After Congress passed President Donald J. Trump’s tax reform bill, the top three officials in state government said they’d try to shield Marylanders from paying more in state taxes.
To varying degrees, Gov. Larry Hogan, Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch spoke of a desire to make sure state taxpayers were made whole despite a federal tax overhaul that tilted against wealthy states such as Maryland. Hogan called his plan to protect state taxpayers his “Christmas gift” to Marylanders.
As the General Assembly session nears the end of its 90-day session, it’s clear that nine in 10 Marylanders will break even or come out ahead. But an unlucky 9 percent of state taxpayers are expected to get a lump of coal.
Instead of protecting every taxpayer, legislators crafted a plan that — with Hogan’s blessing — keeps $200 million in higher state taxes resulting from the federal law. The plan is to use the money to help pay for future increases in state aid to local school systems.
To some Republican lawmakers, that’s a betrayal. As the House of Delegates debated the budget last week, Del. Herbert H. McMillan cried foul.
“If you plan on saving it and then you spend it, no tax money will ever go back to the taxpayers ever,” the Anne Arundel County Republican said.
Legislative staffers said examples of some taxpayers who could pay more include those with many un-reimbursed business expenses, high property tax bills or paid-off homes.
After the House voted 94-42 for the bill that would bank the $200 million rather than returning it to taxpayers, McMillan said he wasn’t exempting the Republican governor from his criticism.
“If a person makes a commitment to do something, I expect them to keep it — be it the governor, the Senate president or the speaker — all of whom promised to fully make whole all Maryland taxpayers,” he said.
“Promise” may be overstating the case. Hogan, Miller and Busch all set a goal of protecting Maryland taxpayers, but their statements weren’t an ironclad commitment to hold every taxpayer harmless.
“That was everyone’s intent and hope. It was aspirational,” said Del. Anne R. Kaiser, a Montgomery County Democrat who chairs the tax-writing Ways & Means Committee.
At issue are hundreds of millions of dollars in unanticipated revenue for the state as a result of the federal tax overhaul. In cutting federal rates, Washington also scrapped many deductions — which, under current Maryland law, state taxpayers can no longer claim on their state returns either.
“Our goal will be to leave that money in the pockets of hard-working Marylanders,” Hogan said Dec. 20.
At a Democratic Party event in January, an exuberant Miller raised expectations of tax relief.
“We're going to have a Maryland solution to this [expletive] stuff that happened on Capitol Hill,” Miller said. “Our people are not going to pay a tax on a tax on a tax on a tax.”
Busch was the most cautious of the three, pointing to uncertainties about the predicted windfall. From the start, he hedged his bets on whether some of the money might be needed for other priorities. But at a news conference with Miller shortly after the session started, he unveiled a series of Democratic bills intended to protect taxpayers.
“We want to make sure Marylanders can get relief,” Busch said.
Early in the session, both chambers in Annapolis unanimously passed a bill to ensure that Marylanders would still be able to claim their personal exemptions. That legislation was prompted by a concern that the federal tax bill could be construed as eliminating such exemptions, which benefit about 92 percent of Maryland taxpayers. Legislative analysts said that would yield a $1.2 billion in new tax revenues for state and local governments.
But that legislation did not address the tricky issue of deductions that were eliminated at the federal level. Hogan’s Protecting Maryland Taxpayers Act of 2018 attempted to do so.
The measure sought to “decouple” Maryland’s tax code from the federal law and preserve a multitude of deductions that benefit Maryland taxpayers.
“Under our proposed legislation, Marylanders will not pay one cent more in state taxes as a result of actions at the federal level,” Hogan said when the bill was unveiled in January.
The bill quickly ran into problems in the Senate. The biggest was the price tag. Legislative analysts estimated that the bill would not just hold taxpayers harmless, but actually cost the state about $900 million more in revenue over five years than the comptroller’s office was projecting the state would take in as a result of the federal law.
Members of the House and Senate budget committees became wary about relying on the comptroller’s estimates, saying that they kept changing. The Senate committee decided in early March to scrap Hogan’s bill, concluding that there was too little time to rewrite it.
Acting on a bipartisan basis, the committee led by Chairman Edward J. Kasemeyer approved two tax cut bills.
One — giving a small break to many Maryland taxpayers -- increased the standard deduction by $500 for individuals and $1,000 for married couples.
Kasemeyer, a Howard County Democrat, estimated that more than 2 million Maryland taxpayers would benefit from the change. It wouldn’t be a huge break — at most about $80 — but it would go primarily to lower-income and middle-class taxpayers.
The second break would allow young low-income working adults who don’t have dependents to benefit from the state Earned Income Tax Credit. Federal law requires such individuals to be 25 before they can take that benefit. The Senate-approved bill would remove that age barrier.
Together, those bills would put an estimated $100 million into the hands of state taxpayers.
But the committee also decided to hold onto $200 million of extra revenue coming from the federal bill to prepare for a new school funding formula expected to be recommended later this year. The tax decisions won the unanimous endorsement of the committee, including its three Republicans. Hogan did not protest the demise of his bill and endorsed the panel’s recommendations.
“Protecting low and middle-income taxpayers was always the governor's intention and what passed out of [the Senate budget committee] represents progress on that front,” his spokesman, Doug Mayer, said.
Those measures have since passed the Senate. The House agreed about keeping $200 million in reserve for education, but has different ideas about tax strategy as the two chambers prepare to resolve their differences.
The House committee’s bill would index the standard deduction to inflation rather than raise it by a dollar amount. It’s an approach that would return less money to the taxpayers but would let the deduction grow over time. It also limited the earned income tax to young people without dependents to taxpayers 21 or older.
Legislative leaders insist the session will end with a good deal for taxpayers.
Miller, a lawyer, said he expects to fall into the estimated 9 percent of Marylanders who will pay more in taxes as a result of the federal changes. He said the committees are correct in making education a priority and making middle-class tax relief their priority. “We’re not here to reward corporations or the upper 1 percent,” the Calvert County Democrat said.
Busch said putting money aside for education is a benefit to all citizens of Maryland. “I think that makes the taxpayers whole,” the Anne Arundel County Democrat said.
At a news conference Monday, Hogan thanked the House and Senate for passing the exemptions bill but put pressure on the House to move in the Senate’s direction on other tax bills, including his proposed breaks for retired veterans, law enforcement officers and correctional officers.