Gov. Larry Hogan is right that Maryland leaders need to act to prevent the Republican federal tax bill from creating a backdoor state tax increase for potentially hundreds of thousands of Marylanders. Whether such a bill can pass unanimously, as the governor insists it should, is hard to say considering he has yet to identify a mechanism for achieving his goal, much less actual legislation. But the effect he describes of the federal tax change on state income tax bills in Maryland is real and should be of concern to members of both parties. But dealing with it may not be simple, and it is hardly the only negative consequence of the Trump administration’s signature (and sole) legislative accomplishment that Maryland leaders need to prepare to deal with.
The reason Maryland state income tax bills for many will go up as a result of the federal tax legislation has to do with Republicans’ efforts to steer more people into taking standard deductions rather than itemizing. The new tax law eliminates personal exemptions and eliminates or limits certain deductions but nearly doubles the standard deduction to $23,000 for a married couple. The problem is this: Nearly half of Maryland taxpayers itemize their deductions, the highest rate in the nation, because of the combination of relatively high mortgage expenses and state and local tax bills, among other things. On average, state taxpayers who itemize rack up about $13,000 in deductions.
State law does not allow taxpayers to itemize on their Maryland returns unless they have done so on their federal returns, so some unknown but likely quite large number of people in this state will find it to their advantage to take the standard deduction even though it subjects thousands more dollars (and in some cases, much more) to state taxation. It’s not just a problem of the wealthy in this state but will likely reach well into the middle class.
What to do about it is the hard part. The governor wants a revenue-netural solution, which is an appropriate goal, but it will be tricky to figure out how to do that both in the aggregate and in the particularized cases of individuals. Maryland could allow people to itemize their state returns under the old rules even if they take the standard federal deduction, but that would be a massive administrative burden for the comptroller’s office and confusing for taxpayers. We could change our own tax law to boost state standard deductions as well, but that has a host of policy consequences for the real estate market, charitable contributions and other activities advantaged under the current system. The fact that legislators aren’t all immediately cheering Governor Hogan’s announcement doesn’t mean they want to see their constituents’ taxes go up, it just shows they recognize the devils in the as yet unspecified details.
Meanwhile, though, the federal tax bill has a host of other likely negative consequences for Maryland that the governor and legislators need to address. A big one is the repeal of the Affordable Care Act’s individual mandate, the requirement that most people have insurance coverage. That will lead to millions fewer with coverage nationally, and it is expected to produce higher rates for insurance on the ACA marketplaces. Because of the unique way Maryland handles uncompensated medical care, an increase in the number of uninsured will directly increase the costs the rest of us pay for our health care. Even before the tax bill passed, Maryland health advocates were pushing for the creation of a state-level individual mandate, as Massachusetts has. That’s an imperative now.
Because of the way the GOP bill lowers taxes for pass-through income earned by owners of limited liability corporations and similar entities, we are likely to see large numbers of people essentially reclassifying themselves as contractors rather than employees in the years ahead. What will that do to state taxes? The GOP bill is expected to have strongly negative effects on the real estate market in states like Maryland because of the limits on state and local tax deductions and on deductions for mortgage interest. What will that mean for the state’s economy — and for the property tax revenues state and local governments rely on as their most steady income stream? And to what extent will the higher deficits this legislation causes serve as an excuse for Republicans to slash the social safety net and government spending in general, which would disproportionately affect this state?
We’re certainly glad that Governor Hogan is mindful of the unintended consequences of this legislation. He and members of the General Assembly need to make sure they’re looking out for all of them in the years ahead.
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