The so-called loophole in Maryland's tax law is more accurately a gaping inequity: Unlike the federal government, Maryland allows residents to exclude from taxation 40 percent of the profits from the sale of houses, stocks, bonds and other property. This tax break costs the state plenty. The newest statistics from the state comptroller's office show that in part because of the capital gains tax break, 77 Marylanders who earned an average of $430,785 a year paid no state income taxes at all in 1988. More than that, the state loses over $30 million annually by not taxing Marylanders on the full value of their capital gains.
The recession, coupled with the threat of layoffs and fewer state dollars flowing to local governments is undoubtedly why a bill to close this loophole sailed through the House Ways and Means Committee Wednesday. The proposal would eliminate entirely the capital gains tax break for people who earn more than $50,000 a year. It would slice the tax break from 40 percent to 20 percent for those who earn less.
The bill is a made-to-order solution for lawmakers struggling to plug an $88 million budget gap this year, a $115 million gap next year and avoid "major" tax increases like those suggested by the Linowes commission, which could hit the working and middle-class hard. But if revenue-raising and equity are the goals, then it makes little sense to let some taxpayers exclude even 20 percent of their capital gains from taxation. Maryland, like the federal government, ought to treat all capital gains as precisely what they are -- income -- and tax 100 percent of the profits anyone makes from the sale of investments and property.