Republicans, led by Donald Trump, have been boasting about the “big, beautiful Christmas present” given to the American people last year in the form of their major overhaul of the tax system. Republican Sen. Mitch McConnell, however, was quoted many times as saying that the cut would be “revenue neutral.” So, how can we be receiving presents while the nation’s budget is not impacted? Just what does this tax cut mean?
It’s actually pretty simple: While taxes for some will go down, taxes for many others will go up in order to pay for this “new normal.” The only question is: Who wins and who loses? For many Marylanders, the overhaul amounts to an oversell. Yes, many will pay more.
Couple this realization with the news that the Federal Reserve is boosting interest rates for the third time in a year — the first time that’s happened since the early 2000s, and you might start to worry. Something is shifting in our understanding of economics, class and mobility. The system is being locked down. All but the wealthiest are being locked out.
The winners in Trump’s tax-cut fever end up being the ultra-rich top 1 percent and corporations, who have seen their tax rates slashed and their ability to take deductions actually increase. In Maryland, middle class families have had valuable tax deductions at both the federal and state level taken away. They likely will see their tax bills climb.
One of the biggest pieces of the federal tax change is the elimination of most of our state and local income and property tax deductions, which are now limited to $10,000. This will expose more of our income to federal taxation. But there is more.
As it turns out, Maryland state government may be the beneficiary of a huge windfall of state and local income tax revenues resulting from the federal tax law change. While your federal taxes may or may not increase, your Maryland taxes almost certainly will increase. I believe the operative phrase here is: “Speak to your accountant.”
How did this happen? How did a reworking of the system that was touted as a tax cut actually lead to an increase? It’s all about the federal standard deduction, which was boosted to $12,000 for individuals and $24,000 for families. This move will lead many taxpayers away from itemizing deductions on their federal returns. Since Maryland allows most of your federal tax deductions to carry over to your state tax return, you will lose those itemized deductions if you take the standard deduction on your federal return. If you are a family with itemized deductions of less than $24,000, they will disappear from your Maryland return.
Many at the state level knew this would cause taxes for middle class Maryland families to increase. Some lawmakers proposed changes in the state tax code to fix the problem — in effect, to hold harmless the state’s middle class taxpayers. The state’s response was to raise its standard deduction by a paltry $250 for individuals and $500 for families, which may end up saving you an additional $35.
As a result, if you are a middle class family who usually itemizes deductions on your federal and state returns, your Maryland tax bill could increase by as much as $1,600. Are you ready to pay for that?
Now that the smoke has cleared and we can see this “tax cut” for what it really is — a remarkable benefit for the ultra-rich and corporations — we can begin to understand the larger pieces that are now in play. Like the Fed boosting the price of borrowing, the continuing consolidation of huge companies and the nagging problems of wages that barely keep pace with inflation.
Tariffs are already hammering the automobile industry, and uncertainty about the impact of additional tariffs, along with the realization that the overall impact of the tax cut on the economy would last only a year, is starting to be seen in the past week’s stock market returns.
Some in Congress and in the White House love to tout the good times they say we’re in. Sure, that’s true — if you’re a millionaire. If you’re not so lucky, well, maybe that second job will help.
Middle class families are the backbone of this country. That’s just as true in Maryland as anywhere else. We deserve a break, too. We’re bleeding over here. Unless or until these lawmakers show us some change in attitude, we won’t be buying what they’re selling — especially if it has the word “cut” in it.
Steve Isberg is an associate professor of finance in the University of Baltimore’s Merrick School of Business. His email is firstname.lastname@example.org.