Democratic leaders in the House of Delegates proposed legislation Wednesday night to expand the state’s sales tax to professional services as a way to bring in billions more to pay for the Kirwan Commission’s recommended overhaul of Maryland’s public schools.
The legislation would expand the sales tax to include many industries that go currently untaxed — such as legal services, accounting and engineering — while cutting the rate across-the-board from 6 cents on the dollar to 5 cents.
Del. Eric Luedtke, a Montgomery County Democrat who is House majority leader, said the bill would be formally introduced Thursday morning.
The legislation would continue a sales tax exemption on food, medicine, health services, educational services and the nonprofit sector.
Luedtke said the bill would bring in an estimated $2.6 billion in new revenue by 2025, the amount needed to pay for sweeping, expensive legislation meant to boost Maryland’s public schools to the “world-class levels" of Finland, Singapore and other leading education countries and states.
“The single most important thing we can do for Maryland’s future is make sure we have great schools," Luedtke said. "This will give us the ability to fully fund great schools in every portion of the state.”
Republicans said they were gearing up to oppose the plan. Del. Nic Kipke of Anne Arundel County, the House minority leader, said the proposal would further burden overtaxed residents and businesses.
“Maryland is already one of the highest-taxed states in the country,” he said. “It is oppressively costly to live here and Marylanders have been leaving our state ― especially near retirement ― in alarming numbers.”
Maryland’s sales tax — currently 6%, with a 9% tax on alcohol — brought in $4.9 billion in 2019, according to the most recent available data from the Comprehensive Annual Financial Report.
Luedtke said the estimate is that an average family making $80,000 a year would pay about $3 more a week under the expanded sales tax.
“I think most people would be willing to pay $3 more a week to make sure we have the best schools in the world,” Luedtke said.
Democrats have been searching for ways to pay for the Kirwan Commission’s proposed educational changes, which would cost an estimated $4 billion a year when they are phased in.
The commission’s report calls for additional programs, such as expanding prekindergarten to more students, enhanced standards and higher salaries for teachers, improved college- and career-prep programs in high schools, and more support for schools with high concentrations of students from poor families. For instance, it would make the starting salary for teachers $60,000 a year.
The state is expected to cover about two-thirds of the costs of the overhaul, while local jurisdictions as a whole would need to come up with the rest. An expanded sales tax would cover nearly all of the state’s portion of the costs, Luedtke said.
The bill has support from major committee leaders in the House, including Appropriations Chairwoman Maggie McIntosh, Economic Matters Chairman Dereck E. Davis and Ways and Means Chairwoman Anne E. Kaiser.
Kaiser, who leads the House committee that reviews tax changes, said expanding the sales tax to such services would affect higher-income Marylanders more than those with lower incomes.
“It creates a more modernized tax system, but also is fairer to the middle-class and lower-class families who are spending the bulk of their money on stuff, while people who have more money spend more on services,” she said.
Officials at the Maryland Office of the Comptroller have reported for the last several years that growth in sales tax collections has been weak, as consumers buy fewer tangible goods and more services and digital goods. The lack of a tax on services “is increasingly out of step with consumption patterns,” wrote Andrew Schaufele, director of the state’s Bureau of Revenue Estimates, in an annual report last summer to the state’s top financial officials.
Other proposals to raise money to pay for the education overhaul include legalizing sports betting, boosting the state’s tobacco tax and applying the sales tax to downloads of digital media, such as e-books and music. House of Delegates Speaker Adrienne A. Jones and Senate President Bill Ferguson have pledged to pass the Kirwan bill without across-the-board increases in the state’s sales, income or property taxes.
Through a spokeswoman, Jones declined Wednesday to comment on the latest proposal. A spokesman for Ferguson did not respond to a request for comment.
Mike O’Halloran of the National Federation of Independent Business said the expansion of Maryland’s sales tax would hit consumers as well as small business owners.
“The fact remains: This will raise the cost of doing business in Maryland,” he said.
While businesses would be able to charge less in sales tax, O’Halloran said, they would have to pay the tax themselves for services provided by accountants, lawyers and other professionals on whom they rely. The additional tax that businesses would pay would likely be passed on to consumers, he said.
Other businesses would face challenges in having to collect sales tax for the first time, O’Halloran said.
“I just don’t think this will pan out the way they hope it will,” he said.
During his years as governor, Democrat Martin O’Malley attempted to push a smaller expansion of the sales tax, but that effort failed.
Gov. Larry Hogan, a Republican, has said for months he would fight proposed tax increases from the General Assembly to pay for the Kirwan Commission recommendations.
“The last time Maryland saw massive tax hikes like this, they wrecked our economy, and forced businesses and taxpayers to flee the state in droves," Hogan’s spokesman, Mike Ricci, said Wednesday. “Our legislators’ memories may be short, but Governor Hogan was elected ― and overwhelmingly re-elected ― to hold the line on taxes, and that is exactly what he is going to continue doing.”
If passed, the act would take effect Jan. 1.