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.
