One of Maryland's budget-balancing tactics - asking millionaires to pay more money to the state - appears to be backfiring as the number of the highest-earning taxpayers dwindles with the flagging economy.
A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state's finances and make the tax code more progressive.
But as the state comptroller's office sifts through this year's returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million.
Many taxpayers in that bracket likely filed an extension and won't complete their returns until October, but a trend is emerging that indicates a "substantial decline" in the number of residents and small businesses with that kind of income, Comptroller Peter Franchot wrote in a letter to Gov. Martin O'Malley and legislative leaders.
"The revenue figures are ugly," Franchot said in an interview. "Right now, we're digging through a pile of tax returns and trying to understand this."
The recession provides an obvious explanation. Capital gains have become almost nonexistent as stock markets have tanked. Corporate executives have seen their salaries slashed. And small businesses, many of whom file individual income tax returns, have seen their profits gouged by the economic downturn.
Another more debatable explanation would be that millionaires have simply fled the Free State. While some say they have heard anecdotal evidence of the wealthy packing it up, officials say there's no proof yet of such a development.
The new 6.5 percent bracket for the highest earners became effective for the 2008 tax year, and expires after 2010. The General Assembly made the tax change last year to help offset the repealof the unpopular computer services sales tax, which lawmakers passed just months earlier in a 2007 special session as part of $1.3 billion in tax increases intended to close a structural budget deficit.
At the time, fiscal analysts said the change would bring in nearly $330 million over three years. Lawmakers left untouched the next lowest bracket: 5.5 percent for those making more than $500,000.
Franchot said in his revenue report, the first to reflect this year's tax returns, that he is most concerned about a decline in individual income taxes, which dropped more than 17 percent last month compared to the year before.
If the current trajectory remains, tax collections could fall $130 million short of current projections, which could trigger the need for additional budget cuts later this year, Franchot said. The state has made hundreds of millions of spending reductions in recent months.
Millionaires are only part of that picture. According to fiscal analysts, those with taxable income of more than $1 million accounted for only 0.3 percent of all filers.
Karen Syrylo, a tax expert with the Maryland Chamber of Commerce, which lobbied against the millionaire bracket, said she has heard from colleagues who are attorneys and accountants that their clients moved out of state to avoid the new tax rate. She said that some Maryland jurisdictions boast some of the highest combined state and local income tax burdens in the country.
"Maryland is such a small state, and it is so easy to move a few miles south to Virginia or a few miles north to Pennsylvania," Syrylo said. "So there are millionaires who are no longer going to be filing Maryland tax returns."
But Franchot and other state officials insist that it's too early to determine if that has occurred and whether any exodus would even have a discernible impact on the state's overall budget.
During a fiscal crisis in the early 1990s, the General Assembly temporarily raised the tax rate to 6 percent for those with taxable incomes of more than $100,000 for single taxpayers and $150,000 for joint returns. The number of filers in those brackets actually increased during that time, according to the comptroller's office.
Allen Schiff, who runs an accounting firm in Towson, said that those in industries hit hard by the national downturn, such as retail and banking, are likely among those who no longer qualify to pay the millionaire tax. He added that he has several high-income earners as clients who will be paying more but have no plans to leave the state.
"When you make that type of money, another 1 percent in taxes doesn't matter," he said. "They have the attitude that it is what it is."
Previous tax rate: 5.5 percent
Current tax rate: 6.25 percent
Estimated collection from millionaires: $330 million over three years
Total income tax receipts from all payers in April: $985 million
Decline from previous year: 17.4 percent