Personal tax rates loom as big issue

House, Senate differences stand in way of compromise on two competing bills

November 16, 2007|By James Drew | James Drew,SUN REPORTER

Several Maryland senators say they expect to reach a compromise with the House of Delegates over their competing tax bills, but differences over how to overhaul personal-income tax rates could prove thorny.

Most of the Montgomery County senators who voted in favor of that chamber's tax bill last week said the House version hits upper-income taxpayers too hard, although the House did not go as far as Gov. Martin O'Malley.

Sen. Jennie M. Forehand, a Montgomery County Democrat, said she did not think the top income-tax bracket, for those with incomes more than $500,000 a year, should be higher than 5.5 percent.

"My district has a lot of high-tech, biotech companies that are expanding and trying to recruit some of the top scientists and business people," she said.

When senators and delegates meet in a conference committee to resolve the differences between each chamber's bills, senators will have less room for compromise; the Senate's version of O'Malley's $1.4 billion package of tax increases passed by only one vote.

"I've got some senators over here who say, `If the top bracket goes any higher, we're not going to vote for the bill,' and we only had 24 votes for the tax package," said Senate President Thomas V. Mike Miller, a Southern Maryland Democrat. "There are going to be some sticking points and it's going to take some compromise to get us out of here in the next few days."

The House version calls for a 5.5 percent rate that would kick in at $150,000 for individuals and $200,000 for couples, and a 5.75 percent rate that would apply to individual incomes above $200,000 a year and joint incomes of more than $250,000 a year.

O'Malley wants to change a fundamentally flat income tax structure, under which most Marylanders, regardless of income, pay the same 4.75 percent rate.

Sens. Brian E. Frosh and Michael G. Lenett, both Montgomery County Democrats, said they prefer the House version.

"It will be a source of controversy within the Senate," Frosh said. "There are some folks, especially those from Montgomery County, who think we should take it easier on well-to-do people."

Sen. Alex X. Mooney, a Republican who represents Frederick and Washington counties, said he hopes that tension between House and Senate Democrats over the personal income tax provisions will "kill the thing," but he acknowledged that it is wishful thinking from the "loyal opposition."

Some Democratic senators who voted for the tax bill said they preferred some changes in the House version, chiefly that it does not extend the state sales tax to any new services.

The Senate version stripped out the services that O'Malley had proposed adding - health club memberships and property management, for example - and replaced them with computer services and arcades.

Sen. Bobby A. Zirkin, a Baltimore County Democrat, voted against the Senate tax bill. He said the addition of computer services to the sales tax base was a major reason.

"It's not a good idea without giving it a lot of thought," he said.

The Senate and House also have differences on business tax changes.

The Senate approved an increase in the corporate income tax rate from 7 percent to 8 percent. The House voted to increase it to 8.75 percent.

Also, the Senate deleted O'Malley's corporate tax law change known as "combined reporting," which supporters say would prevent big companies from hiding profits out of state. The Senate ordered a business tax study.

"We don't have a good read on who wins and loses," said Sen. Nancy J. King, a Montgomery County Democrat. "I can't say I'm against it. I don't think we have enough information."

The House included "combined reporting" in its tax bill.

The House approved O'Malley's proposal to close a "loophole" - referred to as "controlling interest" - that enables some corporations to avoid recordation and transfer taxes by making their real estate part of a limited liability company.

The Senate amended the governor's plan to raise the threshold of what defines a company covered by the tax law change, changed the method of valuing property from the sale amount to the assessed value, and exempted all deals before Jan 1.

"The Senate amendments provide a substantial loophole in the effort we are trying to resolve," said Sen. Richard S. Madaleno Jr., a Montgomery County Democrat who supports the House version.

Sen. Ulysses Currie, chairman of the Budget and Taxation Committee, said he expects a compromise with the House over the personal income tax proposals and the rest of the tax package.

He has met regularly with House leaders and the governor's aides to smooth out differences before a conference committee convenes.

"You try not to push too hard, you hold hands, and say, `Can we get along?' to try to get to the bottom line,'" the Prince George's County Democrat said.

james.drew@baltsun.com

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