Governor’s Radical Tax Cut Plan Would Put Maryland on a Dangerous Path

Gov. Hogan’s proposal to eliminate income taxes on retired individuals would cost the state billions each year once fully phased in and hand a windfall to the wealthy few, according to estimates from state analysts.

• The plan would cost the state and counties $7.7 billion altogether by 2028, undermining the shared investments all Marylanders – including seniors – rely on.
• More than half of tax cuts under the plan would go to the small minority of Maryland households with federal adjusted gross income over $200,000.
• The revenue loss would make it harder to support investments that build statewide opportunity, such as the Blueprint for Maryland’s Future, while primarily benefiting the small subset of overwhelmingly white households that hold the bulk of built-up wealth.
• The bill is a radical, multibillion-dollar plan to redistribute income to the wealthiest, and will do more to harm low-income seniors than help them. Lawmakers should say no.

The Hogan Tax Cut Plan Is Astronomically Expensive

Once fully phased in, the bill is projected to cost the state $1.7 billion per year in lost revenue, plus $1.1 billion in lost county revenues, for a total of $2.8 billion in lost revenue per year.

Over the six-year period 2023 to 2028, the bill will cost the state and counties a total of $7.7 billion.

Even during the phase-in period, the bill’s costs exceed the Hogan administration’s projections, rising from $201 million (state only) in FY 2023 to $950 million in FY 2027.

The biggest bombshell comes in FY 2028, when complete elimination of state income taxes on eligible filers nearly doubles the bill’s cost in a single year.

Even based on the administration’s rosier assumptions, the Department of Legislative Services estimated that the governor’s tax cuts would turn the state’s projected $533 million FY 2027 structural surplus into a $409 million deficit. Soon thereafter, this bill’s full phase-in would turn this fiscal hole into a chasm. What would this mean for public investments in Maryland?

• While the historic Blueprint for Maryland’s Future education funding plan is entirely self-supporting through FY 2025, it will require support from the state’s general fund in later years. This poses no hardship in the state’s current, strong fiscal position – but would become daunting if policymakers decided to throw billions in annual revenue out the window.
• The governor’s plan would increase the risk of repeating mistakes that put us in a worse place to respond to the coronavirus pandemic. Policymakers responded to fiscal challenges in the early 1990s and after the Great Recession by slashing state funding for local public health departments, leading to staff cuts, pared back services, and increased fees. So, far, 85% of Marylanders who have died of COVID-19 are at least 60 years old.
• Population aging in Maryland is driving a rapidly growing need for long-term care, a large portion of which is funded through Medicaid with significant state support. However, low wages and poor working conditions contribute to persistent workforce shortages in the industry. The governor’s tax cut plan would put downward pressure on state Medicaid spending, making it harder to pay a competitive wage to the care workers our state will need as our senior population grows.

A Windfall for the Wealthiest Individuals

State tax data indicate that a small number of wealthy individuals would reap the bulk of the bill’s benefits. Only about 7% of Maryland tax filers have federal adjusted gross income of at least $200,000, but this group would likely reap more than half the tax cuts under the governor’s plan, based on data released by the state Department of Legislative Services. Three-quarters of tax filers have federal taxable income under $100,000, but this group would likely see less than 20% of the cuts. This would worsen Maryland’s already upside-down tax code, which allows the wealthiest 1% to pay a smaller share of their income in state and local taxes than the rest of us do.

Lopsided tax cuts like those Gov. Hogan is pushing unavoidably widen the racial wealth gap and hinder opportunity. The 1% of Maryland households with the highest incomes derive half their income from built-up assets, compared to only 6% among everyone else. Centuries of discriminatory policies have concentrated nearly two-thirds of all household assets among the wealthiest 10 percent of white households, leaving little for everyone else—including the large majority of white households as well as nearly all households of color.

Broad-based income tax cuts generally do little to help struggling families because these families already pay little in state income taxes. This is doubly true because low-income seniors already receive significant tax advantages. Maryland offers larger tax breaks to older adults than most other states, including exemptions for pension and Social Security income and an enhanced personal exemption – at a total cost of $600 million in FY 2020.

Making the System Easier to Game

The bill’s design potentially opens new opportunities for exploiting loopholes to reduce or eliminate taxes:

• Under the governor’s plan, individuals over age 65 are eligible for the tax break if they are not employed full time as of the last day of the year, or are collecting Social Security benefits.
• The bill does not define “full time.” If “full time” means at least 40 work hours per week, there are no clear guardrails to prevent someone from reducing their hours to 39 per week. The same problem applies to 35 hours or any other threshold.
• The bill does not specify documentation requirements. Would workers be required to submit pay stubs with their tax return to establish eligibility? Would the last pay stub of the year suffice, or a larger sample?
• Could individuals and employers adopt seasonal work schedules, firing senior workers every December and rehiring them each January? The bill does not specify guardrails to prevent this manipulation.

We should take Maryland’s current fiscal strength as an opportunity to invest in thriving communities and broadly shared prosperity. This tax cut plan instead shovels billions toward those who are already doing well, at everyone else’s expense.