The much-maligned proposal to expand Maryland’s sales tax to professional services was defeated by state lawmakers Wednesday night.
A House of Delegates subcommittee that reviews tax changes rejected the sales tax bill on a unanimous, bipartisan vote in a late-night voting session.
The subcommittee’s rejection means the bill won’t advance further in the legislative process.
Del. Eric Luedtke, the Montgomery County Democrat who sponsored the bill, found humor in his bill’s defeat: “See, bipartisanship in action,” he joked.
On Monday, lawmakers heard more than five hours of testimony on the tax, mostly from people from a range of industries who were opposed.
The proposal would have dropped the sales tax rate from 6% to 5%, and applied it to a range of professional services from architects and attorneys to lobbyists and landscapers.
Luedtke promoted his bill as a way to raise billions of dollars to fund public schools. By 2025, the changes would have resulted in a net increase of $2.9 billion to the state each year.
That would have been enough money to cover the state’s share of increased funding to implement education programs recommended by the state’s Kirwan Commission, such as expanded prekindergarten, increased teacher pay and improved college- and career readiness.
Gov. Larry Hogan quickly generated a campaign against the sales tax bill, using money raised by his Change Maryland political fund. The Republican governor railed against the bill in a news conference and in social media posts, saying it would not only reverse economic gains made in recent years, but it would also “destroy our economy.”
The bill also drew intense opposition from a number of industries.
Hundreds of real estate agents rallied against the bill Monday in Annapolis, saying it would drive up the costs of buying and maintaining homes. And more than two dozen business groups banded together in a news conference to blast the bill before a lengthy public hearing that day.
As the House Ways and Means subcommittee on revenues debated the bill late Wednesday, more than two dozen lobbyists watched intently from the audience. The subcommittee’s Democrats and Republicans present voted “unfavorable” to defeat the legislation without debate.
“Small businesses can breathe a little relief,” said Mike O’Halloran, state director of the National Federation of Independent Business.
However, O’Halloran said the business community remains concerned about several other tax proposals still under consideration. One bill that’s still being discussed would be a more limited expansion of the 6% sales tax to selected services.
“The more the legislature determines this industry should be exempt or that industry should be exempt, the more it means a smaller group of businesses are left holding the bag, and that’s problematic,” O’Halloran said.
The debate over the education programs and how to pay for them has emerged as a central focus of the 90-day General Assembly session.
As Hogan repeatedly criticized lawmakers for pushing forward the Kirwan plan without a plan to pay for it, lawmakers have floated an array of proposals, including a new tax on digital advertising, applying the sales tax to digital media such as e-books and streaming services, increasing the tobacco tax, eliminating “loopholes” for corporate taxpayers, and eliminating some business subsidies.
Luedtke said he wasn’t surprised at the intensity of opposition to his bill, but he said it still was an important measure to consider.
“Nobody likes taxes. Anytime you’re talking taxes there’s opposition,” he said. “We heard the public and we appreciate their input.”
Luedtke, who is chairman of the subcommittee that voted down the sales tax proposal, said he believes the other tax bills will raise enough money combined to fund at least a few more years of the Kirwan Commission’s education programs. But it won’t be enough to pay for the full 10-year implementation of the commission’s recommendations.
Last year, lawmakers identified funding for the first three years of the phase-in of the Kirwan programs. So, their focus this year has been finding ways to pay for the rest of the 10-year implementation — or, at the least, paying for a few more years of the programs.
“Future governors and future legislatures will still be dealing with it,” Luedtke said.