Maryland lawmakers want to let counties replace flat across-the-board local income taxes with progressive brackets that hit high-earners with higher rates, a move Democrats assert could open the door to tax cuts for working-class families but that Republicans argue will instead make tax hikes inevitable.
Legislation received final approval in the General Assembly on Friday, sending the matter to Gov. Larry Hogan for his consideration.
Each county and Baltimore City has its own local income tax rate that residents pay. Unlike state income taxes, which charge progressively larger rates on higher incomes, local tax rates are currently a flat percentage that’s charged to everyone regardless of how much they earn.
The change would allow local governments to create a graduated system, with lower tax rates on lower earnings and higher tax rates on higher earnings.
Anne Arundel County Executive Steuart Pittman has championed the idea for more than two years. He says that with the flexibility, he could, for example, propose a tax break on the first $30,000 of a person’s earnings, and then a tax hike on anything above $500,000.
That means the county could raise money for needed programs, such as improving public schools, primarily from the county’s wealthiest residents, Pittman said.
“This gives us a way to get revenue from people who have benefited in the pandemic economy and benefited from economic growth in recent decades — as opposed to people who have been left out,” said Pittman, a Democrat who plans to run for reelection in 2022.
Pittman got leaders from other counties on board with his idea, but the issue has been divisive in his politically-mixed suburban county. He said he wouldn’t propose a change in the tax rate in his budget for next year, but possibly the year after that.
Anne Arundel County Sen. Bryan Simonaire, who also is the Republican leader in the state Senate, argued against the bill, saying it could lead to increased taxes.
“This bill gives local governments all the tools and mandates to raise taxes,” he said. “It’s like dumping gas on a pile of dry wood and handing them a match and after the fire is blazing, saying: ‘We didn’t start the fire.’”
Under current state law, each county and Baltimore City must set the local income tax rate at a minimum of 1% up to a maximum of 3.2% — with whatever percentage local leaders pick charged across the board.
Under the legislation approved by state lawmakers, the minimum local income tax rate would rise to 2.25% — matching the rate set by Worcester County, the lowest actual rate charged anywhere in the state — and the maximum would remain unchanged. But local leaders could choose to vary the rates on different levels of income, similar to how state and federal income taxes have different rates for different tax brackets.
Twelve jurisdictions charge the maximum of 3.2%, including Baltimore City, Baltimore County and Howard County as well as Montgomery and Prince George’s counties in the D.C. suburbs. Harford County currently charges 3.06%, Carroll County charges 3.03% while Anne Arundel’s current rate, 2.81%, is the fourth-lowest in the state.
Two-thirds of Maryland’s residents live in areas with the maximum 3.2%, so they would either see no change or a tax cut, based on what their local government decides, said Sen. James Rosapepe, a Democrat who represents Anne Arundel and Prince George’s counties.
If counties with the maximum 3.2% rate wanted to cut taxes on some residents, they’d have no way to make up the lost revenue by raising taxes on the wealthy residents.
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“Without this bill, counties are forced to have the same tax rate on working class people as well as the high income people. The bill changes that. The bill gives them the flexibility to be progressive,” Rosapepe said.
The bill also affects “disparity grants” that the state awards to poorer counties to help them pay for county government services.
Currently, counties receive the grant if they charge a local income tax of at least 2.6%. The counties get more money if their tax rate is higher — essentially rewarding counties that collect as much money as they can themselves before relying on a disparity grant.
The bill further changes the formula for disparity grants
Del. Jefferson Ghrist, an Eastern Shore Republican, said the bill offers a way for counties to still get disparity grants while potentially lowering taxes for some residents.
“For the poorer counties who are maxed out on their local income tax, if they still want to maximize their disparity grant, this vehicle is the only way they can actually lower taxes for the folks who live in their county? So I’ll be voting for the bill,” he said.
The legislation, officially called the “Local Tax Relief for Working Families Act,” passed the Senate 30-17 and the House of Delegates 92-37 — margins that are sufficient to override any potential veto from the governor. Hogan has not publicly offered a position on the bill.