Views Differ On Benefits Of Tax Plan In Maryland

By John Wagner
Washington Post Staff Writer
Thursday, October 4, 2007; A01

The $1.7 billion deficit-reduction plan rolled out by Gov. Martin O'Malley has sparked a fierce debate over how well it treats the working-class families whose interests O'Malley promised to champion last year as a candidate.

In some ways, the plan would clearly make Maryland's tax code more progressive. A relatively small number of high-end earners, many of them in Montgomery County, would pay thousands of dollars a year more in income taxes, and most others would pay slightly less than they do now, according to both O'Malley (D) and an independent analysis by the state comptroller's office.

And O'Malley's plan includes other tax breaks for low-wage workers and senior citizens that have drawn praise from liberal groups.

But the largest generator of revenue in the governor's plan -- a 1-cent increase in the sales tax projected to yield $730 million a year -- is widely considered "regressive," O'Malley acknowledges. The increase, to 6 cents per dollar, would consume a larger percentage of a low-wage earner's income than that of a wealthier taxpayer.

The same is true of a proposed doubling of the cigarette tax to $2 per pack. The extra hit on a pack-a-day smoker -- $365 a year -- would more than offset any savings in income taxes under O'Malley's plan. And some lawmakers have pointed to another part of the plan they find curious: Homeowners would get a break on their property taxes, but apartment tenants -- who, on average, have lower incomes -- could wind up paying more in rent as building owners pass on the cost of a new tax.

O'Malley also plans to raise $550 million a year from the legalization of slot machine gambling, an activity that advocates for low-income residents say saps a greater percentage of their income. Administration officials have suggested that would be less true in Maryland, the most affluent state, than elsewhere.

Both the number and scope of O'Malley's proposed changes to the tax code complicate assessments of their overall impact.

O'Malley, who is seeking to sell his plan in closed-door meetings with legislators this week, has said repeatedly that he thinks his proposals are fair, particularly given the magnitude of what he is trying to accomplish: to close a largely inherited $1.7 billion shortfall in a $15 billion budget while raising an additional $400 million a year for transportation priorities.

O'Malley said his plan was crafted with the interests of working-class and middle-income families in mind, people "who have really been taking it on the chin.''

"I do believe that this is a progressive plan," O'Malley said. "If you look at the three major revenues we are proposing to reform, the vast majority of Maryland families will actually have their tax burdens reduced."

That claim is based on an analysis by his administration of his plans to overhaul the income tax brackets, phase in a property tax cut over three years and raise the sales tax as early as Jan. 1, if lawmakers pass his plan in a special session this fall.

Republican leaders sharply questioned this week whether O'Malley's plan would benefit as many working-class families as he suggests, pointing to components of the plan not included in the analysis.

The governor, for example, is also proposing to raise the titling tax, which would add $200 to the price of a $20,000 car. And the cost of an increase of 1 percentage point in the corporate tax probably would be passed along to consumers, GOP leaders said.

"This is at best confusing and at worst deceitful to Maryland residents and taxpayers," said House Minority Leader Anthony J. O'Donnell (R-Calvert).

Several Montgomery Democrats, meanwhile, have questioned whether O'Malley's income tax plans are, in effect, too progressive. Although a large majority of Montgomery residents stand to gain from O'Malley's plan, the county is home to nearly half of those in Maryland who reported in 2005 at least $500,000 in adjusted gross income. That group would be most affected by the plan.

Mahlon R. Straszheim, an economics professor at the University of Maryland, said O'Malley's plan contains some progressive components, some regressive components and others that could be tweaked to make the overall plan more progressive. Given the number of tax changes in play, an analysis of the plan's overall impact is relatively difficult, he said.

"You have to estimate what people spend on all the kinds of things being taxed," Straszheim said.

Here's a look at what is known about the potential impact:

High-Income Earners

No other part of O'Malley's plan would have such varied effects on Marylanders' finances as his income tax proposal.

O'Malley has said that single filers making up to $185,000 a year and joint filers making up to $250,000 would get a modest break in their income taxes. About 2.1 million households would pay less, and 85,177 would pay more, the governor's office says.

O'Malley's plan calls for changing what is effectively a flat tax -- most Marylanders are now in the 4.75 percent bracket -- by reconfiguring existing brackets and adding two upper-end brackets of 6 percent and 6.5 percent.

The top bracket of 6.5 percent would apply to taxable income in excess of $500,000. It would affect only about 16,000 filers, but they would collectively pay $438 million more a year -- one of the larger revenue generators in O'Malley's plan -- according to the governor's office. Collectively, everyone else in the state would pay $275 million less in income taxes.

Under examples provided by O'Malley's office, a married couple with two children making $750,000 a year would pay $7,028 more in income taxes, and a married couple with two children making $125,000 a year would pay $176 less.

Maryland Consumers

Under O'Malley's plan, everyone would pay $6 in sales tax instead of $5 for every $100 in purchases. The sales tax on a $900 refrigerator would rise by $9, and a $2,500 flat-screen TV would set the purchaser back an additional $25 in taxes.

"I readily admit it is not a terribly progressive tax," O'Malley said during a town hall meeting last week, at which he also argued that a 6 percent rate would remain competitive with the levies in surrounding states.

O'Malley has also proposed applying the sales tax to several services that are now exempt, including health clubs, tanning salons and property management. That part of his plan, which would net an estimated $74 million a year, is generally considered more progressive. It would add $3 in taxes to a $50-per-month health club membership.

Straszheim said O'Malley's proposal could be made more progressive by decreasing the rate increase and applying the tax to more exempt services, such as dry cleaning and household cleaning. Those with higher incomes tend to spend more on services, he said.

Apartment Dwellers

Of O'Malley's proposals for taxing services, the planned levy on property management is the most controversial.

The tax would apply to building owners who hire others to manage their properties, a common practice at apartment complexes. Some lawmakers and others argue that much of the cost would be passed to tenants.

"It's going to increase what renters pay, and it seems out of line with the goal of the package," said William Castelli, vice president for government affairs at the Maryland Association of Realtors.

Castelli estimated that the tax could add $60 to $100 a year to a typical apartment tenant's rent.

"I think if there's an adjustment to be made in the governor's package, that's the first place I'd look," said Senate President Thomas V. Mike Miller Jr. (D-Calvert).

About 30 percent of Maryland households rent, according to Census Bureau figures. The number varies among jurisdictions, because of such factors as income levels and housing costs. In Baltimore, nearly half of households are renters.

Homeowners, meanwhile, would get a property tax break under O'Malley's plan. Once fully phased in after three years, the savings for the owner of a $500,000 home would be $150 a year.

Smokers

Perhaps no group would feel the pinch of O'Malley's plan more than smokers, for whom the tobacco tax would increase from $1 to $2 on each pack of cigarettes. Nearly one in five adults in Maryland smoke, according to the Centers for Disease Control and Prevention.

Straszheim said the tax is "definitely regressive" but also "good health policy," because the higher tax would discourage some people from smoking.