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Gov. Hogan's tax credits based on bad math, economics

Gov. Larry Hogan last month proposed a multi-part plan that he claims represents "$480 million in tax relief to those Marylanders who desperately need it most." Further, he claims that these cuts will have "a direct, dramatic, and positive impact on our state economy." Neither claim is true. The proposal will reduce Maryland's revenues by $480 million, but, according to my analysis, only put a maximum of $395 million back in the pockets of state residents — most of them fairly wealthy and more likely to save, rather than spend, their extra cash.

One of the biggest parts of the governor's plan involves reductions spread over five years in the annual filing fee for businesses that he says account for $164 million — a third of his proposed tax relief. But a large portion of the funds that Maryland doesn't collect won't stay with business owners; it will have to be paid to the federal government in the form of taxes. Assuming a 33.33 percent average marginal income tax rate (an assumption that is probably low), the actual fee savings that businesses realize will be about $109 million total; in other words, Mr. Hogan's filing fee cuts will send $55 million that used to go to the state to the feds. And because the cuts are "back loaded," meaning they get bigger as time goes on, they actually underestimate the revenue loss to Maryland after the initial five-year period.

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The governor also wants to reduce 100 non-statutory fees, resulting in $71 million in lost tax revenue over five years. Many, but not all, of these fees are also business fees subject to a similar analysis — let's say about half. Applying the same calculus as above, nearly $12 million of the revenue Maryland doesn't collect will go to the federal government. That means the tax cut for Marylanders is really only about $59 million — not $71 million.

The governor's proposed "Seniors Tax Relief," meant to save 640,000 seniors $183 million in taxes over five years, will also transfer money from Annapolis to Washington. Many of these seniors deduct state taxes when calculating their federal income tax. Adjusting for this, and for a lower marginal income tax rate, approximately $18.3 million of the "savings" will become additional federal income tax paid by Marylanders.

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Finally, there's a proposed "manufacturing jobs initiative." The governor has not set forth a revenue loss figure for this item. Whatever that figure is, though, you can safely assume that approximately a third will, in effect, represent a transfer of money from Maryland to D.C. And it will be on top of the $85 million (a conservative estimate) already transferred to the federal government.

But wait, what about the crumb thrown to the poor? That's the proposed increase in the refundable Earned Income Tax Credit. This will result in tax relief to poor working individuals of only $27 million over the next two years — or 5.6 percent of the $480 million in lost revenue. Because the poor don't take itemized deductions when they calculate their federal income tax, no portion of this cut will be sent to Washington. Thus, the entire $27 million in revenue loss to Maryland turns into tax relief for Marylanders. And 100 percent of that is likely to be spent in Maryland; poor people tend not to travel much outside of the state. So Governor Hogan can take full credit for this crumb.

The lion's share of the proposed tax cuts are meant to benefit businesses, whose owners tend to be relatively wealthy. Wealthy people tend to save, not spend, tax cuts. Therefore, the money will not go back into the economy. Any positive relationship between tax cuts and employment growth is largely driven by cuts targeted to lower-income groups; the benefit of tax cuts for the top 10 percent on employment growth is small. In other words, if what you want is economic stimulus, you don't want the governor's plan because it sends money to the wrong people.

The governor's proposed "tax cuts" are based upon bad math and bad economics. Bad math because the proposals confuse revenue loss with tax reductions. And bad economics because a significant amount of the dollars involved will be diverted away from Maryland's economy while any benefits flow toward the well off — certainly not "those Marylanders who desperately need it most."

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Stuart Levine is a tax and business attorney in Baltimore. His email is sltax@taxation-business.com.

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