Pick Your Tax Poison

February 06, 1992

A higher income tax? A higher sales tax? A higher corporate tax? Stiffer tobacco and liquor taxes? State legislators in Annapolis are at the point where they have to make the distasteful decision as to which taxes, if any, should be raised to help bring Maryland's budget back into balance. The clear favorite at the moment: extending the sales tax to certain services and narrowing the number of exemptions.

From a tax-equity standpoint, that's a sound decision. It is also a good decision from the revenue-raising side: depending on how far the extension and the removal of exemptions are taken, this step could raise nearly $1 billion. And it would put Maryland in an improved position later this decade because services are the fastest-growing segment of the state's economy.

At the moment, Maryland's sales tax is one of the least effective in the United States. Its base is so narrow -- it only applies to goods and there are 25 multiple exemptions in the law -- that in constant dollars, Maryland's sales tax barely kept pace with inflation from 1977 through 1990. And then last year, for the first time since the tax was imposed in 1947, revenues actually declined.

The shift from a manufacturing to a service economy will continue to hurt sales-tax collections. So will the aging of Maryland's population, since the elderly buy fewer goods. Without changes, the tax will not produce enough new revenue for government's future needs.

Gov. William Donald Schaefer is seeking $375 million in additional money by taxing some services (cable television, dry cleaning, auto repairs, furniture repairs, data processing, lawn care, beauty shops) and ending the tax exemptions for ready-to-eat foods for sale at grocery stores, food sold at school and hospital cafeterias and goods sold by religious organizations. Legislative leaders have drawn up their own list, more modest in scope, that would raise $250 million. House Speaker R. Clayton Mitchell also wants to use a broader sales tax to close the budget gap after deeper spending cuts have been made.

Tax fairness cries out for a sales tax applied to both goods and appropriate services. Exemptions should be kept to a minimum. This would give Maryland a solid revenue base for the years ahead and assure citizens that everyone shares equally in paying this tax.

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