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January session could bring tax talk

Originally Appeared on Gazette.Net

Economic & Fiscal Policy

by Sarah Breitenbach

MPPI IN THE NEWS

Although Gov. Martin O’Malley has said tax increases designed to balance the state’s budget are a possibility next year, speculation remains as to which he might push.

With the state facing a $1 billion deficit next year, O’Malley (D) and the legislature could weigh options ranging from a sales tax expansion to modifying corporate filing regulations, experts say.

The nonprofit Maryland Budget and Tax Policy Institute has analyzed several tax proposals and policies, including extending the state’s 6 percent sales tax to professional services and Internet sales; reinstituting a higher tax on people with incomes of more than $1 million; and closing a loophole that allows large corporations to file their taxes in other states where rates might be lower, potentially bringing $144 million to the state, according to the institute.

Neil L. Bergsman, executive director of the institute, said the most practical way to generate significant revenue would be an extension of the sales tax to services. Doing so could raise an additional $2 billion in annual revenue, according to a report from Bergsman’s group.

“[It is] kind of like adopting the metric system, it makes all kinds of sense,” Bergsman said. “It would be better for the economy, [but] there’s a mountain of public and political resistance to do it.”

Services such as vehicle repairs make up more than half of American spending. They also comprise the state’s largest untapped tax base, Bergsman said.

It is a source of revenue that would continue to grow with the economy, he said.

However, levying a tax on services could financially devastate low-income citizens already struggling in a weak economy, said Pamela Chaney, a clinical law instructor at the University of Maryland School of Law.

“Lower-income groups historically have less access to professional services than other income groups, and all you’re going to do is further make that problem more complicated and more difficult to resolve,” she said.

Senate Majority Leader Robert J. Garagiola (D-Dist. 15) of Germantown said the legislature has to consider revenue options, but extending the sales tax to services could be a poor decision.

In 2008, after much public outcry, the legislature repealed a sales tax that had been expanded to computer-related services during a special session the prior year.

“I think we need to be careful,” he said. “If we’re going to go down that road, we need to look at what belt tightening we can do. There are different colleagues [in the legislature] that come to this with different ideas in mind.”

Garagiola said he is not sure if taxing businesses further would be a good idea, either.

High corporate taxes and larger tax burdens for the wealthy contribute to an anti-business climate in Maryland, encouraging business owners and wealthy people to leave the state, said Christopher B. Summers, president of the conservative Maryland Public Policy Institute.

Data from the state comptroller’s office released in November 2009 suggested the state lost 4,910, or 30 percent, of its millionaires between the 2007 and 2008 tax years. Proponents of the millionaire’s tax say increasing the burden on wealthy households doesn’t drive people out of Maryland. Instead, the state has fewer millionaires because people made less money during the recession.

Raising revenue in Maryland should be accomplished by making tax policy friendlier to businesses, Summers said.

“I would suspend the corporate income tax for three years,” he said. “If you want to send a message out to the rest of the country that Maryland is open for business, I would put that sign on Maryland’s door.”

O’Malley and other state leaders have said decisions on cuts to services or tax increases can’t be considered until a congressional super committee dedicated to hashing out the federal budget makes its recommendations in December.

How those decisions impact Maryland will steer the governor’s position on tax increases, said Takkira Winfield, a spokeswoman for O’Malley’s office.

“I think he’s open to a lot of different options and in terms of specifics, nothing has been specifically laid out,” Winfield said. “At MACo, he really encouraged the counties to be open to a more balanced approach. There are lots of different options.”

Regardless of how the legislators handle tax increases or cuts to services to balance the state’s general fund, Garagiola said he will propose a gas tax increase to replenish the state’s languishing fund for road construction and repair.

Legislators and the governor also have said there likely will be more cuts to Maryland’s budget, although it is unclear which portions of state funding with be financially targeted.

Garagiola called the $60 million to $80 million expected to be generated by increases in vehicle title and registration fees, measures passed by the legislature earlier this year, a small down payment on the state’s transportation debt.

In recent years, the state has sucked more than $1 billion from the Transportation Trust Fund to fill budget gaps elsewhere, leaving counties without money for road repairs and other projects.

Earlier this year, Garagiola introduced a 10 cent gas tax increase to raise the $800 million needed to replenish the fund.

“I know I’m going to be pursuing it, some sort of revenues to meet our transportation needs,” Garagiola said. “Local elected officials, they see the need. They support it.”

Garagiola said he has support for a gas tax hike from the governor, House Speaker Michael E. Busch (D-Dist. 30) of Annapolis and Senate President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach.

During the MACo conference last week, Howard County Executive Kenneth S. Ulman, the MACo board of directors president, speculated that while county leaders have supported an increase in the tax to send funds back to their jurisdictions, he doubts it will gain enough support in the legislature.

“I’m assuming there are options on the table,” Winfield said. “We don’t know which ones we’re going to take, but none of them are going to be easy.”