Balance the burden

March 28, 2003|By Robert S. McIntyre

WASHINGTON - Maryland's budget situation is not a happy one. But there's a potential silver lining: The budget crisis offers lawmakers a chance to make the state's tax code less unfair.

Overall, middle- and low-income Marylanders pay 9 percent of their earnings in total state and local taxes. But the wealthiest people in the state, with an average income of $1.1 million, pay only 5.1 percent.

Over the past decade, as Maryland cut income taxes and raised regressive excise taxes, taxes have risen sharply on the poor but have fallen for the very rich. Meanwhile, big corporations conducting business in Maryland have set up sleazy tax shelters to shift their profits, on paper, out of the state. As a result, corporate income taxes, which were 4.5 percent of total Maryland state tax revenues as recently as 1995 - and 6 percent back in 1980 - have plummeted to only 2.4 percent.

In addressing the budget shortfall, Maryland lawmakers should take steps to reverse these regressive trends and restore a more equitable burden to the tax code.

They could start by cracking down on corporate tax-avoidance scams. The House of Delegates' budget plan includes some modest corporate reforms, but much more ought to be done. Closing indefensible loopholes isn't anti-business. On the contrary, Maryland companies that actually pay their fair share of state taxes have a stake in ensuring that their tax-avoiding competitors do so, too.

The next step should be to add some long-needed progressivity to Maryland's personal income tax. Nearly everyone, regardless of income, now is in the same 4.75 percent tax bracket, which kicks in at only $3,000 in taxable income, making Maryland's income tax one of the least progressive in the country.

Adding a new top bracket on the highest earners wouldn't affect the vast majority of Marylanders but would raise substantial revenues from those who can most afford it and who now pay less of their incomes in total taxes than anyone else.

For example, a new top income tax rate of 6 percent on taxpayers making more than $200,000 would raise $212 million a year, nearly all of it from the wealthiest 1 percent. As an added bonus for Maryland's economy, $80 million of that would be paid by Uncle Sam, due to the federal deduction for state income taxes.

Just as important, Maryland lawmakers should avoid tax hikes that make the state's tax code even less fair. Mainly that means saying a firm "no" to higher sales taxes.

Currently, Maryland's sale tax takes nearly a 3 percent bite out of the earnings of the poor, just under 2 percent on people in the middle, but only four-tenths of a percent of the income of the rich. Thus, raising the sales tax would be six times as tough on the poor and four times as tough on middle-income families as on the wealthy. And not a penny of that regressive tax increase would be offset by the federal government since sales taxes aren't deductible.

Two recent polls show that the Maryland public is ahead of the politicians on what needs to be done on the budget and taxes.

A March 2003 Gonzales/Arscott Research & Communications poll found that Marylanders favored increased revenues over program cuts by nearly 5-to-1. Among possible revenue options, raising income taxes on the well-off was favored over raising the sales tax by 3-to-1.

Likewise, a Kitchens poll found that Marylanders overwhelmingly favored "raising taxes in some way" rather than cutting programs as the best way to address the deficit. Two-thirds favored higher income taxes on the well-off and three-fourths favored increasing corporate taxes. But most opposed boosting the sales tax.

So progressive tax reform is not only morally right, it's wildly popular.

It's time for the politicians to get on board.

Robert S. McIntyre is director of Citizens for Tax Justice, a nonpartisan tax policy research group in Washington. The group's full Maryland tax report is available at www.ctj.org.

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