Maryland House passes budget, setting up a debate with Senate over size of tax hike

Maryland’s House of Delegates passed a spending package Friday that would hike income taxes on six-figure earners and shift some teacher pension costs to counties in an effort to avoid cuts to classrooms, health-care and other Democratic Party priorities.

On paper, the budget plan looks similar to the one that passed the Senate last week, which would also raise taxes and send retirement costs back to counties.

But politically, the two options now represent bookends in a debate that could produce dramatically different perceptions about Maryland’s fiscal priorities.

Both plans follow the blueprint of Gov. Martin O’Malley (D) to continue funding education at record levels and to raise taxes rather than cut scheduled spending increases that have outpaced still-depressed state tax revenue.

Both plans keep general fund spending near last year’s level but also allow overall spending and borrowing to increase by about $1 billion, or 3 percent.

The atmospherics surrounding the two plans, however, couldn’t be more different.

The Senate plan would collect most of its new revenue from an across-the-board income tax hike; the House version would target the state’s top fifth of tax filers, or most of those earning above $100,000.

The House plan hews more closely to O’Malley’s original budget proposal to limit exemptions and deductions for six-figure earners, but the Senate plan comes closer to raising the larger amount of tax revenue needed to fund his spending priorities.

With O’Malley increasingly becoming a national voice for Democrats, an across-the-board income tax hike could undermine the governor’s credibility in advocating the party line that the rich pay must pay a “fair share” to balance government budgets — a central tenet of President Obama’s 2012 platform.

O’Malley is still pursuing a nearly 20-cent-per-gallon gas-tax increase, a doubling of the state’s so-called flush tax to fund Chesapeake Bay cleanup and a new flat fee on every resident’s electric bill to subsidize development of offshore wind power.

Combined, those increases could add up to hundreds of dollars annually for every household, regardless of income level. Advocates for the poor have warned that the net effect of O’Malley’s proposals could be a disproportionate burden on those struggling most.

But since the General Assembly’s decision on income taxes will probably emerge as the main headline from this year’s legislative session, the stakes will remain high for O’Malley as the House and Senate begin to work out a compromise next week.

“It is better news for O’Malley if the House version goes through because that’s closer to his original vision, and it allows him to say ‘We didn’t raise it as much as it could have been raised,’ ” Maryland Democratic strategist Mike Morrill said. “I think people recognize the basic fairness of it: If we’re going to raise taxes more, it ought to be skewed to the higher end rather than lower end, particularly as we’re coming out of a recession.”

But Senate Democrats ran into trouble as they began to parse O’Malley’s plan to raise roughly $300 million annually by limiting deductions and exemptions from high-income earners.

O’Malley’s plan was derided by homeowners groups and lobbyists for real estate agents and home builders. They cast it as the first step toward the state doing away with mortgage-interest deductions, widely considered the largest financial incentive to home­ownership. Some Republicans charged that the mere discussion of O’Malley’s plan had already had a chilling effect on home sales in recent weeks, even though home prices appeared to rise in Maryland in February.

The Senate plan would raise income taxes on most Marylanders by a quarter percentage point and apply a higher rate to all earnings for those making more than $500,000. It would raise more than $440 million next year.

The House version would increase income taxes by a like amount for single filers with an adjusted gross income of more than $100,000 and for married couples and joint filers making above $150,000. It would raise about half as much.

“We do appreciate the efforts that both chambers have made,” said Nancy Soreng, president of the League of Women Voters of Maryland. Soreng said both plans have positive points, but she gives slight preference to the Senate plan because it includes an increase in the earned income tax credit — which the House plan struck — and provides more revenue.

“We like the House version in that it’s a little bit more progressive,” she said. “But we like the Senate version in that it . . . deals with the structural deficit problem not only this year but in the coming years,” she said.

Without new taxes or cuts, the gap between projected rising costs and revenue in Maryland would be about $1 billion annually for the remainder of the decade.

Staff writer Greg Masters contributed to this report.

Aaron Davis covers D.C. government and politics for The Post and wants to hear your story about how D.C. works — or how it doesn’t.
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