Washington Has Given Maryland a Tax Cut, but Will Annapolis Take It Away?
There are some jokes that start with “I’ve got some good news and some bad news.” That’s also the way of looking at the tax reform legislation approved in Washington.
The good news is that Marylanders are going to enjoy more than $30 billion of tax relief over the next 10 years.
The bad news is that the state tax system will take away a big chunk of that tax relief if politicians in Annapolis don’t act to prevent an automatic tax increase.
The key thing to understand is that most states “conform” with the federal tax system, which basically means the states use one or more numbers (such as Adjusted Gross Income [AGI]) from taxpayers' federal tax returns when calculating how much those taxpayers owe in state taxes.
So when there’s major tax reform in D.C. that changes those numbers, which inadvertently can result in either tax increases or tax reductions at the state level. In this case, it means an automatic tax hike.
The Washington-based Tax Foundation explained the issue earlier this month:
For reasons of administrative simplicity, states frequently seek to conform many, though rarely all, elements of their tax codes to the federal tax code. This harmonization of definitions and policies reduces compliance costs for individuals and businesses… States conform on either a static or rolling basis. Static conformity means conforming to the Internal Revenue Code (IRC) as of a specific date, such as January 1, 2016. Rolling conformity means adopting IRC changes as they occur.
Maryland is one of the states with “rolling conformity” for both individuals and businesses. As the Tax Foundation explains, that means a broader definition of taxable income in Washington will lead to a broader definition of taxable income in Maryland.
How states define their tax bases would matter a great deal for their revenue impacts under federal tax reform. For instance, a state that uses federal taxable income or AGI as its starting point would likely see an increase in revenue due to the elimination of many federal itemized deductions. Under the House and the Senate tax plans, the federal tax base (the definition of taxable income) would become broader, leading to an expansion of the state tax base. The federal changes include rate cuts to offset the broader bases, but states set their tax rates independently. Absent state-level changes, states would have a much larger tax base without correspondingly lower rates, leading to higher state-level revenue.
In other words, federal tax reform is going to give Maryland taxpayers a nice chunk of tax relief, but then the state will automatically get a significant slice of that money via an automatic tax increase.
That’s not fair to the citizens of Maryland, so hopefully the legislature will act quickly on Governor Hogan’s request to protect state taxpayers.
I am announcing today that our administration will submit legislation that will protect our taxpayers, and which will mitigate negative impacts of these changes to state taxes. Our goal will be to leave that money in the pockets of hardworking Marylanders. I am confident that our partners in the General Assembly who have expressed concern over the impact of this tax reform bill will support us unanimously in protecting Marylanders who could be negatively affected. Protecting taxpayers should be a bipartisan issue.
It’s not often we get legislation from Washington that lowers costs on Marylanders. It would be most unfortunate if some of the benefit was eroded by an automatic tax hike at the state level.
If politicians in Annapolis want to take more money from the citizenry, they should cast a public vote, not accept windfall money from federal reform.