ANNAPOLIS -- Seventy-seven Marylanders who earned an average annual income of $430,785 recently managed to avoid paying a penny of Maryland income taxes for the year -- largely by taking advantage of a tax break a House committee voted last night to all but eliminate.
The new report by the state comptroller's office, based on returns for 1988, the latest year for which statistics are available, was compiled at the request of Delegate James C. Rosapepe, D-Prince George's. It showed that three-quarters of those wealthy taxpayers reduced their Maryland tax liability by nearly half by taking advantage of Maryland's favorable treatment of capital gains.
Unlike the federal government, which taxes 100 percent of the profits on the sale of stocks, bonds and other property, Maryland permits taxpayers to exclude 40 percent of capital gains from taxation.
Under a budget-balancing bill sponsored by Delegate Rosapepe and approved, 17-4, last night by the Ways and Means Committee, that capital gains tax break would be abolished for all taxpayers who earn $50,000 or more. The tax break for those who earn less would shrink from 40 percent to 20 percent.
That action, combined with a separate 16-5 vote by the committee to include cigarettes under the state's 5 percent sales tax, would generate $74 million in revenue. The money would be used to balance next year's state budget and thus avoid a series of contingent cuts in local aid programs, including education, police protection and grants that offset local property tax increases.
The votes came after a personal plea from House Speaker R. Clayton Mitchell Jr., D-Kent, for passage of the tax measures, which he described as "stopgap measures to get us through the recession."
But some committee members said their constituents want smaller government, not higher taxes. "They wanted us to balance the budget without raising taxes," said Delegate Elizabeth S. Smith, R-Anne Arundel.
Mr. Rosapepe, whose original proposal would have denied the tax break only for Marylanders who earned $200,000 a year or more, said that even with its broader scope, it would primarily affect the state's wealthiest taxpayers.
"It is outrageous that 77 wealthy Marylanders with average incomes of over $430,000 paid zero income tax while the average Marylander pays income tax," he said. "And it is significant, for the purpose of closing the capital gains loophole, that one of the biggest single reasons they paid zero taxes is because of their enormous capital gains."
The comptroller's report noted that many of the 77 Marylanders who paid no taxes for 1988 also sheltered income in other ways.
In addition to the capital gains break, about half the 77 reduced their taxable state income by claiming income earned during a period of non-residence. About a third sheltered their income by investing in tax-deductible U.S. obligations.
Christine A. Scott, the tax revenue analyst who reviewed the returns and compiled the report, said many of the taxpayers also offset their income by reporting business losses during the year.
"They're not cheating. We pulled their returns. . . . I looked at these people, and they're not doing anything wrong," she said. "A lot of them had business losses . . . affecting their taxable incomes."
None of the 77 claimed any reductions for child-care expenses, and only eight of the 77 claimed a reduction for vehicle expenses for charitable purposes.
"We're not talking about people involved in 'Meals on Wheels' here," Mr. Rosapepe said.
In addition to the new tax on cigarettes, committees in both houses are considering other budget-balancing tax measures, including bills that would apply the sales tax to snack foods, close other sales tax loopholes or even tack a surcharge onto the state or local "piggyback" income tax.
Mr. Rosapepe thinks most of those ideas are premature. "The thrust is, it is just unfair to ordinary taxpayers to raise taxes on their cigarettes or on their snack foods, or raise their taxes at all, without cutting out the loopholes for these wealthy people who are not paying any income tax at all," he said.