Glendening takes a step back in trying to halt tax cut

January 20, 2002|By JAY HANCOCK

FOUR YEARS ago Gov. Parris N. Glendening called the 10 percent state income-tax cut "the single most important step we can take to make Maryland more competitive and create more jobs."

So why does he want to delay phasing in the measure, which has already taken too long to become reality?

Since Glendening took office, Maryland has gone from being a shoo-in for the annual prizes for high taxation awarded by the financial magazines to actually putting some suspense into the process.

In a fund-raising letter last fall, potential gubernatorial candidate Robert L. Ehrlich repeated the slur that Maryland is a "tax hell" compared with other states.

But it's not true. We may be in the suburbs of tax hell, just outside the Beltway, but in recent years Maryland's tax ranking against other states has improved significantly - helped in no small way by the income-tax shave.

The state is well within the upper middle of the pack in taxation, and in some important categories we beat out the likes of Mississippi and Arkansas.

Improving Maryland's tax reputation required large amounts of political grief and toil. Reneging on the last 2 percentage points of the 10 percent income-tax cut - even if temporarily - will undo much of the progress, costing more in symbolism than the $175 million it would save in revenue.

With an anti-business reputation that lingers in the memories of corporate real-estate pros, Maryland must outdo Caeser's wife when it comes to taxes and regulation. It can't just be blameless. It can't just be above suspicion. It must be above suspicion of suspicion of business abuse.

Glendening reportedly has suggested that legislators scrap the last installment of the tax cut altogether, which would break a promise to Marylanders and send an even worse signal to the world than delaying the measure.

When the cut is fully implemented, Maryland's top personal income-tax rate, affecting all income over $3,000, will be 4.75 percent. While 4.75 percent is a seemingly small decline from the 5 percent top rate of five years ago, it is enough to return hundreds of millions of dollars to residents and to keep Maryland out of the red zone in state tax rankings.

(If you're keeping score at home, you've noted that the difference between a 4.75 percent rate and a 5 percent rate equals a reduction of only 5 percent. The other half of the 10 percent cut is obtained in lower brackets.)

At 4.75 percent, Maryland's top personal-income levy is significantly better than the top rates in Virginia, 5.75 percent; Delaware, 5.95 percent; West Virginia, 6.5 percent; North Carolina, 7.75 percent; New Jersey, 6.37 percent; Massachusetts, 5.85 percent; and Alabama, 5 percent.

Maryland is still behind Pennsylvania, whose top personal-income tax rate is 2.8 percent; Connecticut, 4.5 percent; and Colorado, 4.63 percent.

The top personal rate is important because it disproportionately affects the capitalists. Capital, you may recall, unless you live in Takoma Park, is necessary for jobs, government services and a decent standard of living.

And the top personal income tax rate doesn't affect just personal income, destined to be spent on yachts and butlers. It is a corporate rate, too.

As frequently pointed out by former Maryland economic development chief James Brady, who was the driving force behind the tax cut, closely held, entrepreneurial companies are generally taxed on the personal income tax schedule, even when they have millions in sales. These companies are the future of Maryland employment, and it is in the state's interest to make them feel at home.

Of course, the state personal income tax is not the only way Maryland reaches into your pocket. Dozens of other taxes exist on business and individuals, from the 5 percent state sales tax to the 1.25 percent to 3 percent "piggyback" income tax levied by Maryland cities and counties.

The local piggyback tax is particularly important because, combined with the state rate of 4.75 percent, it jacks up the state's effective personal-income tax rates to as much as 7.75 percent, making Maryland far less competitive than the above comparisons would suggest. Most states don't have local income taxes.

But the state has improved its standing in the overall tax rankings, too, thanks not only to the personal income-tax cut but to other reductions such as last year's change in the way manufacturers' income taxes are calculated.

The best way to measure a state's tax climate is to compare all state and local tax revenue against total personal income - a rough and ready measure of a state's economy - and against population.

Such gauges show surprising progress during Glendening's tenure, although the governor has not exactly been conducting the tax-cut concert.

In 1994, the year Glendening won the governorship, Maryland hauled in 10.2 percent of its residents' income, ranking the state 20th-highest in the nation and putting it just below the national average state tax share of 10.4 percent, according to the Tax Foundation.

After all the 2001 returns are tallied, the foundation estimates, Maryland will have claimed only 9.7 percent of personal income and will rank 35th-highest, putting it in the company of Florida, Nevada, Georgia and Virginia. The national average for last year's state tax claims will come to 10.2 percent of income, the group estimated.

Maryland's ranking in per-resident state and local tax collections has improved, too, from eighth-highest to 16th, since 1994.

There is still plenty of Maryland money to succor the needy, invest in the future and collect the trash. Don't start to reverse your administration's accomplishments, Mr. Governor.

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