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Cleaning Up the Tax Code Would Protect Needed Investments and Strengthen Maryland’s Economy

March 10, 2017 by Christopher Meyer in Blog, Budget and Tax

As one disappointing revenue estimate after another came in last fall, it became increasingly clear that this would be a difficult year for Maryland’s state budget. Governor Hogan’s proposed budget confirmed that fear and then some: the governor’s plan responds to Maryland’s fiscal challenges with a counterproductive cuts-only approach, balancing the budget on the backs of people who need the state’s assistance the most. There is an alternative to cutting the investments that support our economy, like hiring qualified teachers and funding local transportation improvements. To maintain  essential services and ensure our state economy works for everyone, Maryland needs adequate revenue.

Five bills currently before the General Assembly would move us in the right direction by cleaning up the tax code and ensuring powerful interests are not exempt from paying their fair share.

  • Eliminate corporate “nowhere income”: Some corporations located in Maryland are able to earn income by making sales into other states without paying taxes on that income in any A proposal from Sen. Paul Pinsky and Del. Jimmy Tarlau would ensure that Maryland businesses pay taxes on all their income by assigning to Maryland any corporate income generated through sales into states that do not have jurisdiction to tax them. This proposal would raise between $53 million and $69 million per year over the next five years, and help level the playing field for local businesses.
  • Stop cutting the multi-millionaire estate tax: Maryland’s existing estate tax helps to reduce the gap between high and low income households, but several years ago lawmakers made changes that reduced its effectiveness. The exemption for the estate tax in Maryland is now set to rise every year until it reaches nearly $6 million in 2019. Once these cuts are fully phased in, the tax is expected to apply to less than 1 percent of estates. A proposal from Delegate Tarlau would stop the cuts, freezing the exemption at its current value of $3 million. This proposal would raise $17 million in fiscal year 2019, increasing to $60 million in fiscal year 2022.
  • Close the carried interest loophole: This loophole allows highly paid private equity and hedge fund managers to dramatically lower their federal tax responsibilities by paying the low capital gains rate on much of their income rather than ordinary income tax rates. In addition to being unfair, this special treatment is simply bad tax policy. A proposal by Senator Pinsky and Delegate Tarlau would close this loophole by allowing the state to collect revenue from Maryland taxpayers that would go to the federal government if it accurately classified carried interest as ordinary income. The Department of Legislative Services estimates that this proposal could bring in upward of $50 million per year in revenue.
  • Modernize the sales tax: Brick-and-mortar businesses in Maryland are required to collect sales taxes as a part of doing business, but online retailers are currently exempt from this requirement if they do not have a physical presence in the state. This means that some sales can escape taxation entirely—even when taxes are legally owed—since it is more difficult to collect taxes after the fact than at the point of sale. A proposal from Sen. Richard Madaleno and Del. Sheila Hixson would level the playing field by requiring large businesses that regularly make sales into Maryland collect sales taxes. While the precise amount of revenue Maryland would generate by modernizing our tax code to include online sales is uncertain, the Department of Legislative Services estimates that our current, outmoded treatment of online retailers may cost as much as $320 million in uncollected revenue in the current fiscal year.
  • Tax marijuana like alcohol: A growing number of states are rethinking their approach to marijuana as the damaging effects of prohibition on communities and the economy become clearer. Maryland decriminalized possession of small amounts of cannabis in 2014, and eight states plus the District of Columbia have now legalized marijuana possession. This step both ends the counterproductive punitive approach and enables states with above-ground cannabis markets to generate much-needed revenue. A set of bills before the General Assembly would follow their lead, bringing in resources for education, job training, and effective, treatment-based approaches to substance abuse. Marijuana taxes in Colorado and Washington each brought in more than $200 million in 2016, and are similar in structure to the one proposed in Maryland.