Punitive income and estate tax hikes would hurt Md.’s economy
Originally published in the Daily Record
For those who followed Maryland’s General Assembly when Martin O’Malley was governor, the 2020 legislative session is (to quote Yogi Berra) “déjà vu all over again.”
As part of a package of bills to fund the $32 billion Kirwan Commission education plan, Del. Stephanie Smith, D-Baltimore, proposes that Maryland increase income tax rates on households earning $72,000 a year or more — a low bar in high-income Maryland. The bill would also raise tax rates for millionaires from 5.75 percent to 7 percent.
Nothing short of amnesia can explain these misguided proposals. It was just over a decade ago when Maryland adopted a similar tax plan that proved to be a spectacular failure. In 2007, the year that Maryland adopted the millionaire’s tax, high earners began leaving the state, yielding a staggering revenue loss of $257 million.
If lawmakers want to raise more money, they should remember that people are highly mobile – and they often move where they are more lightly taxed. Even if they ignore this lesson or pretend it no longer holds, relying on high tax rates for higher earners is poor policy for other reasons, as well.
First, high earners often earn a portion of their income from capital gains or the stock market, which makes tax revenue from this source highly volatile. Since three out of four economists predict the United States will encounter a recession by 2021, the timing here is risky. According to Stanford University economists, “millionaire-bracket incomes are especially sensitive to the business cycle, and revenues from the tax will fall sharply during recessions.”
Second, microeconomists point out that tax rates like these distort labor markets by creating disincentives for workers to gain additional skills and become high earners. As the Tax Foundation summarizes, there is a “negative incentive affect associated with high top marginal rates,” which leads to loss of labor productivity and hurts long-run economic growth.
Estate tax realities
A related bill also seeks to apply Maryland’s estate tax to estates of $1 million or more, again a low bar in a state with pricey real estate.
Raising Maryland’s already punitive estate tax is likely to damage the state’s economy. While some states levy an estate tax (on the estate itself) and others levy an inheritance tax (on the beneficiaries), Maryland is the only state that does both.
In addition, the overall national trend has been toward reducing estate taxes. Neighboring New Jersey and Delaware eliminated estate taxes in 2018, but Maryland is considering going in the opposite direction.
Such backward tax policy would compromise entrepreneurship and innovation. According to a study by the Tax Policy Center, receiving an inheritance increases the likelihood of an individual owning and managing a business. That’s because entrepreneurs often lack access to easily spendable funds, what economists call “liquidity constraint.” Inheritances can remove that constraint.
The proposed income tax increases and estate tax hikes would further exacerbate Maryland’s already dismal business climate. Increasing such taxes would undermine risk-taking entrepreneurship, job creation, labor productivity, and wage growth. This would end up hurting Maryland’s low- and middle-class workers as well as the unemployed.
So instead of fueling flight by the wealthy and handicapping its economy, Maryland legislators should re-evaluate the proposed Kirwan plan and its unreasonable price tag.
According to the Institute on Taxation and Economic Policy, Maryland already has the 10th-most progressive tax structure among the 50 U.S. states and District of Columbia. There is no reason for Marylanders to believe the tax hike supporters’ false claims that Maryland’s wealthiest pay less taxes than the rest of the population.
In addition, the bill’s proponents claim they are merely modernizing the tax code, arguing that Maryland “cannot fund a 21st century education system with a 19th century tax code.” Yet neither reestablishing the failed O’Malley tax nor increasing estate taxes that other states are abandoning would “modernize” Maryland’s tax code.
In reality, the proposed tax “reforms” are just the latest way that Maryland legislators are expressing their spending appetite and desire to falsely signal their virtue as class warriors.
High earners don’t become so by sitting around doing nothing. When their incomes are threatened by a poorly designed education and tax reform package, they will leave. And when they do, Maryland will lose not only their estate and income taxes, but substantial sales and property taxes as well. That will leave the remaining hardworking Marylanders to foot the Kirwan bill and make up for the loss.
Carol Park is a senior policy analyst at the Maryland Public Policy Institute.
(Editor’s note: An earlier version of this column mistakenly had the word “property” in place of “income” in the headline.)