Maryland's new tax cut comes with a headache

Tax preparers brace for wave of people who can't figure it out

1998 Changes

January 03, 1999|By Kristine Henry | Kristine Henry,SUN STAFF

Have you heard the one about the state's new income tax code?

The good news is you get a tax cut.

The bad news is the short form has been eliminated and taxpayers will in effect have to calculate their taxes twice using two different sets of guidelines.

"I don't think people are going to be able to figure it out, it's too complex for them," said John D. O'Neill, founder and chairman emeritus of the Maryland Taxpayers Association Inc.

"I've been doing this for 50 years or more and I know when people aren't going to be able to figure it out."

The major changes in the state's tax code are:

* The personal exemption went from $1,200 to $1,750.

* The income tax rate decreased from 5 percent to 4.875 percent.

* Taxpayers for the first time may file returns electronically.

* The earned income tax credit can bring a refund check.

* Determining what you owe your local government went from one simple calculation to 10 extra lines and, according to most, a major headache.

The changes stem from the General Assembly's decision in 1997 to lower taxes by 10 percent over five years, beginning in 1998. Because Baltimore City and Maryland's 23 counties depend on a piggyback tax, which is based on a percentage of the state income tax, they stood to lose revenue from the change.

Under pressure from county officials, lawmakers agreed that local entities would not have to go along with the cut. The 1998 piggyback tax will not be based on the state's new lower rate, but on 1997's higher rate.

That means a taxpayer must first figure out what is owed the state using one set of criteria, then, using an entirely different set of criteria, determine what is owed your local government.

"I want to make sure people understand it's the counties that screwed them up," said state Sen. Barbara A. Hoffman, chairwoman of the Senate Budget and Taxation Committee. "When the state reduced its income tax, had the local income tax stayed coupled, that, too, would have gone down and it would have been a true tax break. But the counties did not want to give up one thin dime."

The senator, whose district straddles Baltimore county and city, said there was never a vote on whether to force the tax cut on the counties because it was clear such a bill would have failed.

The lower state tax rate will bring a single individual earning $60,000 a reduction of $24 this year. That savings would have increased $13.20 to $37.20 for an individual in Baltimore County, where the piggyback rate is 55 percent, had the local governments agreed to abide by the tax cut.

"We think we made a mistake," said Del. Sheila E. Hixson, the Montgomery County Democrat who chairs the House Ways and Means Committee.

"It's up to us to convince the counties [that going along with the tax cut] is the best way to go," said Hixson, who got calls from angry constituents. "It will have to be looked at in early January."

But getting counties to give up funds will be an uphill battle. David S. Bliden, executive director of the Maryland Association of Counties, said the lower rates would have cost the counties $200 million annually.

"The issues the counties are grappling with are primarily a growing student population, and, on the supply side, one of the challenges facing counties is that their property tax base is not as resilient as it used to be," he said. "I can't believe that having to push the calculator button one more time is going to require people to go to H&R Block."

Sen. Robert R. Neall, the Anne Arundel Republican who sits on the Budget Committee, said lawmakers may have to reconsider the tax issue if the filing process turns out to be too complicated.

"Clearly, the reduction in state income tax was meant to be a positive thing, not a negative thing," he said. "We didn't know exactly how it would be accomplished, we assumed there would be a payment chart. How does one know how much money to take out for taxes? You do a table."

But according to Assistant State Comptroller Marvin A. Bond, simply printing a separate table to calculate the piggyback tax won't work.

"I don't know that it is mathematically possible to just add a table. You have the whole thing of different values of the personal exemption, as well as the different bases on which you're doing the computation," he said. "But the biggest single problem is if you print two different tables, taxpayers will use the wrong one for the wrong thing, and that just doubles your problems."

One additional hassle that was originally written into the 1997 tax bill was eliminated in the 1998 session. Lawmakers had wanted to highlight the fact that the taxes collected went to both the state and local entities, and to illustrate the point were going to require people to write two checks.

But late Comptroller Louis L. Goldstein convinced lawmakers that it would cost his office too much money -- $1 million the first year and $200,000 in subsequent years -- to file the extra checks, and the provision was scrapped.

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