State blows chance for a fairer tax system

November 18, 2007|By C. FRASER SMITH

You're a relatively small landscaping company, a computer repair outfit or the local muffler shop. You may think you have little leverage in Annapolis, where the fat cats frolic.

You are so wrong! You rocked. You and a legion of tax resisters - from Montgomery County and elsewhere - tailored and reshaped Gov. Martin O'Malley's tax reform proposal.

Instead of taking even modest steps toward broadening the base of the sales tax, legislators left it alone almost entirely. There had been hope that modernizing the system - extending the sales tax to cover services and making the income tax more progressive - might be a byproduct of the effort to erase a $1.7-billion budget deficit.

But small business, its customers and traditionally liberal Montgomery County snuffed that hope. Consumers of course, tend to be voters. They were heard. And lamentably misled.

Had the tax system been repositioned to match the consumer-based economy, the tax bite in other areas might not have been as deep. If taxes were applied to parts of the economy that are growing - including services such as lawn care, tanning and sports clubs - the sales tax returns might be greater and more progressive. Even with the inevitable pass-along of the tax to consumers, this was possible.

The governor's plan may be applauded as the best he could do in the face of fierce resistance. But old-style lobbying beat back reforms across the board.

Legislators could see the dimensions of the opposition if they glanced at their e-mail inboxes. Led by Montgomery County legislators, the Assembly chose to make the income tax levy less progressive than the governor's proposal, offering a shelter to the state's wealthiest. Legislator and voter alike, no doubt, were more concerned about taxes than tax structure.

"In addition to the fact that everyone has a lobbyist or can run out and get one, people are generating a ton of e-mail," said Del. Samuel I. "Sandy" Rosenberg. The Baltimore Democrat has 800 unanswered messages - 600 of which, he guesses, have to do with the special legislative session and its attempt to deal with the budget deficit via tax increases.

The service tax issue tended to arise inadvertently. To spare the wealthy in Montgomery, the state Senate attempted to tax computer repair services - without announcing that intention in time for the opposition to be heard. That levy would have raised an estimated $200 million, a striking demonstration of the computer industry's presence and the amount of revenue at stake.

Governor O'Malley's people apparently anticipated the difficulty of taxing services; they proposed to tax only a few. The House of Delegates then stripped out the governor's service-tax proposals along with the Senate's computer service gesture.

Mr. O'Malley's plan recognized the reality of the consumer economy, raising the sales tax from 5 to 6 cents on the dollar. But a more thoroughgoing recognition would have brought the underlying structure into conformity with the economy as it has evolved from manufacturing to service. We don't make things so much anymore. What we do, some wit suggested, is take in each other's laundry. It's a little more complicated than that, but the point is clear.

"Raising the sales tax does get you closer to the nature of the economy as we become more of a consumer society. But we would have fared better if we had really broadened the base," said Warren Deschenaux, the legislature's chief fiscal adviser.

The ideal is to have as broad a base as possible while keeping the rate as low as possible. The base in Maryland has been and will remain relatively narrow. Other states have done what Maryland should have done, Mr. Deschenaux said.

For Mr. O'Malley, Job One was raising money while keeping his political equilibrium - that is, his re-electability. It was important for him to craft a package that helped "working families," shifting more of the tax burden to the wealthy. But Montgomery legislators threatened to vote against the entire package if the income tax bite on the wealthy weren't eased.

The Senate tried to make up what was lost in income tax revenue by taxing computer services. It was a clumsy step in the right direction. But the powerful geek squads, the shrub tenders, the muffler men - and their customers - preferred to stay in the Dark Ages.

C. Fraser Smith is senior news analyst for WYPR-FM. His column appears Sundays. His e-mail is fsmith@wypr.org.

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