Tax cut next year?

September 12, 1995

There's a dispute under way in the Annapolis State House that should be soothing to the ears of Maryland taxpayers. Lawmakers and aides to the governor are debating what form a tax cut should take next year. That's right. It's no longer a question of "whether" but "how."

Business leaders and some Republicans want a big income-tax rate reduction that would give the largest benefits to wealthy Marylanders. They see this as a way to make Maryland more attractive to businesses looking to relocate. The governor and House leaders seem to favor this position, but with a smaller overall cut in taxes. A 5 percent reduction under this plan would mean a savings of $403 for someone making $200,000 a year, but only $31 for an individual earning $25,000.

Senate leaders, though, want to hike the individual exemption, a move that would give the biggest percentage tax break to low-income filers, since everyone would receive the same amount of tax relief -- $190 under a 5 percent cut. This approach could prove meaningless as an incentive to lure businesses to Maryland, critics claim.

Still, all this sounds idyllic for the ordinary Maryland taxpayer. Why not a 10 percent income-tax rate cut as the state's Chamber of Commerce urges? Because fiscal circumstances may make such a move rash and counter-productive.

Most worrisome is the anticipated cut in federal aid, now estimated at $2.4 billion for Maryland over the next seven years. Gov. Parris Glendening says he doesn't intend to fill gaps in programs and services from these cuts. But that's easier said than done, especially as the clamor builds for the state to serve as a safety net to keep programs going. The governor's stated approach would mean fewer government services for middle-class and lower-class families. That may not prove a wise political strategy.

At the same time, Mr. Glendening will have to reduce government spending by $200 million or more to underwrite a decent-sized income-tax cut. Putting that on top of the drastic reduction in federal aid could create a huge financial hole in a few years. And if business leaders insist on a second round of tax cuts in 1997 -- as seems likely -- the potential danger increases.

Given the uncertainty of the precise federal cuts, prudence ought to be a prime consideration in the months ahead as lawmakers and the governor discuss ways to reduce taxes. A sizable reduction that sends the right signal to businesses is important -- but only if it doesn't put Maryland in a long-term fiscal bind.

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