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Protecting taxpayers from bad federal policy, the Maryland way

In principle, we agreed with Gov. Larry Hogan’s goal to make sure that the federal tax law changes President Donald Trump signed into law last year wouldn’t make any Marylanders’ state and local taxes go up. It’s not that we’re as averse to taxes as Governor Hogan is, but we do believe that if the state is going to raise them, it should be as a result of thoughtful deliberation about Maryland’s needs, who should pay to meet them and how much. Letting Maryland’s tax code get whipsawed by the unintended consequences of short-sighted federal legislation is simply not good policy, whether it causes state taxes to go up or down.

Mr. Hogan’s proposed approach was intuitively simple. The big driver of Maryland state and local tax increases under the Trump tax bill was likely to come as a result of more people finding it advantageous to take the new, nearly doubled standard deduction under the federal tax code and being thus forced to do so on their state taxes, even if that hurt them. So why not just change Maryland law to let people itemize on their state returns even if they take the federal standard deduction? We floated the same idea ourselves as the federal tax bill was nearing enactment.

But it turns out that isn’t a particularly workable idea. It would require the state to freeze in amber the federal tax code circa November 2017 and enshrine it in state law. The comptroller’s office would have to hire additional staff to administer the new system, and it would suddenly have vastly new responsibilities to audit itemized returns that the IRS now handles. It would be complicated for individual taxpayers, too, as they would have to figure out which combination of standard and itemized deductions on federal and state returns was optimal for their particular situations. Moreover, legislative analysts predicted that Mr. Hogan’s bill would have cost the state and local governments more than they would gain as a result of the federal tax changes.

What the Senate arrived at doesn’t achieve the goal of making sure that all individual Marylanders state and local tax liabilities are unaffected, but the Budget and Taxation Committee has done something that’s better: It has found ways to make the state tax code more progressive while also providing more resources for education. B&T has sent to the Senate floor a modified version of Sen. Andrew Serafini’s bill increasing Maryland’s standard deductions, which will offset the negative state tax impacts of the federal legislation for most lower and middle class taxpayers. In his presentation of the legislation, the Western Maryland Republican noted that the largest concentration of state tax losers under the federal bill were in the $25,000-$50,000 income range, and this approach is particularly helpful to them. (Those with higher incomes tend to see larger benefits from the federal tax cuts, so few of them will be net losers when federal, state and local taxes are considered in the aggregate.)

The second bill that’s headed to the Senate floor is a version of legislation Sen. Richard S. Madaleno, a Montgomery County Democrat and gubernatorial candidate, has long advocated — an expansion of Maryland’s version of the Earned Income Tax Credit. One of the most effective anti-poverty tools, the EITC puts money directly into the pockets of low-income wage earners, and this expansion is targeted to childless adults, who had to be extremely poor (and over 25 years of age) to get any benefit under the old system.

The combined effect of those bills and another the Senate already passed dealing with personal exemptions is expected to leave about a $200 million state tax windfall as a result of the federal change, money that would be considered a down payment on an expected call for additional education funding when a committee evaluating state school spending makes its report. We’ll be curious to see what additional ideas the House of Delegates may offer, but the Senate package amounts to a smart and balanced response to the federal tax law changes and one that reflects Maryland values.

It would, nonetheless, have been easy for Governor Hogan to complain that Democrats had killed his bill and moved forward instead with one that will mean higher state income taxes for some Marylanders. It could have been a good, if somewhat cynical, talking point for his re-election campaign. But he’s not; a spokesman lauded the Senate committee’s action. It’s just another sign that Governor Hogan and the Democrats in Annapolis have a more functional working relationship than either might like to admit.

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