice in the state. Lower-income earners will benefit from bigger personal exemptions and a more generous earned income tax credit.

Car buyers will pay an extra $200 in titling taxes on the purchase of a $20,000 car beginning in January, though if they have a trade-in they could pay less tax than they do now. Some car dealers say they could get a boost once consumers understand that wrinkle.

O'Malley said he crafted his proposals to tax the rich and corporate America more heavily while making the state's tax code more progressive. At a signing ceremony less than 13 hours after passage of the bills, he characterized the final plan as a "fair, long-term" solution.

According to a fiscal analysis, a family of four earning $100,000 a year would pay $55 more a year, assuming no one smokes and the extra cost of buying a new car is spread out over time - even though the titling tax is paid in a lump sum at the time of purchase. Accounting for just the personal income tax changes, about 96 percent of filers will pay the same or less, the governor's office said. The changes to individual income tax rates raise only about $30 million in the next fiscal year.

Corporations will pay an income tax rate of 8.25 percent, up from 7 percent, which will bring an additional $140 million to the state treasury.

The reaction among residents and businesses in Annapolis ranged from trepidation to ambivalence.

Vince Quinlan, owner of Castlebay Irish Pub, a block from the State House, said legislators should have looked harder at slowing state spending before raising taxes.

While the legislature recommended $550 million in spending cuts for the next fiscal year, it's up to O'Malley to implement them. Legislators also passed a voter referendum on slots, but if the measure fails at the polls, $650 million in slots revenue to the state won't materialize.

"The old saying goes that there are three things in life: You are born, you die and you pay taxes," Quinlan said. "We're all willing to pay the taxes if there is some accountability."

Down the street at a jewelry shop owned by Del. Ron George, the Anne Arundel Republican said he worries that the sales tax increase will hurt his business of selling "high-quality items with a very thin markup." He said a customer who bought his fiancee a $5,200 engagement ring yesterday would have paid $52 more in sales tax if he had waited to pop the question in January.

"People only have so much discretionary income," George said.

But a few doors down Main Street at The Cook's Revenge, owner Kerry J. Smith said he's not worried about the sales tax increase because he figures that customers who buy his high-end cookware won't notice it. "I don't see it having an impact," he said.

Some car dealerships welcomed changes to the titling tax laws.

While the rate goes from 5 percent to 6 percent, the legislature also approved a provision giving customers full credit for their trade-ins. That means a customer buying a $20,000 car and trading in a vehicle valued at $10,000 would pay 6 percent on the difference - rather than on the sticker price of the car. That puts the titling tax bill at $600 compared with $1,000 under the prior law.

David Williams, owner of Williams Family Auto Mall in Elkton, said customers and car dealers could benefit. He expects car dealers will advertise the potential savings.

"I believe what this will do is stimulate car sales in Maryland," said Williams, chairman of the Maryland Automobile Dealers Association. "The car industry has been somewhat depressed over the last three years. We need something to get things moving."

In contrast, computer services companies reacted angrily at having their services taxed for the first time. The change is expected to raise more than $200 million a year. The tax would apply to facilities management and operation; custom computer programming; computer disaster recovery; hardware or software installation; and maintenance and repair.

Geoffrey Harrelson, owner of Basic Computers LLC in Baltimore, called the new sales tax "devastating." He said a third of his business has disappeared this year amid general economic malaise that has dampened consumer spending.

"It's tough right now to make a living in the computer field," Harrelson said.

Roger Cochetti, director of U.S. public policy for the Computing Technology Industry Association, said in a statement that Maryland would become less attractive for information technology companies and local businesses. "This tax will certainly encourage Maryland IT users to outsource their computer service needs to companies located in Reston, Va., or even Bangalore, India," he said.

Some Maryland lawmakers said they plan to revisit the computer services sales tax, which would expire in five years, to determine the impact on business and possibly consider a repeal.

laura.smitherman@baltsun.com hanah.cho@baltsun.com

Impact of General Assembly tax plan on a family of four earning $100,000 a year

SALES TAX -- Pays $190 more because of the sales tax increase from 5 percent to 6 percent.

INCOME TAX -- State and local: Saves $248 because the family can claim $3,200 in added exemptions. The income tax rate remains 4.75 percent for such a family.

Federal -- Pays $62 more because state taxes are deductible from federal taxes and the family will be deducting less.

CAR PURCHASES -- Pays $51 more, assuming that the cost of the titling tax increase from 5 percent to 6 percent is spread over time.


NOTE: Calculation does not include increases in the tobacco tax

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