O'Malley Aims to Include Tax Cuts in Revenue Package

By John Wagner
Washington Post Staff Writer
Friday, September 14, 2007

Maryland Gov. Martin O'Malley is angling to cut state property taxes and expand a tax credit that helps lower-income workers at the same time that he and lawmakers prepare to raise other taxes to close a looming $1.5 billion budget shortfall, according to several people familiar with his plans.

The targeted tax cuts are designed to cushion the blow of what is widely expected to be a politically unpopular revenue package and to allow O'Malley (D) to frame the debate in terms of tax fairness, the sources suggested. The property tax is among the most criticized of government levies, and the earned-income tax credit benefits some of the working families whose interests O'Malley promised to champion while he was campaigning.

O'Malley is planning to talk about his intentions during a meeting with legislative leaders Tuesday morning at the governor's mansion, according to the sources, who requested anonymity because all lawmakers have not yet been briefed.

State property taxes -- 11.2 cents per $100 in assessed value -- account for a relatively small share of most homeowners' bills because counties and some municipalities apply a rate several times that much.

But the politics surrounding the state's levy have been particularly heated in recent years. The rate was raised by 4.8 cents early in the term of O'Malley's predecessor, Gov. Robert L. Ehrlich Jr. (R), then cut by 2 cents as the 2006 election approached. Aides have said O'Malley would like to reduce the levy at least to where it stood when Ehrlich took office in 2003, although how quickly is unclear.

Tuesday's meeting is part of an effort by O'Malley to build consensus for a special session this fall to pass a budget package that could include a 1-cent increase in the sales tax, an increase in income taxes for upper-end earners, a doubling of the cigarette tax and the closing of several corporate tax loopholes -- and the legalization of slot-machine gambling. A property-tax change would also require the approval of a three-member panel made up of the governor, comptroller and treasurer.

Legislative leaders are divided over the wisdom of a special session; some suggest that they can wait until their regular session starts in January to address the projected shortfall in the state's $15 billion general fund for the fiscal year starting in July. But O'Malley again indicated yesterday that he hopes to hold one.

"Keep the early part of November clear for me," O'Malley said in greeting a delegate attending one of several events yesterday in Bel Air, which the governor had declared "Capital for a Day."

During an interview in which he was asked about his plans to cut taxes, O'Malley was circumspect. But he said he intended to push a revenue package that reflects different priorities than those of Ehrlich.

"For the past four years, the policy was one of tax by fee, tax by tuition increase, tax by property-tax increase," O'Malley said. "I believe in a progressive tax code and one that is fair to the working people.''

During a meeting with a group of legislators in July, O'Malley ruled out raising the property tax as part of a solution to the state's budget problems, telling reporters afterward, "I believe that hurts people on fixed incomes."

Aides said O'Malley has looked at expanding eligibility for the earned-income tax credit and at raising the amount that can be claimed, but an aide said no final decision had been made.

Maryland currently allows low-income workers who qualify for a federal earned-income tax credit to claim a state credit equal to 50 percent of the federal break. If the credit exceeds the size of the tax liability, they may be entitled to a refund if they have at least one dependent.

An expansion of the federal credit in the 1990s turned it into the nation's largest anti-poverty entitlement program, according to Maryland legislative analysts.

About 9.5 percent of Maryland tax filers claim the state credit, and about 8 percent claim the refundable version, analysts said. The largest beneficiaries are residents of Baltimore and Prince George's County.

Eligibility differs according to several factors. As of last year, for example, an individual with an adjusted gross income of less than $32,001 would be eligible for the credit if that person maintained a home for a child at least six months of the year.

Maryland's budget problems are largely the result of an income tax cut initiated a decade ago and an education initiative passed by lawmakers in 2002 without new revenue to pay for it. At its current pace, Maryland is projected to be spending about $1.10 for every $1 the government collects in taxes.

O'Malley balanced this fiscal year's budget by tapping nearly $1 billion from the state's "rainy day" fund, a move he said would provide time to search for long-term solutions and to let wounds heal from four years of partisan battles between lawmakers and his Republican predecessor.

Separately, House Appropriations Committee members received a briefing yesterday on spending mandates in the budget that could be eliminated to help ease the shortfall.

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