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The cost of being rich

New tax bracket for Md. millionaires becomes law

Economic & Fiscal Policy

by Michael Dresser, The Baltimore Sun

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APRIL 9, 2008 Bookmark and Share

It's quite an exclusive club, Maryland's new millionaires' tax bracket. A little more than 6,000 households statewide qualify for the distinction - more than 40 percent of whom reside in Montgomery County.

It's a group that includes a Fortune 500 executive in Potomac, an energy company CEO in Roland Park and wealthy retirees with bayside estates in St. Michaels. Throw in some developers in Howard County, a growing corps of black entrepreneurs in Prince George's County and certain small businesses statewide. The Ravens' star middle linebacker would appear to be among the 16 percent of the club that lives in Baltimore County, No. 2 in the state for resident millionaires.

With the General Assembly's passage of the new 6.25 percent top tax rate on incomes above $1 million, and Gov. Martin O'Malley's signing of the bill yesterday, Maryland has apparently become the first state to create an actual millionaires' bracket.

Some other states have created high-income tax brackets - some paying rates that make Maryland's levy look like a bargain - but they kick in at lower thresholds. For instance, New Jersey residents in the top income bracket pay a rate of 8.97 percent but don't receive the cachet of being in a millionaires' club because it applies to all income above $500,000.

The new rate puts Maryland - which boasts the nation's highest median income, according to the Census Bureau - among the states with the highest income taxes at top earning levels if county "piggyback" taxes are included. Even with those included, Maryland still falls well short of Rhode Island's 9.9 percent top rate.

To join the Maryland club, you have to be a real millionaire - earning $1 million a year you can't offset with deductions. Just owning a big house that's appreciated won't cut it. Some sole proprietorships, limited liability corporations and other small businesses will pay, however.

Some prosperous Marylanders are not enthusiastic at the prospect of qualifying for the honor, which kicks in for the 2008 tax year and expires after 2010.

Howard Rensin, a successful Howard County businessman and developer, thinks many Maryland millionaires will decamp for less taxing locales.

"There's already been a substantial migration of people of high income out of Maryland," Rensin said. "I think you're going to see an increase in that type of flight."

But others who move in affluent circles think most of those privileged enough to feel the additional burden will just "grin and bear it."

That's the calculation of the Maryland General Assembly, which is counting on the additional $328.5 million the increase is projected to raise over three years to help pay for the cost of repealing an ill-received computer services tax.

According to the Department of Legislative Services, there were roughly 6,300 households that filed returns in 2005 with a taxable income of more than $1 million. That amounts to 0.3 percent of those who filed that year. Most filed jointly.

The average income reported by those in the new bracket was $3.1 million. That translates to an extra $15,000 a year for three years until the surcharge sunsets - or just about the $45,000 that would put a mid-range BMW in the three-car garage - compared with the law at the beginning of the session. (In some cases, some of that extra cost could be offset by federal tax deductions.)

Faced with more than a $1 billion shortfall between anticipated revenues and expected expenses - the so-called structural deficit - O'Malley called a special session late last year in which he proposed to raise income taxes on higher-income earners. His plan included a so-called "millionaires' bracket" of 6.5 percent for income above $1 million.

That idea ran into resistance from legislators from Montgomery County, where millionaires abound. They gave O'Malley roughly a half a loaf, capping the top rate at 5.5 percent for income above $500,000.

But that left the state short of its goal of closing the budget gap, so legislators - casting about for something to tax that wouldn't offend a powerful lobby - hit on the idea of a computer services tax. The reaction to the computer tax - especially from high-tech industries and business consumers of information services - was almost unanimously negative.

By the end of the session, the idea of taxing the rich wasn't looking so bad to many of the Assembly's leaders. O'Malley jumped aboard the repeal bandwagon and re-endorsed the millionaires' tax.

"I've had numerous people come up to me in the course of these last few months and whisper to me that they are in that highest bracket of millionaires and they are willing and they are able to pay their fair share," he said.

Ed Hale, chief executive of First Mariner Bank in Baltimore, said he told O'Malley the computer tax had to go - even if he had to pay more in income tax.

"Any self-respecting person that was wealthy enough could pay more tax just because of the quality of life in the state of Maryland," he said. "It's much ado about nothing for a very few people."

John Eckenrode, president of Catonsville-based Corporate Professional Service Inc. and one of the leaders of the tech tax repeal effort, said the extra cost of the millionaires' tax is "inconsequential" to people in that tax bracket. Like others interviewed, he declined to confirm his membership in the club but said those he knows who do qualify are "comfortable" with it.

"This is the net equivalent of a person making $30,000 getting a speeding ticket on Route 95," he said. "I think it's a great trade-off to save an industry."

Christopher Summers, president of the libertarian-oriented Maryland Public Policy Institute, said Maryland traded one bad tax for another.

"I wouldn't say there'll be a mass exodus [of millionaires]," he said. "Even if one leaves, I see that as a sign of a damaging policy."

Joe Geier, whose Geier Financial Group in Ellicott City serves as financial adviser to professional athletes and other high earners, said it won't be easy for his clients to avoid the impact. For example, he said, Orioles players with multimillion-dollar contracts who live out of state must pay taxes on half their income to Maryland.

But Geier doubts many people will leave the state to stay out of the club.

"Most people are going to have to grin and bear it and pay it and not be happy about it," he said.

michael.dresser@baltsun.com

Copyright © 2008, The Baltimore Sun

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