Do Marylanders believe that the wealthiest among us should pay income taxes at a higher rate than the less affluent? We would wager Ravens Super Bowl tickets that the answer is yes. Maryland’s last governor, Martin O’Malley, made the state income tax progressive a dozen years ago, raising the top bracket from 4.75% to 5.75% but applying that maximum rate only to those earning $250,000 or more as well as giving relief to moderate and lower income filers by raising the personal exemption and the earned income tax credit. There was, briefly, an even higher tax applied to those who earned $1 million or more to help the state weather the Great Recession, but that’s long expired. For all the complaints about Maryland taxes by Gov. Larry Hogan, the O’Malley changes have held. Flat tax rates are out, progressive is in.
But what about income taxes at the county or Baltimore City level? Currently, Maryland subdivisions have to set flat income tax rates. The highest is 3.2%, the lowest 1.75%. But remember all those O’Malley era brackets at the state level? They don’t apply. So a couple earning $50,000 faces the same local income tax rate as one earning $2 million. Does that seem fair? Again, we suspect a lot of people are going to say no to that, too.
Anne Arundel County Executive Steuart Pittman has some ideas about that. As first reported this week by the Annapolis Capital Gazette, he’d like the Maryland General Assembly to give local governments the authority to set progressive income tax rates. How might that work? There are at least two ways to go about it. First, let subdivisions go back to having true “piggyback” tax rates so that income taxes are based on the state’s progressive formula (as used to be done so that local taxes might simply be 50% or even 60% more of whatever the state collects). Or, alternatively, set new tax tables on the local level. In theory, filers earning $50,000 could pay 2.5%, $100,000 at 2.75%, $200,000 at 3% and so on.
This is a timely discussion not only because it’s a matter of basic fairness in the era of the Trump tax cuts, which disproportionately helped the rich, but also because the Kirwan Commission recommendations on education improvements are eventually going to require local governments to come up with hundreds of millions of dollars more for their share of increased school aid in the coming decade. Where will that money come from? Imposing higher income tax rates on the wealthiest citizens might prove an attractive option. And here’s the best part: Such a targeted approach could mean most of us would not see any higher taxes at all and some might even get a break. That’s right, a tax cut. That’s what happened during the O’Malley tax reform, and it could happen again at the local level as rates drop for lower income earners.
We’d have to see specifics to give a flat-out endorsement to the proposal but it’s surely worth serious consideration when the Maryland General Assembly reconvenes next month. County Executive Pittman isn’t asking lawmakers to increase taxes on Anne Arundel County residents (who, by the way, don’t face top local income tax rates now), he’s only asking for the ability for the county to make that choice. So opposing the plan on the grounds it’s a “tax-and-spend” proposition is highly misleading given that some people (conceivably thousands of county residents) might well see a tax cut from progressive rates. Some local governments may prefer a revenue-neutral tax structure just to shift a bit more of the cost of government away from the working class.
Might there be a downside? Absolutely. It’s certainly another level of complexity for the Maryland Comptroller’s office, which has had problems in the past collecting municipal taxes. Might Maryland’s business climate be judged by outsiders on its maximum income tax rate instead of its average? Perhaps, but that happens already. And, of course, the enabling legislation is certain to spur vocal opposition from Governor Hogan. Still, the question is raised: In a state with a progressive income tax rate, shouldn’t local governments be allowed to do the same?