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Expanding Maryland’s sales tax could pay for schools. Businesses tell lawmakers the cost will be too much.

For hours Monday afternoon, they stepped up to the witness table in an Annapolis hearing room: accountants, lawyers, engineers, hoteliers, real estate agents, car wash owners.

They told state lawmakers that expanding the state sales tax to professional services would harm their businesses as well as Maryland consumers.

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“This affects right to the bottom line for everything that we do,” said Jim Starke of the Best Western Plus BWI Airport Hotel in Elkridge.

Starke said he’d have to consider canceling contracts for maintenance and other services, and possibly bring those tasks in-house. Or, to afford the 5% extra the hotel would have to pay on services, he might have to slow the rate of employee raises.

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“We just can’t sit back and absorb increased expenses,” he said.

Maryland lawmakers are considering a bill that would drop the state sales tax rate from 6% to 5%, but also expand it to a wide range of professional services. According to a nonpartisan analysis, those two changes combined would result in the state collecting an additional $2.9 billion in sales taxes each year — enough, proponents say, to pay for the state’s share of ambitious education reforms that are under consideration.

The sales tax bill has quickly emerged as a central focus of debate in Annapolis, as lawmakers consider how to come up with the money they’re seeking for education.

Earlier in the day, hundreds of real estate agents rallied in opposition to the bill and more than two dozen business groups held a news conference to register their concerns. They say taxes on legal fees, appraisals, inspectors and other required services will make it more expensive to buy a home.

At the same time, Republican Gov. Larry Hogan’s social media accounts lit up with posts opposing the sales tax as a “return to the failed tax-and-spend policies of the past.” His political group, the Change Maryland Action Fund, has been running ads against the bill as well.

Hogan’s secretary of commerce, Kelly M. Schulz, testified against the bill at the hearing, saying that for businesses considering locating in the state, it would be “a big flashing neon sign that they should look elsewhere.”

Proponents say reworking the sales tax would have two effects: funding education and making the tax fairer.

Del. Eric Luedtke, chief sponsor of the bill, said businesses that sell goods already must charge the sales tax. It only makes sense, he said, for service-based businesses to charge the sales tax as well.

“It strikes me as somewhat unfair that we would tax a mom-and-pop bookstore, but not a mom-and-pop realty business,” Luedtke, a Montgomery County Democrat, said during Monday’s bill hearing.

Del. April Rose, a Carroll County Republican, pointed out that Maryland has a reputation of being a highly taxed state. “I fear we are going right back down that road,” she said.

Luedtke countered that when taxes are considered as a share of income, Maryland ranks 38th. That tax money goes to schools, roads, fire service, police service and other valuable government services, he said.

“Look, nobody likes paying taxes,” he said. “I don’t like paying taxes. But taxes are the price we pay for living in a civil society.”

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Luedtke and one of Hogan’s lobbyists, Mathew J. Palmer, had an intense exchange during the hearing when the delegate asked whether the governor had another plan to generate more money for public schools.

“What’s the governor’s idea? Does he have one?” Luedtke asked.

Palmer responded that the governor has provided record funding for public schools, and that improved collection of taxes from online sellers is bringing in more money than predicted.

“I think there are plenty of ways to fund it,” Palmer said, “however, this bill is not one of them.”

Luedtke’s bill does not expressly dedicate the extra sales tax money to schools, but proponents say that’s where the money could be used.

The state’s Kirwan Commission — named for its chairman, former University System of Maryland Chancellor William “Brit” Kirwan — has recommended an array of programs with the goal of boosting the state’s public schools to among the best in the nation.

The programs include: 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 Kirwan Commission has recommended a 10-year phase-in, and the state has already funded the first few years of the programs. But lawmakers are in search of a long-term funding source.

While many of the Kirwan-recommended programs enjoy broad support, the various suggestions for how to pay for them have not met with much praise.

Opponents are making a full-court press against Luedtke’s bill. During a news conference before the hearing, they described how the sales tax expansion would have a cascading effect on businesses and consumers.

As an example, they said a small business that would have to collect the sales tax for the first time might need to pay to hire a bookkeeper or accounting service, and they’d have to pay the sales tax on that service. Those extra costs of doing business might then be passed on to consumers, who would be paying the sales tax, also.

“It certainly is a burdensome tax on citizens,” said Regina Ali of AAA Mid-Atlantic. She noted that the labor on car repairs, roadside services, car washes and travel services would trigger the sales tax under the bill.

Lawyers would have to pass added costs on to clients, who often are seeking legal help at “a time of crisis in their life,” said Dana O. Williams, president of the Maryland State Bar Association.

Others noted that businesses are facing other “burdens” passed by the legislature in recent years, including scheduled increases of the minimum wage to $15 per hour and requirements to give employees paid sick leave.

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In addition to expanding the sales tax, lawmakers 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.

Del. Lorig Charkoudian, a Montgomery County Democrat, has a more limited sales tax proposal that would keep the rate at 6% and apply it to about a dozen services that she said are used mostly by high-income families, such as art storage, interior design, country club memberships and lobbying. But the list also includes tattooing, tanning and dog-walking.

None of those proposals on their own come close to paying for all of the Kirwan programs.

And none of the bills has moved forward yet in this 90-day General Assembly session. Lawmakers are facing a procedural deadline in two weeks, when bills must be passed by at least one chamber — either the House of Delegates or the state Senate — to have the best chance of success.

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