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Maryland lawmakers are considering expanding the sales tax to services. Here’s how it would work.

Maryland lawmakers are considering a proposal that would lower the state sales tax from 6% to 5%, but also apply it to a range of professional services that aren't currently taxed.
Maryland lawmakers are considering a proposal that would lower the state sales tax from 6% to 5%, but also apply it to a range of professional services that aren't currently taxed.(Paul W. Gillespie/Capital Gazette)

Maryland lawmakers are considering significant changes to the state’s sales tax in hopes of drumming up money to implement reforms in public schools.

The reforms recommended by the Commission on Innovation and Excellence in Education, also known as the Kirwan Commission, for Chairman William E. “Brit” Kirwan, would cost $4 billion more per year than Maryland spends already on education when fully implemented in about a decade. The state would pay $2.8 billion more and local governments would pick up the rest.

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Here are details of the proposal to expand the state sales tax for pay for it.

The sales tax rate would drop from 6% to 5%

For many years, the state sales tax had been 5%. Then, it was increased to 6% in 2008 under then-Gov. Martin O’Malley to cope with a state budget deficit amid the last recession.

The new proposal would roll the tax back to 5% — lower than several surrounding states, including Pennsylvania (6%), West Virginia (6%), the District of Columbia (6%) and Virginia (5.3%).

Delaware charges no sales tax.

But the sales tax would be applied to more purchases

The key part of the proposal requires the sales tax to be paid not just on material goods, but also on professional services. That’s a broad category that could apply to services ranging from haircuts to landscaping to lawyers.

By applying the sales tax to significantly more purchases, the bill’s sponsors believe they will raise significantly more money, even though the tax rate will be lower.

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Not all services would be required to pay the sales tax

The bill carves out exceptions so that certain services would not be taxed, borrowing definitions from a federal program called the North American Industry Classification System.

Most notably, day care and child care would continue to be exempt from the sales tax. (Gov. Larry Hogan and others have incorrectly said day care would be taxed.)

The exceptions include:

  • Educational services: Nonprofit and for-profit schools, colleges, universities, trade schools, training programs and exam preparation.
  • Health and social assistance services: Health care practitioners such as doctors, dentists and mental health practitioners; outpatient, family planning, dialysis and ambulatory centers; medical labs; home health care services; ambulance services; hospitals; nursing and residential care facilities; continuing care retirement communities; shelters; vocational rehabilitation services, and child care services.
  • Services provided by a religious organization: Churches, synagogues, mosques and other religious organizations; also convents, monasteries, mission organizations and retreat houses.
  • Grantmaking or “giving” service: Organizations such as foundations and trusts that give grants for “social welfare activities,” such as health, education, science and culture.
  • Services provided by a “social advocacy organization”: Examples include organizations that advocate for issues such as community action, firearms, conservation, human rights, the environment and wildlife preservation.
  • Services provided by a civic or social organization: Examples include alumni associations, parent-teacher associations, booster clubs, ethnic associations, scouting organizations, social or fraternal clubs, and veterans’ groups.
  • Services provided by a business, professional, labor or political association: Examples include industry trade groups, chambers of commerce, labor unions, political clubs and political campaigns.

The sales tax changes would raise billions of dollars

The state typically collects about $4.9 billion per year from the sales tax, and these changes would bring in billions more.

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A nonpartisan analysis estimates that by 2025, adding a 5% sales tax on services would bring in $3.7 billion more per year.

At the same time, the state would lose out on some money by dropping the rate from 6% to 5% on physical goods that are purchased. In 2025, that would be a nearly $800 million hit to sales tax revenues.

And the Office of the Comptroller would need to hire about two dozen more employees to collect and enforce the sales tax.

Overall, the net effect of the bill would mean the state would collect about $2.9 billion extra in sales taxes, according to the analysis from the Department of Legislative Services.

Del. Eric Luedtke, a Montgomery County Democrat who is the bill’s lead sponsor, has said the average Maryland family making $80,000 per year would pay about $3 more weekly — or about $150 per year — from the expanded sales tax.

Hogan, meanwhile, claims the hit would be about $1,700 per household and says it will “destroy our economy” in Maryland.

The money could help pay for improvements to public schools

Supporters of the bill argue it would raise enough money to cover the state’s portion of the increased spending on public schools recommended by the Kirwan Commission.

The commission, which spent three years studying how to improve education, recommended changes including: expanding prekindergarten for low-income students, boosting teacher training and pay, improving career- and college-prep programs, and providing more support for schools in low-income neighborhoods.

The bill does not, however, expressly dedicate the increased money from the sales tax to public schools.

State lawmakers also are considering an array of other options for raising money, including: applying the sales tax to digital downloads of books, movies and other media; creating a new tax on digital advertising; increasing the tax on tobacco and creating a new tax on nicotine vaping products; legalizing sports betting, and an array of changes to corporate tax rules.

The bill faces significant opposition

As soon as the sales tax bill became public, representatives from various industries began speaking out against it, including accountants, attorneys and others.

A coalition of about 20 business groups plans to be in Annapolis on Monday morning to express its opposition to the bill.

That afternoon, the House of Delegates Ways and Means Committee will hold a hearing on Luedtke’s sales tax bill, as well as another bill that proposes to expand the sales tax to about a dozen services while leaving the rate at 6%. Those are the only two bills on the agenda — a sign that lawmakers expect a large number of people will testify.

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