Md.'s rate on tax arrears is a crime

The Baltimore Sun

Now that Maryland has turned up its tax rates a couple more watts, big and bright as neon, is it too much to ask the state to stop taking even more of our money under cover of darkness?

We pay Maryland in multiple ways beyond the sticker price. One of the biggest offenders will be on display today before the Senate Budget and Taxation Committee - the extortionate interest the state collects on late taxes.

You might think a legislature with a history of outrage over private-sector usury would be embarrassed by its own resemblance to Tony Soprano.

Alas, Maryland's 13 percent rate on late tax payments - mostly income taxes but others as well - is on its third governor and going strong. That's far above the real cost of money, way over what the federal government charges and the sixth-highest rate for delinquent state taxes in the country, according to data from the 2007 State Tax Handbook.

"It's incredibly unfair and unjust," says Sen. Edward J. Kasemeyer, the suburban-Baltimore Democrat and Senate majority leader who has sponsored a bill to cut the rate.

It's also incredibly lucrative for the state treasury. In fiscal 2007 Maryland collected $118 million in interest on delinquent taxes, according to Comptroller Peter Franchot's office. That's more than proceeds from the state's alcohol and admissions taxes combined.

Not just corporations and crooks pay up. Most of the money - $73 million - came from people who owed individual income tax, says Franchot spokeswoman Caron A. Brace.

Anybody can get dinged. If you obtain a filing extension and don't pay income tax until late in the year, you're charged a 13 percent annual rate starting April 15.

"A lot of people are not aware of that," says Baltimore tax lawyer Caroline Ciraolo, who backs Kasemeyer's bill. "They think when they get an extension to file it's an extension to pay, too."

If you make a good-faith error on your return and correct it a couple of years later, you'll encounter the state's inner loan shark. Ditto if your tax pro messes up, or a medical emergency temporarily keeps you from paying what you owe.

Since many underpayments aren't discovered until years later, interest charges are frequently higher than whatever tax is owed, lawyers say.

"I don't think people realize how much it hits low- and middle-income taxpayers," says Steven M. Gevarter, a Columbia lawyer who has pushed Kasemeyer and other legislators to consider a change.

Everybody agrees tax scofflaws should pay stiff penalties. Franchot's office collects plenty of them, too. But the 13 percent interest gets piled atop the penalties to create a scrumptious, double-scoop revenue cone that Maryland can't seem to give up.

A bill to reduce the rate failed last year after budget analysts calculated it would cost the state $54 million over five years.

The fact that credit card companies often charge more than 13 percent is no defense. Credit cards are private services used voluntarily. High rates cover the risk of extending zero-collateral loans. The state, on the other hand, bears little risk because not paying taxes is not an option.

In 2006, Pennsylvania charged only 7 percent on tax underpayments, according to the State Tax Handbook. Virginia charged 9 percent; West Virginia, 9.5 percent, and Delaware 12 percent. Some states charge the prime rate - now 6 percent. The Internal Revenue Service's floating rate for delinquent taxes is 7 percent - much closer to the genuine cost of borrowed money, which is really all a late tax payment is.

Maryland employs other sneaky revenue grabs.

There is the "6 percent" sales tax that's really more than 6 percent, which I blogged about a couple of weeks ago. (If tax owed is even slightly more than 6 percent, it gets rounded up to the next penny - which nets Maryland an extra $18 million a year.)

There is the new measure to limit property-tax increases only for people who request the limitation, which will cause unjustified trouble unless Kasemeyer gets it repealed.

There is Baltimore's little proposal to reduce the property tax rate - to make taxes seem more affordable - while lifting the ceiling on assessed value so the city rakes in the same amount of revenue.

Kasemeyer is not optimistic about his bill to get Maryland out of the usury business. But a state with taxes this high can afford the integrity of erasing the fine print and ditching the subterfuge.

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