Maryland’s State Tax Policies Reduce Some Inequality but Have a Long Way to Go

February 7, 2017 by Ellen Hutton in Blog, Budget and Tax

State tax policies often are a culprit in increasing income inequality. Maryland now ranks 24th in the nation for income disparity between the richest 5 percent of households and the poorest 20 percent, despite past attempts to close the gap. There are additional steps we can take to change public policies that contribute to income inequality in our states.

A snapshot of income inequality in Maryland shows that households in the top 5 percent have incomes that are, on average, 14 times more per year than households in the bottom 20 percent. That figure doesn’t include capital gains income, a significant source of income for many of the wealthiest Marylanders. This problem, of course, extends beyond Maryland. Nationwide, the wealthiest of households have enjoyed several decades of much larger gains in income than the rest of Americans. The Center on Budget and Policy Priorities has developed recommendations for ways in which states could reduce this type of inequality through tax policies, including options that could be applied in Maryland.

Make taxes more equal across income groups

In Maryland, people who bring home less than $24,000 per year pay 9.7 percent of their income in state and local taxes. Meanwhile, the top 1 percent, those with incomes in excess of $480,000, pay only 6.7 percent of their income in state and local taxes, according to research by The Institute of Taxation and Economic Policy. Maryland’s graduated income tax helps equalize the share of tax responsibility faced by households across the income scale, but raising tax rates at the top and eliminating tax breaks for the wealthy would reduce this disparity.

Retain or expand taxes on inherited wealth, such as the 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 estate tax in Maryland is set to rise to nearly $6 million in 2019, which is expected to apply to less than 1 percent of estates. To avoid increasing inequality, Maryland’s millionaire estate tax should be frozen at its current level, which applies only to estates worth $3 million or more.

Eliminate costly and ineff­ective tax breaks for corporations

Eliminating tax shelters and ineffective business tax credits also would help Maryland reduce inequality. One way to level the playing field for small businesses is adopting “combined reporting,” a fairer, more effective, and productive corporate tax system used in the majority of other states. Each year Maryland’s small businesses pay their fair share and meet their tax responsibilities while large, multi-state enterprises use a tax loophole to limit their corporate taxes by shifting income – on paper – out of state. Combined reporting closes this loophole.

In a recent blog post, MDCEP explored a pair of jobs creation tax credits offered in Maryland that have proven to be ineffective at creating new jobs, while costing the state revenue that could be used to invest in the things that truly support a modern economy, like good schools and an efficient transportation network. These and other tax cuts and loopholes for corporations should be eliminated.

Broaden the sales tax base

Maryland could broaden its sales tax base to be more equitable by taxing services used by the wealthy, such as country club memberships or investment counseling. As Maryland’s sales tax is currently structure, low-income households pay a disproportionate amount of their incomes in sales taxes compared to wealthy Marylanders.

Enact or expand earned income tax credits

Maryland’s earned income tax credit give the state a leg up in equality compared with others, but many Marylanders do not benefit from the existing EITC. Pending legislation seeks to expand the EITC to include workers not raising children, allowing more people who work but struggle to get by on low wages to get some money back at tax time. The expansion would allow Maryland to make greater progress in reducing inequality.

Maintain an overall tax system that raises sufficient revenue to pay for the building blocks of shared prosperity

By enacting tax policies that shift a more equitable share of tax responsibility to the wealthiest households, while still ensuring sufficient revenues for the state, Maryland can invest in quality education, health care access, infrastructure, and all of the other components necessary to a thriving community and greater opportunities for Marylanders of all income levels.