Making it final

The cost of being rich

New tax bracket for Md. millionaires becomes law

General Assembly

April 09, 2008|By Michael Dresser | Michael Dresser,SUN REPORTER

It's quite an exclusive club, Maryland's new millionaires' tax bracket. A little more than 6,000 households statewide qualify for the distinction - more than 40 percent of whom reside in Montgomery County.

It's a group that includes a Fortune 500 executive in Potomac, an energy company CEO in Roland Park and wealthy retirees with bayside estates in St. Michaels. Throw in some developers in Howard County, a growing corps of black entrepreneurs in Prince George's County and certain small businesses statewide. The Ravens' star middle linebacker would appear to be among the 16 percent of the club that lives in Baltimore County, No. 2 in the state for resident millionaires.

With the General Assembly's passage of the new 6.25 percent top tax rate on incomes above $1 million, and Gov. Martin O'Malley's signing of the bill yesterday, Maryland has apparently become the first state to create an actual millionaires' bracket.

FOR THE RECORD - An article in Wednesday's editions of The Sun stated that the new 6.25 percent tax rate adopted by the General Assembly would be the nation's first millionaire's tax bracket in the United States. A provision of California law, approved by a ballot proposition, imposes an additional 1 percent tax on income over $1 million to fund mental health programs. According to the California Franchise Tax Board, the levy is not considered a tax bracket under state law, but the result for the taxpayer is similar.

Some other states have created high-income tax brackets - some paying rates that make Maryland's levy look like a bargain - but they kick in at lower thresholds. For instance, New Jersey residents in the top income bracket pay a rate of 8.97 percent but don't receive the cachet of being in a millionaires' club because it applies to all income above $500,000.

The new rate puts Maryland - which boasts the nation's highest median income, according to the Census Bureau - among the states with the highest income taxes at top earning levels if county "piggyback" taxes are included. Even with those included, Maryland still falls well short of Rhode Island's 9.9 percent top rate.

To join the Maryland club, you have to be a real millionaire - earning $1 million a year you can't offset with deductions. Just owning a big house that's appreciated won't cut it. Some sole proprietorships, limited liability corporations and other small businesses will pay, however.

Some prosperous Marylanders are not enthusiastic at the prospect of qualifying for the honor, which kicks in for the 2008 tax year and expires after 2010.

Howard Rensin, a successful Howard County businessman and developer, thinks many Maryland millionaires will decamp for less taxing locales.

"There's already been a substantial migration of people of high income out of Maryland," Rensin said. "I think you're going to see an increase in that type of flight."

But others who move in affluent circles think most of those privileged enough to feel the additional burden will just "grin and bear it."

That's the calculation of the Maryland General Assembly, which is counting on the additional $328.5 million the increase is projected to raise over three years to help pay for the cost of repealing an ill-received computer services tax.

According to the Department of Legislative Services, there were roughly 6,300 households that filed returns in 2005 with a taxable income of more than $1 million. That amounts to 0.3 percent of those who filed that year. Most filed jointly.

The average income reported by those in the new bracket was $3.1 million. That translates to an extra $15,000 a year for three years until the surcharge sunsets - or just about the $45,000 that would put a mid-range BMW in the three-car garage - compared with the law at the beginning of the session. (In some cases, some of that extra cost could be offset by federal tax deductions.)

Faced with more than a $1 billion shortfall between anticipated revenues and expected expenses - the so-called structural deficit - O'Malley called a special session late last year in which he proposed to raise income taxes on higher-income earners. His plan included a so-called "millionaires' bracket" of 6.5 percent for income above $1 million.

That idea ran into resistance from legislators from Montgomery County, where millionaires abound. They gave O'Malley roughly a half a loaf, capping the top rate at 5.5 percent for income above $500,000.

But that left the state short of its goal of closing the budget gap, so legislators - casting about for something to tax that wouldn't offend a powerful lobby - hit on the idea of a computer services tax. The reaction to the computer tax - especially from high-tech industries and business consumers of information services - was almost unanimously negative.

By the end of the session, the idea of taxing the rich wasn't looking so bad to many of the Assembly's leaders. O'Malley jumped aboard the repeal bandwagon and re-endorsed the millionaires' tax.

"I've had numerous people come up to me in the course of these last few months and whisper to me that they are in that highest bracket of millionaires and they are willing and they are able to pay their fair share," he said.

Ed Hale, chief executive of First Mariner Bank in Baltimore, said he told O'Malley the computer tax had to go - even if he had to pay more in income tax.

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