Raising state's already high taxes won't stop layoffs



The current laments in Maryland government about the state's revenue shortfall and the need for higher taxes is, taken by itself, one of the more hypocritical arguments to waft through these ears in a long time.

The notion that higher taxes are needed to avoid layoffs makes no sense during a recession, when the state's private economy faces the same dilemma. Why not have the state government give money back to the private sector so the private sector can avoid layoffs?

The argument that state revenues must be increased to save essential public services is the best-sounding defense of higher taxes. But it breaks down as well under closer scrutiny of Maryland's tax structure.

Maryland is already a high-tax state. We're a high-income state, too, so we're relatively able to afford higher taxes. However, our tax load has been increasing more rapidly than the U.S. average (which partly negates the explanation that state taxes have risen all over the country in response to Reagan-era cutbacks in federal aid).

State and local tax revenues per person in Maryland rose from 99 percent of the U.S. average of $264 a year in 1965 to 117 percent of the U.S. average of $1,888 a year in 1989, according to the state's own figures.

Maryland's affluence has allowed its tax load, as a percentage of personal income, to remain less than the U.S. average. However, between 1965 and 1989, Maryland's tax revenue as a percentage of personal income rose from 89.4 percent of the U.S. average to 99.1 percent. What this means is that Marylanders have been required to pay a steadily increasing share of their incomes in state and local taxes.

Beyond that rising tax load, taxes here are likely to be paid by citizens of modest means because our personal income tax rates are the same for nearly everyone. This is what's known as a regressive tax structure and that may be fine with you, especially if you're affluent. But our regressive tax structure destroys much of the logic for raising taxes to provide needed public services.

Who's helped by these services? Well, state officials wouldn't get very far arguing that the needed services were for rich people, would they? Nope. The "needed services" argument only works if the services are for middle-income, lower-income and poor residents.

Well, such folks already are poorly served by the state's tax structure. Using income, sales and property taxes (the major taxes individuals pay), Maryland's 1.7 million households paid an average of 8.3 percent of their average 1989 household income of $46,316 in taxes, or $3,845.

However, tax rates paid by lower- and middle-income households was higher -- 10.3 percent for those earning $20,000 to $30,000, 9.5 percent for those earning $30,000 to $40,000, and still above average for those with incomes from $40,000 to $70,000. Any household earning more than $70,000 paid less, with the state's richest 172,100 households -- those earning more than $90,000 -- paying an effective state and local tax rate of 7.2 percent.

The income tax is the obvious candidate for change, not only because it's regressive but because Maryland depends on this tax twice as much as a typical state, deriving 24 percent of total state and local revenues from personal income taxes compared with a state average of 12.4 percent in 1989.

Business is not an idle observer here. Figures compiled by the state's Department of Fiscal Services show that business taxes totaled only 2.6 percent of Maryland's state and local tax revenues in 1989, vs. a state average of 4.0 percent. Even 4.0 percent doesn't seem large, but getting there from the current level would entail boosting business taxes by more than 50 percent.

If state officials were crying real tears for the less fortunate, they'd change this tax structure before even thinking about raising taxes, which is what they could have done last year with the so-called Linowes Commission proposals.

Without basic tax reform, including capping if not reversing course on Maryland lottery revenues, the state has no defensible basis for raising taxes.

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