Source: Institute on Taxation and Economic Policy
No, Maryland’s Tax Code Is Not “Upside Down”
Let’s all hope that the tragic and disgraceful events of January 6 will, among other things, make everyone more determined not to shade the truth for political purposes. With that in mind, consider this oft-repeated talking point as Maryland legislators consider an array of tax hikes (even as our economy struggles through the COVID-related recession):
“Maryland right now has an upside down tax code. The wealthiest 1% of Marylanders pay a smaller share of their income in taxes than anyone else. And that’s just really unfair to the rest of us 99%,” Del. Julie Palakovich Carr (D-Montgomery) said in an online news conference sponsored by the Maryland Fair Funding Coalition. [Source: Maryland Reporter]
But the notion that this proudly progressive state is somehow a tax haven for the wealthy flunks a laugh test. Based on IRS tax migration data over 1992-2018, Maryland loses an average of about $655 million in Adjusted Gross Income annually, as high-income earners exit to friendlier tax climes (chiefly Florida, Virginia, the Carolinas, and Pennsylvania). In 2016, a special commission concluded that the state’s “tax structure is a detriment to [its] competitiveness in attracting and retaining businesses as well as in creating jobs and expanding the revenue base of the government itself.”
And, indeed, upon further review the tax raisers’ talking point proves to be disingenuous – at the least. It likely comes from a 2018 "report" produced by the Institute on Taxation and Economic Policy, classified by Influence Watch as a “tax and budget policy advocacy group that… the left-of-center Pew Research Center has described… as a ‘liberal think tank.’” Nothing wrong with a liberal point of view, of course, but your advocacy is likely to be more credible if built on a firm factual and analytic foundation, and there ITEP fails.
The assertion that Maryland’s one-percenters pay less in taxes “than anyone else” (!) is based on ITEP’s estimates – which flow from their black-box “microsimulation model,” the accuracy of which will be touched on later – of various types of tax paid by different income groups. But it’s profoundly misleading to base characterizations of a state’s tax policy on the mix of taxes that ITEP chooses (combining, for example, sales and income tax estimates).
Sales taxes in Maryland are a flat 6% of the sale price of taxed goods. You simply can’t make sales taxes very progressive; we exempt some things like groceries to make them less regressive. But cashiers can’t ask customers to present their tax returns at checkout in order to charge one-percenters higher rates. That Maryland’s sales tax fails to do the impossible, then, is not a serious criticism.
The tax source that can be made progressive is the personal income tax, and by that criterion Maryland is very “right side up.” That’s clear even from this advocacy group’s own estimates, shown in the accompanying graphic. Our one-percenters actually pay far higher proportions of their earnings in income taxes “than anyone else.” By ITEP’s measure, they pay thirteen times more than the state’s poorest quintile, and 132% more than the next quintile.
Of course, when it comes to income tax payments, we need not rely on “microsimulation models.” Comptroller Peter Franchot’s 2019 report shows, for example, that the 14% of Marylanders with AGI over $150,000 paid 52% of total state and local income taxes. Our richest 1% – all those filing returns with AGI over $500,000 – paid 19% of the total, and the state’s roughly 8,000 millionaires (less than 0.4% of the population of tax filers) paid 12% of the total. Progressive stuff, that.
And when ITEP’s model “simulates” the incidence of other taxes by income group, their estimates should be taken with a grain of salt. They assert, e.g., that Maryland one-percenters pay just 0.4% of their income in general sales taxes, compared to 2.4% for individuals in the state’s bottom quintile. That seems suspect: ITEP puts the average one-percenter’s earnings at $1,448,000, so paying 0.4% of that in sales tax (just $5,792) when the statutory sales tax rate is 6% implies these affluent folks spend less than 7% (just $96,533) of their considerable incomes on taxable items. Most likely, ITEP simply has incomplete data on sales tax payments or a flawed model, and their estimates should be disregarded.
One can argue, of course, that even the official data on Maryland’s income tax receipts suggest that our system, though progressive, is simply not progressive enough. Shouldn’t we slap a higher marginal income tax rate on millionaires in the interest of “fairness?”
If we weren’t trying to recover from a recession, that might make political sense, at least. No worries about maybe making 8,000 millionaires grumble when the loot can be used to buy, er, win the favor of many of the rest of the state’s four million voters.
The problem is, again, flight risk: some of those millionaires might vote with their feet. It’s nice that the average Maryland millionaire pays about $185,000 annually in state and local income taxes; it’s tempting to squeeze them for more. But it’s costly each time one of them decides to migrate out (or not to migrate in) because there are greener tax pastures elsewhere – maybe more costly than it's worth, depending on how hard we squeeze.
That’s why most public finance experts advise that redistributive policies are best undertaken at the federal rather than state level. That’s crucial to keep in mind amid a pandemic in which many workers have “untethered” from their employer’s corporate offices. Moving forward, we’re likely to see interstate competition for brain power and taxpayers heat up. Maryland is already trailing in that race: in 2020, we again ranked as one of the “most out-bound” states in the country. In this session, we’ll see whether our elected officials are going to address that problem, or make it worse.