2018 Legislation Largely Improved Maryland’s Tax Code

April 25, 2018 by Christopher Meyer in 2018 Session, Blog, Budget and Tax

Maryland lawmakers made significant—and mostly positive—changes to our state tax code in the recently concluded legislative session. Although many observers late last year predicted an unproductive session dominated by election year politics, Congress’s hastily drafted federal tax overhaul upended those expectations. The federal tax changes delivered a massive windfall to wealthy individuals and large corporations, increased state revenue projections by hundreds of millions of dollars, and generated misguided calls for a second round of tax cuts at the state level. The General Assembly made a number of smart choices, like clarifying ambiguous language that could have cost working families millions and preventing yet another giveaway to superrich heirs. At the same time, legislators missed several opportunities to ensure Maryland has the resources needed to create thriving communities and respond to harmful policy choices the federal government could make in coming months.

Four factors shaped Maryland’s fiscal landscape at the beginning of this year’s session:

  • Congress had just passed a hastily drafted overhaul of the federal tax code. This overhaul was a big win for wealthy individuals and large corporations, but largely left out families with low to moderate incomes.
  • Because of interactions between Maryland’s tax code and federal law, the overhaul had major implications for state taxes. Media coverage focused on an expected increase in state revenues, but that wasn’t the only impact. For example, a big cut to the federal estate tax was set to automatically give away millions in state taxes to multimillionaire heirs.
  • Congress and the Trump administration continue to push for big cuts to domestic spending and federal investments in economic security—using the deficits they just created to justify slashing support for millions of families. Because so many federal services are administered at the state level, those cuts would make it harder to help Marylanders make ends meet and support our communities. Without additional revenues, this could force Maryland to gut the foundations of our economy like good schools and safe roads.
  • Even before considering deep federal cuts, our unmet needs are piling up. Between inadequate investments in schools and stagnant wages for human service providers, we will need higher revenues to help our state succeed in a modern economy.

The General Assembly made moderate progress toward addressing these challenges and will need to build on those efforts in the coming years.

Smart Choices

  • The General Assembly clarified an ambiguous provision of the state’s tax law that could have eliminated personal exemptions. If the state’s personal exemptions had disappeared, it would have cost Marylanders upward of half a billion dollars each year, with especially harmful effects on families with children, people with disabilities, and seniors.
  • The legislature repealed an age limit on Maryland’s Earned Income Tax Credit that historically locked out low-wage workers under 25 who don’t claim dependent children. Repealing the age limit will allow young workers—some working full time, others paying their way through school—to pay down debts or make car repairs during tax season. It will put more than $5 million per year in the pockets of low-wage Marylanders, much of which will be spent at local businesses.
  • Lawmakers decoupled Maryland’s multimillionaire estate tax from federal law, preventing the exemption from automatically doubling. Now, our estate tax threshold will remain at $5 million, meaning less than 1 percent of estates pay the tax, but also preventing an additional $50 million-plus annual giveaway to superrich heirs.
  • The General Assembly set aside more than $200 million in the state budget for education, plus more in the state’s rainy day fund. As the Commission on Innovation and Excellence in Education (the Kirwan Commission) finishes its recommendations and federal actions threaten to shift more costs onto the state, these reserves are essential to ensure that we can invest in world-class schools and other building blocks of shared prosperity.

Missteps

  • The legislature moved in the wrong direction on corporate taxes by expanding the single sales factor formula. This policy allows large, multistate corporations to calculate their taxes based only on the sales they make in Maryland, without considering their operations here. In many cases, this absolves corporations’ responsibility to pay for public services that make their businesses possible—from schools to train their workforce to fire protection for their facilities. Worst of all, the new law lets some corporations choose the formula that allows them to pay the least taxes.

Small Ball

Lawmakers passed two pieces of tax legislation that have garnered significant attention but will do little either to help or harm Maryland families:

  • They increased the state’s standard deduction by $250 for single filers and $500 for joint filers. This change will provide a small tax break—less than $30 per year—primarily to middle-income families. Though no final analysis of the bill’s fiscal impact exists, earlier estimates suggest it is likely to cost about $30 million per year.
  • They created a new tax credit for small businesses (those with 14 employees or fewer) that provide paid earned sick days to low-wage workers, rather than the minimum unpaid leave required under the Healthy Working Families Act. The law caps total credits in any year at $5 million, meaning that both the benefit to workers and the fiscal cost to the state will be modest.

Missed Opportunities

There is no question that the 2018 session moved Maryland’s tax code in the right direction. But lawmakers could have done much more to put us on a strong footing for the future:

  • Addressing the state’s unmet needs in education and other areas will require more revenue, and threats from the Trump administration and Congress make this need more urgent. With an upside-down tax system that currently asks the least from those with the most, we should work to eliminate tax breaks special interests have forced into our tax code. We can make positive steps by restoring the top income tax rate on millionaires, returning our estate tax exemption to its historical level, and closing corporate tax loopholes.
  • We can still do more to support the low-wage workers the federal government largely overlooked. This year’s action to expand access to the Earned Income Tax Credit was a positive step, and we should go further by extending greater benefits to more workers.