The report Comptroller Peter Franchot’s office released this week about the impacts of the Trump/Republican tax cut bill on Maryland provides fodder for debate about whether the legislation will achieve its aims in terms of boosting the economy by putting more money in the hands of taxpayers. But it leaves no doubt whatsoever that the bill fails miserably at its aim to make the system simpler. Republicans said they wanted a tax code so simple that you could file your return on the back of a postcard. But when you throw in the state tax implications, that postcard is going to have to be enormous.
The analysis from the Board of Revenue Estimates confirms what tax experts had predicted, which is that side effects of the federal tax legislation would lead to big increases in state and local income tax bills if Maryland leaves its laws alone. About a third of taxpayers would be in that situation, the comptroller’s office figures, to the tune of an additional $572 million in state and local income tax in Fiscal 2019.
What’s driving most of that is that the federal tax law seeks to steer more taxpayers into taking the standard deduction rather than itemizing deductions. It does that by making the standard deduction nearly twice as big ($24,000 for a married couple filing jointly) and by limiting other deductions, most pertinently for Marylanders, capping the deduction for state and local taxes at $10,000. Current Maryland law says you can only itemize your state tax deductions if you do so on your federal return, so for many, minimizing the amount owed to the federal government will increase their state and local tax liability.
Gov. Larry Hogan’s proposal to change the law so that Marylanders can continue to itemize their state taxes under pre-Trump rules whether they do so on their federal returns or not is, in one sense, the simplest solution. In other senses, not so much. It will add massively to the administrative burden faced by the comptroller’s office, and it will potentially force Marylanders to calculate their taxes four different ways if they want to minimize their overall bills — itemize on federal and state; itemize on federal, standard on state; standard on federal, itemize on state; and standard on federal and state. Even then, there is some doubt about whether such a change would make good on Governor Hogan’s promise that no Maryland taxpayers would see increased state bills as a result of the federal legislation. Some of the details of how the federal government changes its tax forms could have additional downstream effects on the deductability of property taxes on state returns, for example. Nonetheless, the governor’s idea should likely be part of the solution.
Another point on which the governor and legislature appear to agree is the necessity of clarifying the status of personal exemptions in the state tax code now that they have been zeroed out (for the next several years anyway) in the federal code. There’s a school of thought that says such a legislative fix is unnecessary, but should a court conclude otherwise, it would cost state taxpayers $1.2 billion a year. At the worst, putting in law that Marylanders can still claim such exemptions on their state taxes will do no harm.
Other ideas legislative Democrats have already suggested merit consideration, too. They want to adjust state estate tax laws to prevent an undue windfall for a handful of wealthy families, and they want to explore the idea of setting up a state tax-refundable credit for donations to a yet-to-be-created non-profit supporting public education. The idea is to effectively allow residents to maintain the value of their state and local tax deductions by taking advantage of the remaining federal deduction for charitable giving. The governor’s office has not jumped at this idea, and some experts have questioned whether the IRS or Congress will step in to close that loophole. But Mr. Hogan should look at it as an issue of business competitiveness. Virginia is among the several states already have such mechanisms for donations to private school scholarship funds, and consequently this quirk of federal tax law makes it distinctly advantageous for businesses and high-income individuals to locate on the other side of the Potomac.
Governor Hogan made clear on Thursday that he remains open to other ideas, and he directed several of his top aides to work closely with the legislature on a package of fixes in response to the state tax changes. That’s heartening. Helpful though the comptroller’s analysis may be, it raises as many questions as answers. Whatever the state does, it should be the product of careful study and consideration, and the more the deliberations can be shielded from election-year politics, the better.