Democratic lawmakers raised the education funding stakes Thursday, when they lobbed a $2.6 billion sales tax hike smack into the middle of the discussion on how to pay for reforms recommended from the state’s Kirwan Commission. And it was about time. There is simply no way the other revenue-raising efforts being considered in Annapolis were going to cover the $4 billion annual bill Kirwan will require after full implementation in a decade. Many had high hopes (see what we did there?) that marijuana legalization would bear the brunt of the cost, but it’s not even on the table in the legislature this year. Instead, the conversation has been focused on a handful of bills that collectively might come close to the state’s share of paying for Kirwan (coincidentally $2.6 billion) if they all passed. Problem is: They shouldn’t. Several bills seek to implement sports betting, which we didn’t see the need to rush through last year, and still don’t this year. Even if Maryland implemented sports betting in casinos, at racetracks and online (the supposed Holy Grail), the state’s share of the revenues would be just $18 million in 2022. We’ve already weighed in on the idea of increasing the cigarette sales tax (please do: Double it for an additional $341.6 million per year and priceless lives saved), but here’s what we think should happen to some other proposals being bandied about.
H.B. 1628: Sales and use tax, rate reduction and expansion of application
Sponsors: Democratic Dels. Eric Luedtke and Anne R. Kaiser (Montgomery County), Ben Barnes (Prince George’s and Anne Arundel counties); Dereck E. Davis and Alonzo T. Washington (Prince George’s County); Michael A. Jackson (Calvert and Prince George’s counties); and Maggie McIntosh (Baltimore City).
Synopsis: Cuts the state’s sales tax rate to 5% (from 6%) and expands its application to include most professional services, such as legal, accounting and so on to raise an estimated $2.6 billion per year. Food, medicine, health services, educational services and the nonprofit sector would continue to be exempt from the sales tax.
Analysis: Quickly lambasted by Gov. Larry Hogan as the largest potential tax increase in state history and an economy killer, the ambitious plan, introduced Thursday, is likely to face tough political going in the State House. But in many ways, the broadening of the sales tax makes sense in an economy increasingly focused on services rather than goods, and the reduction in the sales tax on products recognizes that middle- and lower-income families generally spend on goods, while the wealthy typically spend more on services. A handful of other states, including nearby Delaware and West Virginia, tax at least one professional service, according to the Federation of Tax Administrators, but none have taken this sweeping an approach. Like all sales taxes, it could prove regressive, which leaves lawmakers in the uncomfortable position of potentially picking and choosing which services should be taxed. Child care? Tax preparation? Dog walking? When a similar proposal was last debated a decade ago, lobbyists had a field day exempting their clients. And yet there’s an essential element of even handedness in taxing services the same as goods and surely a benefit to taxing more things a little rather than a few things a lot. It also poses a welcome cure to the state’s structural deficits as revenue from services will grow as Maryland’s economy (and related government spending) will grow.
Editorial board recommendation: Pass.
Sponsors: Democratic Sens. Thomas V. Mike Miller Jr. (Prince George's, Charles and Calvert counties) and Bill Ferguson (Baltimore City). Del. Alonzo T. Washington, a Prince George’s County Democrat.
Synopsis: Requires companies earning more than $100 million annually on digital advertising worldwide to pay a tax on revenue from any ads appearing on Maryland devices, and those earning at least $1 million on digital advertising — or expecting to — to file returns or other paperwork with the state comptroller.
Analysis: This week, Spain’s government approved a 3% tax on digital services — including online ads — for companies with at least $810 million in global revenue, though it still needs parliament’s approval. And last summer, France implemented a similar tax and made it retroactive to Jan. 1, 2019. If passed, Maryland’s bill would make this the first state in the country to tax digital advertising, though Nebraska is also considering a bill that would add sales tax to digital ads. Maryland’s version of the plan would include a tiered tax rate (starting at 2.5% for those with global annual gross revenues of $100 million to $1 billion up to 10% for those making more than $15 billion) and could raise as much as $250 million per year, which would go a long way toward Kirwan expenses. It’s largely meant, like the other proposals, to sweep up the giant internet companies like Facebook and Google that get so much from us (including mountains of personal data) and give relatively little in return. But it could also sweep up news media companies that are already struggling to find the resources to meet their public service missions, particularly as more companies consolidate. Gannett, for example, may look like a powerhouse on paper, with $1 billion in annualized digital revenue — much of it from digital subscriptions — but it’s made up of 152 daily newspapers spread across 39 states. Taxing ad revenue would be a big hit on those individual properties and would likely be challenged on First Amendment grounds in court. It’s also unclear how such a law would square with the federal Internet Tax Freedom Act, which prohibits discriminatory taxes on e-commerce, or the Commerce Clause of the U.S. Constitution, which prevents states from making laws that interfere with interstate commerce. Another concern is enforcement: Companies would have to track their users IP addresses to determine where the ads are consumed, and the Maryland comptroller’s office has said it likely can’t enforce the tax on foreign-owned companies. Overall, the bill is too problematic to pass as written.
Editorial board recommendation: Fail.
Sponsors: Sens. Jim Rosapepe (Prince George's and Anne Arundel counties) Del. Marc Korman, a Montgomery County Delegate.
Synopsis: Applies the state sales and use tax, currently 6%, to the purchase of certain digital products, including: music, ring tones, e-books and audio books, movies, online newspapers; cable, satellite and pay-per-view programming.
Analysis: Digital goods aren’t taxed, tangible goods are. So, as consumers increasingly choose virtual items (an e-book, for example) over actual (paperback), the sales tax base has eroded. Recognizing this, at least 30 states and Washington D.C. (as of 2019) already tax at least some digital goods. Maryland tried last year, attaching a provision to House Bill 426, known as the “21st Century Transportation Funding Act,” that would have taxed digital goods and raised roughly $38 million in its first year, according to a fiscal and policy note filed with the bill. But the bill was ultimately withdrawn. The idea deserves another look, however. There’s simply no getting around the fact that we consume much of our media in digital form — even our news media — today, and that will only increase in the future as DVDs and CDs (and likely one day, print newspapers) disappear. The fact that you can’t hold a copy of “Frozen II” doesn’t mean you don’t fully own the one you bought on Amazon and stream at will. And we already tax the physical versions of such goods (of this newspaper, too). There’s no good reason we’re not taxing digital forms of the same product.
Editorial board recommendation: Pass.