Turn The U-haul Around

Our View: Tax Increases In Delaware And Proposals For More In Pennsylvania Show That Maryland May Not Be At Such A Competitive Disadvantage In The Region After All

July 10, 2009

Looks like Marylanders threatening to leave the state over tax increases have one less place to go. Delaware, long the darling of anti-tax types in the Free State, just wrapped up work on closing an $800 million hole in its budget - no mean feat considering the whole thing is just over $3 billion. Gov. Jack Markell pushed for steep budget cuts but also about $200 million a year in tax increases. That comes out to about $229 per person.

He increased the state's gross receipts tax to about 2.1 percent and the income tax on top earners to 6.95 percent. (And when Delaware says "top earners," it means anybody making more than $60,000 a year.) Taxes on cigarettes, alcohol and slot machine proceeds are going up, too. The state is increasing corporate franchise taxes and the public utility tax and is resurrecting the estate tax.

All that still probably won't bring our neighbors to quite the level of Maryland's combined state and local taxation. The Washington-based Tax Foundation ranked Maryland fourth in that measure in 2008, while Delaware came in 24th at 9.5 percent. This new increase would put Delaware in the 10 percent range, still lower than Maryland's 10.8 percent. That difference amounts to about $1,187 less in taxes per person in Delaware. Then again, Marylanders make $7,820 more per capita than their counterparts in the First State, so moving still might not be such a great idea.

OK, no to Delaware, then. How about Pennsylvania? The governor and legislature are at an impasse over closing that state's budget gap, but Gov. Ed Rendell is pushing to increase income and cigarette taxes and establish taxes on smokeless tobacco and natural gas extraction. In fact, the Tax Foundation says at least seven states will raise their income taxes this year, with many more raising sales taxes, cigarette taxes and other levies.

What all this points to is the absurdity of arguing that one state's tax system is inherently better than another's, or that people and businesses will pack up and move if any tax is increased here. There is no free lunch. Take Delaware's supposed big competitive advantage over Maryland - its lack of a sales tax. Sure, you don't see 6 percent tacked onto your purchase, and that can make a big difference if you're buying a washing machine or a couch. But Delaware's got its own, sneaky version of a sales tax. The gross receipts tax is levied on every transaction of goods or services except the final sale to consumers. That means your couch may have been taxed repeatedly, with the costs baked into the price, before you ever lay eyes on it in the showroom.

Marylanders may still be smarting over the tax increases Gov. Martin O'Malley and the Democrat-controlled legislature approved in 2007, particularly since the budget balancing they achieved proved short lived once the global economy spiraled out of control. But Marylanders can take some comfort in the fact that as the state grapples with new fiscal problems, more tax increases are politically off the table, at least until after the 2010 election - and perhaps for some time after that.

Mr. O'Malley and the other members of the Board of Public Works will probably have to enact more cuts to the current budget, and he and the legislators probably won't be able to avoid cutting even more from the spending plan they'll adopt next spring, just before they head out for re-election - exactly the opposite of what politicians like to do. There is a chance that the state could dip into its rainy day fund, particularly if the state's slot machine gambling program gets off the ground in the next few months; the promise of that new revenue would reassure bond rating agencies that the state's savings could be replenished. But increase taxes in an election year? Not likely.

Maryland may have raised taxes earlier than its neighbors, but in the end, it won't be alone.

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