O'Malley tax ideas appear realistic

September 19, 2007|By JAY HANCOCK

If it's necessary for Maryland to increase taxes, there are far worse ways to do it than what Gov. Martin O'Malley seems to be proposing.

The details are still leaking out, but it looks like he wants to avoid a personal income-tax increase on all but the highest earners - maybe 4 percent of Maryland households.

He would raise the corporate income tax to a point that's still less than that of Pennsylvania, California, Minnesota, Massachusetts and other places. And he would increase the sales tax to be equal to that of Connecticut, Michigan, West Virginia and Florida and still less than that of Minnesota, California and Illinois.

It's far from painless. But it's politically realistic and avoids the danger of badly harming Maryland as an economic competitor.

The dumbest thing that O'Malley could have done would be a wholesale reversal of the 1997 law that cut Maryland's personal income tax from 5 percent to 4.75 percent.

That doesn't sound like much of a change, but it made Maryland more competitive against its neighbors and less of a shoo-in for "Tax Hell" honors in the personal finance magazines. Maryland is one of few places with a statewide local income tax. That local "piggyback" tax, combined with the state levy, soaks households for as much as 7.95 percent of their income - pretty high for a non-federal tax.

The top marginal income tax rate in Delaware, by contrast, is 5.95 percent, according to the Tax Foundation. In Pennsylvania it's 3.07 percent (although some Pennsylvania localities charge income tax on top). And in Virginia it's 5.75 percent.

Undoing the 1997 tax cut would push Maryland's combined state-and-local income-tax rate past 8 percent for even low-income and middle-class families in many counties.

Instead, O'Malley looks like he'll propose raising taxes only on high-income households.

How high, however, is critical, and the exact income level at which the higher rates would kick in was unclear yesterday.

Sen. Thomas "Mac" Middleton, the Charles County Democrat who is chairman of the Senate Finance Committee, said he left an O'Malley briefing thinking that families making more than $150,000 would pay more under the governor's proposal.

But somebody familiar with O'Malley's thinking, who spoke anonymously so as not to steal the governor's thunder when he formally unveils the plan, said families earning less than $200,000 would be "unlikely" to pay higher income tax.

Let's hope that's the case.

Increasing taxes on income over $150,000 would affect nearly 1 in 10 Maryland households, including families in which both partners earn a relatively modest salary to try to afford the state's high home prices. Raising the cutoff to $200,000 would ding far fewer people, and they could more easily afford it.

Even if the rate went to 6 percent for really high earners, the top combined state-and-local bracket (9 percent or so) would still be lower than top rates in California, Rhode Island and Vermont and about equal to those of Oregon and Iowa.

Proposing to raise the sales tax from 5 percent to 6 percent will bring complaints from merchants and advocates for low-income families. But it's the way to go if you really want to increase revenue without resorting to Novocain.

True, a sales tax is regressive, taking a higher portion of income from poorer families than from richer. But Maryland exempts food from sales taxes, preventing much of the sting. And the state ranks very low - 37th in the nation, says the Tax Foundation - in per capita sales tax paid now.

Plus, nobody will notice an extra penny tax on a dollar's worth of goods. These days, 1 percent is equal to about four months of price inflation. When the higher tax goes into effect June 1, just pretend the Consumer Price Index got a little extra happy.

O'Malley wants to raise Maryland's corporate income tax from 7 percent to 8 percent, and I bet the corporations don't even put up much of a fuss. The tax doesn't raise much revenue now, businesses have to look like they're contributing to the package, and they'll soon figure new loopholes to get around it anyway.

The bigger problem for business may be the personal income-tax increase, depending on what it looks like.

Small businesses often are taxed at the personal rates of their owners. An effective top Maryland rate of 9 percent would make Virginia's top rate of 5.75 percent look even more attractive for a company looking to move.

All in all, however, I expected it to look uglier.

Three months ago I warned that O'Malley taxes might harm the business climate and revive Maryland as a Tax Hell contender. Maryland is no Tax Heaven now, and I'm not fully convinced that an increase of this magnitude is necessary. The proposed means of accomplishing it, however, seems to be well thought out.

jay.hancock@baltsun.com

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