O’Malley budget raises taxes on high earners

Marylanders making six-figure salaries or more would pay higher income taxes to help cover the state’s budget shortfall and rising teacher pension costs under a spending plan that Gov. Martin O’Malley is scheduled to release Wednesday.

Individuals who earn more than $100,000 and couples that make more than $150,000 would be limited to smaller personal exemptions for themselves and their family members, and they would face caps on personal deductions, according to several lawmakers briefed Tuesday on O’Malley’s plan.

The income tax changes, along with another plan by O’Malley (D) to collect sales tax on some Internet purchases, would raise more than $300 million, covering about a third of the state’s $1 billion shortfall in the coming year, lawmakers said.

They would also amount to the first broad-based tax increases in Maryland since 2007, when O’Malley pushed through a tax package that increased the sales tax to 6 percent, from 5 percent, and rewrote the state’s income tax brackets.

O’Malley is one of at least a half-dozen Democratic governors this year pushing for tax increases. Lawmakers said that in private conversations Tuesday, O’Malley also confirmed that he would soon introduce a transportation package that will rely on raising taxes on gasoline to fund road, bridge and transit projects. He also plans to propose higher fees on most Maryland residents’ water and sewer bills to fund environmental cleanup efforts for the Chesapeake Bay. He is also backing a measure to promote offshore wind development that would increase state residents’ electric rates.

Democratic leaders in the General Assembly offered initial support for the governor’s budget, calling his push for new revenue the embodiment of what O’Malley and other Democratic leaders nationwide have labeled a “balanced approach” to government spending after nearly a half-decade of budget cutting during the downturn — and a stark contrast, they said, to the cuts-only approach advocated by Republicans on Capitol Hill.

County executives from both parties, however, sounded alarms, saying the budget could undermine the state’s economic recovery and burden already cash-strapped counties with unending commitments to rising teacher pension and retirement costs.

At the core of O’Malley’s budget is a plan to change an 85-year-old practice of using state tax dollars to pay the bulk of teacher pension costs.

As spending on education and teacher salaries has increased in recent years, Maryland’s cost to fund the pensions for some 105,000 current and retired educators has soared to nearly $1 billion annually.

Many powerful state lawmakers have for years pushed for counties — whose school boards set teacher salaries — to take on an equal share of the costs. But as a former Baltimore mayor, O’Malley long rejected the idea, saying it would impose too much of a burden on local governments.

But facing a mandate this year to halve the state’s projected $1 billion annual shortfall for much of the remainder of the decade, aides say O’Malley had few options but to begin to curtail the state’s education and health-care spending.

Under O’Malley’s plan, the state will split teacher retirement costs with counties. Lawmakers said the first-year cost to the local governments would be less than $250 million.

Counties’ share of the extra income tax revenue would cover $111 million of that, and several other adjustments are possible to further lighten the load for counties, they said.

The options include one-time adjustments to some of the numerous state aid programs to counties.

Montgomery County Executive Isiah Leggett (D), whose county faces a $135 million shortfall, said it would not be enough. “The shift is unacceptable, and the mechanisms to soften the blow are insufficient,” he said.

Leggett was among several county executives and other leaders from the Maryland Association of Counties who emerged with glum faces from a late-afternoon meeting with O’Malley, pledging to fight the proposal in the legislature.

“That’s what the 90 days are for,” said Howard County Executive Ken Ulman (D), a potential candidate for governor in 2014. “I’m disappointed. . . . We’re not in any better position to be able to afford it than the state.”

Prince George’s County Council member Ingrid Turner (D-Bowie), president of the counties organization, said she will “absolutely” urge lawmakers from her county to oppose O’Malley’s proposal and said “we’ll certainly continue the dialogue with the governor too.”

“This is going to be a difficult pill to swallow,” Turner said, noting that Prince George’s is already looking at a budget shortfall of more than $125 million next year.

The teacher pension shift won’t be the only battle.

Lawmakers said O’Malley’s budget also proposes forcing Internet companies to collect sales tax on purchases made online from Maryland businesses. Amazon.com has led opposition to such efforts in other states, and lobbyists said they were preparing for a fight on the measure if it is included in O’Malley’s budget. The governor’s budget expects to collect about $21 million in new tax revenue by instituting the measure.

The timing of the income tax changes for high earners may also be a point of contention. Under O’Malley’s plan, the changes would take effect in the budget year beginning in July, but be retroactive to Jan. 1.

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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.
John Wagner has covered Maryland government and politics for The Post since 2004.
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