Gov. Martin O'Malley's concern is trying to eliminate a $1.7 billion budget shortfall, but his tax proposal unveiled last week might have unintended consequences on the behavior of the rest of us.
People are funny about taxes. We take all sorts of measures to sidestep them. Sometimes those measures cost us more than the taxes we'd otherwise pay. Take the investor who won't sell a stock destined to crater because he doesn't want to pay capital gains tax.
If taxes go up in Maryland - and that's a safe bet - you can be sure there will be people trying to lessen the bite. All the details of the governor's proposal aren't out, but tax experts are speculating on what moves consumers are likely to make in response.
Let's start with the sales tax. The governor wants to raise it from 5 percent to 6 percent. This hits all of us, although it's more painful for lower-income families who spend more of their paycheck on the basic necessities subject to sales tax.
Maryland collected about $3.4 billion in sales taxes in the past year, or $1,660 per household.
A 20 percent increase in the sales tax means an extra $332 for each household. That's a rough estimate, of course. How much more you pay in sales tax will depend on how much you spend.
One thing worth noting: The governor softened the sales tax blow to low-income workers with children by proposing an expansion of the refundable earned-income tax credit. This is basically a tax refund for the working poor who earn too little to pay taxes.
Raising the refund from 20 percent to 25 percent of the federal earned-income tax credit can eliminate the impact of a higher sales tax, according to figures from the Center on Budget and Policy Priorities. For example, a couple with two children and earning $20,000 would pay $113 more in sales tax under the governor's proposal but receive an extra $208 from the expanded credit.
More than 214,000 Marylanders in 2005 claimed the refundable credit for a total of $92.3 million, says Clinton Macsherry, director of public policy at the Maryland Committee for Children. The governor's tax proposal makes it all the more important for lower-income families to claim this credit.
For the rest of us, the sales tax rise could easily wipe out the small income tax cut the governor proposes for many taxpayers.
