O'Malley's proposal to raise taxes on "high earners" draws protests in Annapolis and beyond

January 28, 2012|By Annie Linskey, The Baltimore Sun

Frank and Joanne McShalley don't think of themselves as rich. He works for an insurance company. She's an office manager. They've got two kids in Baltimore County Catholic schools.

The family isn't hurting, but with the costs of running a household — their boy needs braces, their girl is a year from college — they don't have money for extras. They've noticed Maryland's higher tolls and fees the past few years.

Now Gov. Martin O'Malley wants them to pay more in income taxes. Since the McShalleys together earn more than $100,000, they fall among the top 20 percent of Maryland taxpayers — a group the governor calls the state's "high earners." The McShalleys are not happy.

"The middle class is getting soaked," said Frank McShalley, 48, a Republican from Parkville. "We're getting nailed here. We are the ones that are going to be affected by this."

If there is one part of O'Malley's plan to balance the state budget that is causing the most ire in Annapolis, this is it. The Maryland Association of Realtors railed against it during its annual lobby day. Republicans actually yelled about the unfairness during a news conference in the State House. Even leading Democrats are breaking ranks.

Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch have both suggested that their chambers will want to make changes to O'Malley's proposal.

"Two people with a combined salary around $100,000 should not be considered wealthy," Miller said.

But General Assembly leaders also point out that the state has to take steps to close a $1 billion budget gap. While they may adjust income levels and other details, they say, the state may have to raise income taxes to pay its bills.

"We are going through all the options we see out there," Busch said. "What is the fairest and most palatable way to go about it? At the end of the day you have to have a balanced budget."

O'Malley, a Democrat, also spoke of fairness when he explained his decision to seek the increase.

"I don't like doing this. I don't like asking for this," O'Malley said. "This is by no means a lack of respect for those we are asking more of. This is the fairest way to go about this."

The governor took care in his proposal not to touch the Maryland income tax rate — which is used as a metric when states are compared with one another. Maryland's rate would remain at 4.75 percent to 5.5 percent for most earners.

Instead, O'Malley suggested changes in exemptions and deductions, the mechanisms that shield earnings from taxes. Under the proposal, 428,000 Marylanders would pay more.

As with federal taxes, Marylanders can deduct costs like their mortgage interest, charitable contributions and property taxes from their income, so they are taxed on less money than they actually take home. The McShalleys, for example, have about $20,000 in deductions.

Under O'Malley's plan, individuals or families making more than $100,000 could take only 90 percent of their deductions — or $18,000 for the McShalleys. Those who earn more — $200,000 and above — could use 80 percent of their deductions.

The change would put an extra $120 million in the state's coffers. It would cost the McShalleys about $150 a year. "We do everything we can do to make ends meet," said Frank McShalley. "If you start adding in all of this other stuff, it starts adding up. It really depresses me."

Ten states, including Pennsylvania and West Virginia, don't allow state taxpayers to take any itemized deductions, according to the Institute on Taxation and Economic Policy, a nonpartisan think tank. The most recent to change its policy is Rhode Island, which eliminated deductions in 2010, according to the institute.

The second part of O'Malley's proposal is to phase out exemptions — reductions in taxes for each family member — for joint filers bringing in $150,000 or more. Marylanders in that category currently can reduce their taxable income by $2,400 per person. Under O'Malley's plan, that figure would be cut in half.

In higher brackets — $125,000 for single filers or $175,000 for couples — exemptions would go away entirely. That part of the plan would generate an extra $63.2 million for Maryland's state government.

A family of four with income of $175,000 would pay the state an additional $268 under the proposed change in exemptions.

The changes are complex. Perhaps intentionally so, some suggest. State Sen. Jamie Raskin, a Montgomery County Democrat, observed, "There's a general principle in tax policy that the more complicated the change, the more diffuse the opposition."

One reason that the income tax proposal is raising hackles among Democrats in Annapolis — whose votes would be needed to pass the measure — is how deeply it reaches into the tax brackets. Most lawmakers don't see a family making $100,000 as well-off.

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