Panel reworks revenue package

Senate committee cuts top rates and leaves `loopholes'

General Assembly -- Special Session

November 07, 2007|By Andrew A. Green | Andrew A. Green,SUN REPORTER

Top-earning Marylanders and big businesses got a break yesterday when a Senate panel amended Gov. Martin O'Malley's revenue package by reducing top income tax rates and eliminating a measure designed to ensure that multi-state corporations pay taxes.

The Budget and Taxation Committee also voted to eliminate some of the breaks the governor had included for lower-income households and against O'Malley's proposal to reduce the state property tax by 3 cents per $100 over the next three years.

The panel moved to extend the state sales tax to include computer services, landscaping and arcade games, but not to other services recommended by O'Malley. And the governor's plan to tie the gas tax to increases in the cost of construction materials also failed in the committee.

But the committee easily approved O'Malley's proposal to hold a referendum in November 2008 on allowing up to 15,000 slot machines at five sites.

The tax and slots measures are scheduled to hit the Senate floor today in what could be the first major step toward resolving the budget crisis that brought the General Assembly back to Annapolis for a special session.

"We're moving toward consensus on a long-term solution that starts with budget cuts, is fair to middle-class families, protects our investment in education - and lets the people decide on slots," O'Malley said in a statement.

Although lawmakers are working within the general framework of revenue bills O'Malley introduced, they are making some significant changes.

O'Malley's initial plan called for an extension of the sales tax to cover real estate management, health clubs, tanning salons and massage therapy. Representatives of those industries lobbied hard against their inclusion in the bill, and yesterday, the Senate committee removed them.

But instead of the $60 million that would have been generated from expanding the sales tax in O'Malley's bill, the Senate committee opted for tapping computer services, landscaping and arcades - a $300 million annual hit of which those industries had no warning. None of them was considered as part of a hearing on taxing services conducted Saturday by the House Ways and Means Committee.

Republicans have objected to the notion that services could be taxed without a full public debate, and the capital's lobbyists are in a panic that their clients could be hit.

"This is moving very fast, too fast for the public's good," said Sen. David R. Brinkley, the minority leader from Frederick County.

Charlie Mello, chief operating officer at My PC Guy Inc., a Glen Burnie computer services firm, said he would not be able to absorb the sales tax because his profit margins are too thin. He said he would be forced to pass the tax on to customers, including many small businesses. In the end, he said, the firm might be forced to move.

"You are going to see companies like ours looking at moving our headquarters to either Virginia or Delaware and having a field technician stay in the area so we can look at not having to pay as much in tax," Mello said.

The Senate committee approved O'Malley's proposal to increase Maryland's sales tax rate from 5 percent to 6 percent.

Another significant change to the governor's plan came in his proposal to make the state income tax more progressive. O'Malley called for a new bracket of 6 percent for individuals making more than $150,000 a year and couples making more than $200,000. A 6.5 percent bracket would kick in for all income above $500,000 a year.

But the plan approved by the Senate committee would reduce those top brackets to 5 percent and 5.5 percent. That change could help win the support of Montgomery County legislators.

"The sense is that our county may be disproportionately impacted by that, and unlike other parts of the state, we sit across the river from Virginia and down the road from D.C.," said Del. Brian Feldman, the Democrat who chairs the Montgomery County delegation.

The Senate's plan also eliminated benefits that O'Malley had built into his income tax plan to help offset the impact of the sales tax increase on low- and middle-income Marylanders. O'Malley's proposal included a new lower bracket for the first $15,000 in income, which the Senate deleted. He also called for a tax credit for low-income workers to offset some of the higher sales tax, which the Senate also rejected.

Other parts of O'Malley's plan made it through largely intact. His slots proposal easily cleared the committee and won the support of some Republicans. The biggest change was to increase the take for slots parlor operators from 30 percent to 33 percent, a change that senators said was necessary to ensure the development of high-quality facilities.

The panel approved two other O'Malley proposals: to close a so-called loophole that allows companies to transfer real estate without paying the transfer tax and to double the tobacco tax to $2 per pack of cigarettes. The Senate previously blocked both of those measures.

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