In the latest snake-swallowing-its-tail moment in Maryland’s governor’s race, Ben Jealous, the Democratic nominee whose platform revolves around huge new government initiatives on health care, education and more, is proposing to cut the sales tax, and Gov. Larry Hogan, who swept to victory four years ago on an anti-tax platform, is balking. There’s plenty that’s weird about this turn of events. For one thing, Mr. Jealous has previously indicated an openness to increasing the sales tax to help cover the costs of his single-payer health care plan. For another, Governor Hogan said four years ago that if elected, he would roll back as many of former Gov. Martin O’Malley’s tax increases as possible. In general, he has barely tried to do so, and specifically he has never so much as mentioned the idea of cutting the sales tax — the biggest single tax increase Mr. O’Malley enacted. Mr. Hogan has certainly never put in a bill to cut the sales tax or even supported legislation by his fellow Republicans to do so. In fact, he has indicated that he intends to spend the new revenue the state anticipates as a result of a Supreme Court decision related to internet sales taxes on education rather than return it to taxpayers. Mr. Jealous would use that to help cover the cost of lowering the overall rate from 6 percent to 5.75 percent.
There’s certainly a case to be made for a sales tax cut as an effort to make Maryland’s tax system more progressive. Maryland’s sales tax is less regressive than that in Virginia, for example, because it exempts food (as well as prescription drugs), but it still hits low and moderate income households harder than it does the wealthy. The more important conversation Maryland should have about its sales tax, though, is whether it needs to be overhauled altogether for an information age economy.
Maryland’s sales tax was established in 1947, in part to pay for construction of the Bay Bridge (and it has been widely credited with contributing to the defeat of the governor who pushed for it, William Preston Lane Jr.). The rate has changed since then, but its structure has remained largely the same, with the levy applied to goods but not most services. That means that the tax is increasingly out of sync with the economy.
The report from the comptroller’s office announcing Maryland’s budget surplus for the recently ended fiscal year sounds several notes of caution about that. Younger consumers show a marked preference for spending that’s not covered by the sales tax, and baby boomers are moving toward spending more on services and less on goods, the report says. Meanwhile, although inflation has ticked up slightly, the trend in prices of goods is actually downward. And unlike many states, Maryland does not subject digital downloads to taxes, meaning if you buy a DVD on Amazon, you pay sales tax, but if you download the same movie from Amazon, you don’t.
In 2012, the Department of Legislative Services estimated the revenue that could be generated by taxing 16 categories of services, ranging from engineering to hair cuts to gym memberships, and it added up to about $1.1 billion a year. With Maryland leaders starting to contemplate the costs associated with the Kirwan Commission’s recommendations on education funding, that money — and then some — would be helpful. Or, looked at another way, if Maryland extended its sales tax to all those services in addition to the goods that are taxed now, it could drop the rate to about 4.8 percent and generate the same amount while simultaneously helping ensure that revenues grow apace with the new economy.
Only a handful of states tax more or less all services, but many have begun to consider expanding the base of their levies in response to the changing economy. Even deep red Oklahoma’s Republican governor proposed a broad expansion of the sales tax to alleviate a fiscal crunch. She was ultimately unsuccessful, but more modest expansions have passed in other states.
The recent track record here isn’t good — Mr. O’Malley tried to extend the sales tax to a handful of services as part of his 2007 tax increase package, and it turned into a political fiasco as one affected group after another made their case to lawmakers. (The massage therapists, who gave shoulder rubs to legislators, were particularly persuasive.) But Mr. Jealous says he specializes in getting hard things done, so how about it?