The Maryland legislature should authorize local governments to enact a local sales tax and link this reform with a reduction in the local property tax and/or local income tax. The benefits of this proposal are not only fiscal and economic, but political. It provides the rare political win that advances the principles of both parties by achieving a number of goals that, though disparate, are sought at various times by either the Republican or Democratic Party.
In light of the state's deepening fiscal imbalance and the arrival of divided government in Annapolis beginning this month, the next few years present a unique opportunity for the state to pass meaningful tax reform that both parties say is needed in Maryland to modernize the way the state finances government, make its economy more competitive and lower residents' tax burden.
If the General Assembly and the governor take this opportunity, one of the best reforms they could pass to fulfill each of these goals is to authorize local governments to enact a local sales tax and link this reform with a reduction in the local property tax and/or local income tax (known as the "piggy-back tax" because it is first collected by the state before the state transfers the proceeds back to each respective local government). Currently, Maryland is home to one of the highest tax burdens in the country after taking into account each jurisdiction's property and piggy-back tax. In addition, Maryland is one of only 13 states in the country that does not authorize its local governments to collect a local sales tax.
As a result, Marylanders who live in one jurisdiction but work or play in another benefit from all the services and amenities of the jurisdictions where they do not live without paying for these services. Meanwhile, each local jurisdiction cannot capture the optimal funding to provide these services. The funding burden falls disproportionately and exclusively on each jurisdiction's residents. The regressive nature of property taxes exacerbates this tax structure: it is based not on one's income, and therefore ability to pay, but on one's property value. At the same time, this tax automatically increases over time as property values rise even if the property owner's income does not. Similarly, the piggy-back tax is regressive because the same rate applies to all of a jurisdiction's residents regardless of each resident's income.
Residents of Baltimore City, for example, probably experience the inadequacies of this system more acutely than that of any other jurisdiction. They pay the highest property taxes in the state and the maximum piggy-back tax (3.2 percent) despite having one of the lowest median incomes of any jurisdiction. The demands placed on the city's public services are also higher than that of any jurisdiction due to the level of crime and poverty in the city as well as the large population of workers who are employed in, but live outside of, the city. This environment of highly regressive taxes, combined with insufficiently funded public services, creates profound disincentives for establishing residency in Baltimore City. Other jurisdictions with diverse income groups must grapple with this problem to varying degrees. A local sales tax would ameliorate this problem by generating revenue from people who make purchases outside their home jurisdiction and by more evenly distributing the tax burden, while reduced property and/or piggy-back taxes would provide individuals with additional locations in which to choose to live.
Moreover, local jurisdictions could and should be allowed to use a portion of money generated by a local sales tax to finance bonds for needed capital projects, such as new school buildings. These investments are what help drive a jurisdiction's population growth. A local sales tax would put jurisdictions in a position where they could take on added responsibility for their capital needs as the state's ability to shoulder this responsibility becomes increasingly tenuous.
Of course, local jurisdictions would not be required to enact this tax since having a new taxing power is not the same as having a new tax. Jurisdictions that are happy with their tax structure and/or funding level could decline this revenue stream, while jurisdictions that desire a change in the way they finance their services could adopt the local sales tax, provided they reduce their property and/or piggy-back taxes.
The benefits of this proposal are not only fiscal and economic, but political. It provides the rare political win that advances the principles of both parties by achieving a number of goals that, though disparate, are sought at various times by either the Republican or Democratic party.
For Republicans, the proposal lowers taxes for potentially all Maryland taxpayers and gives local governments the choice of whether to adopt a local sales tax, thereby increasing their authority over tax and spending decisions, while the state's role is reduced. For Democrats, the proposal creates a new funding stream to generate revenue and provide an alternative means of financing capital projects, and, structured properly, provides financial relief to low and middle income earners.
It further presents an opportunity for both parties to show the public that they can work together, and we hope, create good-will for future, principled compromise.
Michael Kroopnick is a Maryland attorney. His email is email@example.com.