Lawmakers’ $1.4 Billion Missed Opportunity on Fair Tax Reform

Photo by K Whiteford

The recently concluded 2021 legislative session marked forward progress on many issues important to Maryland communities, such as public school funding, policing reform, and helping families weather the pandemic‘s economic toll. But lawmakers passed up an opportunity to move Maryland toward a fairer, more effective revenue system. This inaction means the wealthiest Marylanders will continue to pay less than their share, the state will continue to underinvest in the building blocks of our economy, and our tax code will do little to move us toward racial justice. It also comes with a price tag of $1.4 billion in revenue left on the table. When they next convene, lawmakers should act to clean up Maryland’s tax code and put our state on a strong fiscal footing.

Lawmakers considered more than a dozen bills to improve Maryland’s revenue system during this year’s legislative session, and there were some minor victories that will make our state and local tax systems fairer and more effective:

• Lawmakers fixed a loophole in our tax code that allows federal legislation to retroactively change Maryland’s tax law without any income from state policymakers. However, the version that passed stripped out a provision that would have saved the state millions in retroactive tax breaks stemming from federal coronavirus legislation passed in 2020.
• Lawmakers created a system to financially reward whistleblowers who sound the alarm on wealthy tax cheats. A similar program at the IRS has directly recovered more than $6 billion in unpaid taxes since 2007 and may have saved more by making potential tax cheats think twice.
• Lawmakers passed a law allowing counties to create multiple income tax brackets, just like the state and federal government do. Previously, counties were required to tax wealthy individuals at the same rate as working families. However, the version that passed stripped out a provision that would have increased flexibility for counties to raise revenue from the wealthiest.

These three important bills now sit on Gov. Hogan’s desk. If the governor vetoes the bills, the General Assembly will have to approve them again either next year or during a special session. The legislature took this step this year, overriding vetoes of tax legislation passed in 2020. This smart choice will raise needed revenue, but still leaves our revenue system short of Marylanders’ growing needs and still allows the powerful few to get away without paying their fair share.

The legislature passed up an opportunity to make much more significant improvements to our revenue system. Measures left on the table would have closed loopholes that allow large corporations to artificially lower their tax responsibilities, shrunk or eliminated ineffective special interest tax breaks, and asked more of wealthy individuals—especially the tiny, overwhelmingly white group of households whose income comes primarily from what they own rather than what they do. The legislature did not even advance some reforms that were on their way to passagebefore the pandemic cut short the 2020 legislative session.

Altogether, this inaction amounts to a $1.4 billion missed opportunity:

Some lawmakers justified their inaction by pointing to a recent series of pleasant surprises from state revenue analysts as well as an infusion of cash from the federal American Rescue Plan. But this decision prioritizes the narrow interests of the few at the expense of Maryland communities:

• Even before the pandemic, our state was facing a range of challenges and unmet needs following more than a decade of under-funded public services. The failure to restore funds cut during the Great Recession left many students attending schools without enough teachers and supportive services, caused local health departments to cut back on services, and reinforced barriers to accessing safe, affordable housing, among other challenges.
• Low-income communities and Black and Brown communities often see the greatest harm from lack of investment in the things our families need to thrive. For example, the cuts to education funding meant that by 2017, more than half of Black students in the state attended a school that had significantly less funding than the state’s own standards.
• Policymakers have taken recent steps to strengthen our investments in Maryland communities, such as a major school funding package that received final passage this year. While the state has saved up enough to fund these investments during the next few years, more revenue will ultimately be needed if we want to invest in schools without cutting back on other essentials like health care and transportation.

The same reforms that would enable us to invest in communities would also make our tax code fairer:

• Today, the wealthiest 1 percent of Marylanders pay a smaller share of their income in state and local taxes than everyone else.
• Large, profitable corporations are able to exploit loopholes in our tax code to reduce their Maryland tax responsibility. Each year, about one-third of the 150 largest corporations operating in the state pay zero income taxes, despite the roads, emergency services, and many other public resources they rely on to run their businesses.
• The status quo overwhelmingly benefits a small number of white households, who are much more likely to have significant built-up wealth, at the expense of public investments that would benefit all of us.