Maryland Gov. Larry Hogan vowed Thursday to oppose a proposed change in the sales tax that would reduce the rate but expand who pays it by charging it on an array of services from landscaping to lawyers.
“It’s not ever going happen while I’m governor, I can promise you,” the Republican governor said during a State House news conference.
Democratic lawmakers introduced a bill earlier in the day to expand the sales tax, saying that would raise the billions of dollars needed to improve public schools while having a minimal impact on most Maryland families. The rate would drop from 6% to 5%, but the tax would apply to a vastly broader range of business and services transactions.
The estimated $2.6 billion per year the expanded sales tax would generate would be earmarked to pay for school improvements recommended by the Kirwan Commission, such as increased teacher pay, expanded prekindergarten and more support for schools in low-income neighborhoods. Lawmakers have spent the first half of the 90-day General Assembly session weighing proposals for how to raise money for the Kirwan recommendations.
“The bottom line is: This is one way we can fully fund our schools,” said Del. Eric Luedtke, a Montgomery County Democrat who is the bill’s chief sponsor.
Luedtke said the bill doesn’t break an earlier pledge from the General Assembly’s Democratic presiding officers that they would not approve an across-the-board sales tax increase.
“The leadership pledged we wouldn’t increase the rates,” Luedtke said. “In this bill, we’d be lowering the rates. That would put us below every neighboring state, except Delaware.”
Delaware does not impose a state sales tax.
Hogan blasted the sales tax proposal during his news conference. He said collecting more sales tax would erase economic gains made in the state during his tenure as governor.
“This would destroy everything we’ve done for five years,” Hogan said. “It would destroy our economy.”
Maryland would join a handful of states that charge a sales tax on services, according to the Federation of Tax Administrators, which has surveyed states on taxation of eight categories of professional services, such as architects, attorneys and engineers.
Hawaii and New Mexico have broad sales taxes that apply to most transactions, according to the Federation of Tax Administrators. South Dakota’s sales tax applies to some, but not all, services.
And Delaware and Washington each have a “gross receipts tax” that applies to all services, separate from the sales tax.
Representatives from some industries that would be required to collect Maryland sales tax for the first time expressed concerns Thursday.
Tom Hood, chief executive of the Maryland Association of CPAs, argued the tax would be more difficult to enforce than legislators envision. If an accountant is serving a client who owns gas stations in Maryland, Virginia and Washington, D.C., it is unclear what state the service is being delivered from and what state the service is delivered to, he said.
That same geographical challenge could put Maryland accountants at a competitive disadvantage, Hood said, as few other states charge a similar tax. If Maryland were to enact one, businesses and residents could go elsewhere for accounting services, he said.
Hood urged lawmakers to remember the majority of Maryland’s accounting firms are small businesses. Of the 8,000 firms the association represents, 75% have fewer than 20 employees, he said.
“Is this the right time to do this kind of taxation that will in fact hit small businesses?” he asked.
The Maryland State Bar Association is “vehemently” opposed to the proposed tax, said executive director Victor Velazquez, who argued it would run “counter” to due process rights in the U.S. Constitution. Legal services are unlike other services because clients are paying to have their rights represented and advocated for, Velazquez said.
“Certainly, access to justice is impacted,” he said. “If someone who is injured gets a settlement for compensation, to then have to pay taxes on that settlement is counter to everything reasonable in the eyes of the public.”
Velazquez said the association’s legal team is reviewing the language of the proposed bill, but the proposal is particularly concerning because it’s “wrapped in the cloak of the Kirwan Commission.”
“The objective seems applaudable and we take no position on it,” said Velazquez, referring to the educational recommendations. “But we don’t want this to just be incorporated in large omnibus legislation that has the impact of raising taxes for the public.”
Charging the sales tax on services would be short-sighted, ill-advised and anti-small business, said Brian J. Crepeau, an attorney with Baltimore’s Rosenberg Martin Greenberg law firm, which represents businesses and individuals.
Since few states tax services, Crepeau said, the proposal would put Maryland service providers at a competitive disadvantage.
“If legal work can be completed by a Maryland firm or a Virginia firm, why would a potential client choose to pay a sales tax to the Maryland firm?” he said.
It also would increase firms’ administrative costs, he said. For his own firm, it would be complicated to administer the tax internally because the firm has offices outside Maryland as well, in New York, Delaware and Washington, where attorney services are not taxed.
“We would probably have to hire another accounting person, and we’re a mid-sized firm with 40 attorneys,” he said. “Determining what services are taxed to Maryland versus other states will be just another layer of regulations.”
Donald C. Fry, president and CEO of the pro-business Greater Baltimore Committee, expressed concern that “significant tax reform of this magnitude” was introduced without enough time for discussion. He suggested instead that lawmakers form a commission to study potential changes in the tax code.
The sales tax bill was introduced at nearly the mid-point of the 90-day General Assembly session — after the customary deadline for introducing bills. While the bill faces an additional procedural hurdle in the lawmaking process, with Luedtke and other top Democrats sponsoring the bill, it’s expected to move forward to a committee hearing.
Separately, state lawmakers also are considering bills that would apply the sales tax to digital goods such as e-books and downloaded songs, create a new tax on digital advertising and increase the tax on tobacco and nicotine products. They’re also weighing whether to legalize sports gambling as a way to raise money.
Baltimore Sun reporters Luke Broadwater and Lorraine Mirabella contributed to this article.