By John Wagner
Washington Post Staff Writer
Thursday, September 20, 2007
Gov. Martin O'Malley yesterday proposed the first major overhaul of Maryland's income tax brackets in 40 years, offering what he called a "more progressive" system in which high-end earners would pay more but the majority of filers would get at least a modest tax cut.
The proposal was announced at the first in a series of events that O'Malley (D) has scheduled in coming days to outline his plan to address a projected $1.7 billion budget shortfall. The governor said the income tax component of his plan would net the state $163 million a year, even though 95 percent of filers will have a reduced tax burden.
"Working families will actually be treated much more fairly than they have been in the past," O'Malley told reporters at the event, which was held at the home of a middle-income family in Baltimore County.
The plan was panned by Republicans and by some Democratic leaders in Montgomery County, the jurisdiction in which the largest number of taxpayers would contribute more -- although O'Malley aides said that about nine out of 10 residents would benefit from the proposal.
"We must be very cautious that we're not asking people to go live in other jurisdictions, where taxes are not as high," said Sen. Rona E. Kramer (D), chairwoman of Montgomery's Senate delegation. "Northern Virginia is a very appealing place, and it's right across the river."
O'Malley's plan would add two brackets to Maryland's essentially flat tax structure, in which everyone with $3,000 or more in taxable income pays the same top rate of 4.75 percent -- which O'Malley called "patently unfair."
A 6 percent bracket would be applied to single filers with a taxable income of $150,000 or more and to married couples filing jointly with a taxable income of $200,000 or more. A 6.5 percent bracket would be applied to all filers with $500,000 or more in taxable income. Taxable income refers to a filer's income less certain deductions and exemptions allowed by the government.
O'Malley's plan would also apply lower marginal rates to the first $15,000 in taxable income for single filers and to the first $22,500 for joint filers. And O'Malley would expand a tax credit that benefits lower-income workers.
As a result, O'Malley said, the typical single filer earning less than $185,000 and the typical joint filers earning less than $250,000 could expect a reduction in income taxes. Statewide, 3.7 percent of taxpayers would pay more, and 1.3 percent would pay the same amount, O'Malley said.
Under examples provided by O'Malley's office, a single person making $75,000 annually would save $90 a year in income taxes. A married couple making $750,000 would pay an additional $7,028.
House Minority Leader Anthony J. O'Donnell (R-Calvert) called the plan "a historic beating up on Marylanders through the income tax," noting that the top marginal rate would increase by nearly 37 percent.
Montgomery leaders who objected to the plan noted that Maryland is one of a few states that allow counties to impose a separate income tax, ranging from 1.25 percent in Worcester to 3.2 percent in Montgomery and Howard. Prince George's County levies a 3.1 percent income tax.
Under O'Malley's plan, Montgomery residents in the highest bracket would pay a combined state-county rate of 9.7 percent, which County Executive Isiah Leggett (D) said yesterday is "not acceptable."
"We're prepared to do our share and certainly help, but we also have to be fair," he said. "This is asking an awful, awful lot from the taxpayers of Montgomery County."
In 2005, nearly half of the returns from people earning more than $500,000 in Maryland were from Montgomery, according to the comptroller's office.
The combined rate of 9.7 percent would also exceed the current top marginal rates in the region. In Washington, the top rate is 8.5 percent; in Virginia, 5.75 percent; and in Delaware, 5.95 percent.
Maryland would not be alone in imposing higher rates on upper-income earners. California, for example, applies a rate of 10.3 percent on incomes of more than $1 million.
And the opposition from Montgomery is not universal. Past efforts to make Maryland's tax code more progressive have been initiated by Montgomery lawmakers, whose liberal sensibilities are sometimes at odds with the economic interests of some of their constituents.
"Will there be concerns? Undoubtedly, and we're certainly going to have to look at them," said Sen. Richard S. Madaleno Jr. (D-Montgomery). "But I think the majority of the delegation supports the governor and the concept of what he's trying to do here, which is make the tax code more progressive."
Senate President Thomas V. Mike Miller Jr. (D-Calvert) said all areas will have to sacrifice for the state to close the projected $1.7 billion shortfall in the budget for the 2009 fiscal year that starts in July.
"Every jurisdiction needs to contribute something," Miller said.
House Speaker Michael E. Busch (D-Anne Arundel) said that he is willing to hear concerns from all parts of the state. But, he said, "to the governor's credit, he's trying to come up with a comprehensive plan that takes into account the concerns of middle-income and working-class families."
Maryland's income tax structure has undergone few changes since 1967, when the U.S. median family income was $7,933 a year. One of the last significant changes started a decade ago, when the top marginal rate was gradually cut from 5 percent to 4.75 percent. That move is considered a source of Maryland's current budget woes.
O'Malley said that he will publicly announce other components of his plan this week and next. An event touting the property tax cut is scheduled this morning in Howard County.
O'Malley aides said yesterday that the reduction in the property tax will disproportionately benefit residents of Montgomery and other wealthy jurisdictions.
O'Malley is pushing legislative leaders to convene for a special session on his plan by early November.
Staff writer Ann E. Marimow contributed to this report.
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