O'Malley builds on tax-raising legacy

The General Assembly's speedy embrace of Gov. Martin O'Malley's income tax increases this week cleaned up a political mess in Annapolis, but the rate hikes could come back to haunt the Democrat if he seeks national office when his time in the governor's mansion is up.

O'Malley's tax package, which won final approval from the Democratic legislature on Wednesday, will give Maryland's top earners the seventh-highest income tax rate in the country.

Increases will hit taxpayers who make more than $100,000 and couples who earn more than $150,000 — a much lower bar than the $250,000 minimum endorsed by President Barack Obama and potential O'Malley rival Andrew Cuomo, the Democratic governor of New York.

And the income tax is only the latest levy O'Malley has increased. He raised the sales tax and the cigarette tax in 2007, and established a temporary tax on millionaires.

The package approved during the special legislative session this week also included increases in tobacco taxes and some transaction fees. He advocated this year for raising the gas tax.

In Maryland, where Democrats outnumber Republicans 2 to 1, voters did not punish the governor at the ballot box for his revenue-raising ways when he ran for reelection in 2010. But should he run for president, the national electorate might not be so kind.

Already, some nationally prominent conservatives are using the session to take aim at O'Malley. They say his record on revenues cuts hard against anti-tax currents that have run strong in national politics since at least the 1980s.

But liberal opinion-makers, who would be key in a Democratic primary, are cheering. They believe the anti-tax wave is cresting, and national leaders will have to consider increasing revenues in order to balance budgets.

"This puts Maryland ahead of where most states are," O'Malley told reporters Wednesday after the House approved the tax package. "There are many states that are not able, politically, to apply a balanced approach."

"I don't look at it as a spectrum from right to left, I look at it as a direction forward or backward."

During his time as governor, O'Malley, 49, has brushed off questions about aspirations beyond Maryland. But he will leave office after completing his second term in January 2015 and has done little to quiet the national buzz that he could run for the White House in 2016.

At a recent breakfast in Washington intended to introduce O'Malley to national reporters, he said it was "risky to raise taxes on anyone, any time, anywhere."

Speaking at Third Way, a centrist think tank, he went on to blame former President Ronald Reagan for advancing the narrative that "government is the problem" — a position that O'Malley called "a real aberration in the history of the republic."

O'Malley then spoke of the ways that residents benefit from state programs. He said voters understand "at a base level" that politicians "have severely undercapitalized" programs that would create jobs and opportunities nationally.

"We need to get back to believing enough in our country's future to work for it and invest in it," O'Malley said.

The package approved Wednesday increases income tax rates by a quarter to three quarters of a percent, depending on earnings. It pushes the highest rate to 8.95 percent when county taxes are included, keeping it just a smidgen under that of New Jersey, where Republican Gov. Chris Christie is trying to cut income taxes.

The Maryland income tax hike will affect about 14 percent of the state's taxpayers. It is projected to raise another $250 million in revenue.

During the regular session this year, O'Malley went out of his way to avoid touching income tax rates. The budget he proposed in January would have raised revenues by scaling back deductions and exemptions.

But that approach was torpedoed in Annapolis by the powerful Realtors groups, which blitzed the capital to beat back the idea.

Either method draws criticism from the right. The Wall Street Journal called O'Malley "Maryland's son of Obama" in a February editorial, and accused him of trying to "finance his spending ambitions with taxes on Maryland's thousandaires."

National anti-tax leader Grover Norquist called O'Malley "Obama 2.0," and said the governor was positioning himself "significantly" to the left of the president.

"He is running as your classic tax-and-spend guy," Norquist, the founder of Americans for Tax Reform, told The Baltimore Sun this week. "If he thinks the country wants that in four years it is a smart move."

Norquist predicted that big unions that back Democratic candidates would find O'Malley's record attractive — but that might be the extent of its appeal.

"If you are running in the party of AFSCME and SEIU, that will get you through the primaries," he said. "In a general election, it is less attractive."

Indeed, the state's powerful unions lined up behind to testify in the hearings this week for the tax increase.

A week after the Wall Street Journal's editorial page pummeled the governor's budget, the New York Times took the opposite view, opining that it took "political courage" to push for an increase in the gas tax and praising O'Malley for bucking the "no-new-taxes delusions."

Michael Ettlinger, vice president for economic policy at the liberal Center for American Progress in Washington, says voters "think there should be a balanced solution" to budget problems.

"There is a pretty good recognition that there needs to be more revenues," he said.

The challenge for politicians such as O'Malley is to sell voters on the benefits those revenues buy. That means he'll continue to talk about Maryland's top-ranked public schools, the slow growth of tuition at the state's public universities, the state's AAA bond rating and falling crime.

"I've always thought the resistance to taxes is really about government performance," Ettlinger said. "What bothers people is that the money is not being well spent."

O'Malley is hardly the first governor to look to the income tax for more revenue in recent years. The Democratic governors of Illinois and Connecticut raised taxes on earnings last year. Increases to sales and income taxes in California, also governed by a Democrat, are set go to the voters in November.

Cuomo, in New York, took a nuanced approach: He renewed a tax set to expire on those making over $250,000, but slightly lowered the rate.

Lee M. Miringoff, the director of Marist Institute for Public Opinion in New York, said that raising taxes on the wealthy is easier to sell to the public than a broad based increase.

"If you want to go down that road politically, you certainly want to be talking about higher income levels because those do poll differently," he said.

Will voters consider couples that earn more than $150,000 wealthy?

Definitely not, says Joseph Henchman, the vice president for legal and state projects of the national Tax Foundation. He said O'Malley has expanded the definition of "the well off" beyond most other governors.

He noted that O'Malley was among the first governors to enact a tax on millionaires in 2008. After Maryland put it in place, ten other states followed suit, Henchman said.

But Henchman said momentum for such taxes peaked in 2010, when referendum voters in moderate Washington state soundly defeated a proposal for a millionaires tax.

"I think it is because people recognize that, though it starts as a high earners income tax, it gradually hits more and more people," Henchman said.

Since then, states including Maryland have allowed those taxes to expire.