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Md. Lawmakers Approve Tax Package
Slots Legislation Squeaks Through

By John Wagner
Washington Post Staff Writer
Tuesday, November 20, 2007 2:34 PM

Maryland lawmakers early this morning passed about $1.4 billion in annual tax increases and a public referendum on legalizing 15,000 slot machines as a far-reaching special session of the General Assembly hurtled to a close.

Passage of the bills is intended to solve two long-festering issues: chronic budget problems created by passing a landmark education law five years ago without funding to pay for it and the perennial debate over slot machine gambling.

Before adjourning at 2:36 a.m., lawmakers had sent two bills needed to execute a referendum on slots to Gov. Martin O'Malley (D), as well as another two tax bills and a measure to offer health insurance to 100,000 poor and uninsured adults without Medicaid coverage.

Lawmakers also approved legislation directing O'Malley to trim spending in next year's budget by about $550 million, including slowing the growth in education spending.

"You've got to give Governor O'Malley a lot of credit for going out and, in essence, leading with his chin," said House Speaker Michael E. Busch (D-Anne Arundel), who advised against holding the high-stakes session. "The governor took it all on his shoulders, and the legislature pretty much followed. . . . We've basically, in my estimate, taken a full legislative year of work and condensed it into 20 days."

Republican leaders said the session was more likely to remembered for its frantic pace and for what would arguably be the largest tax increase in Maryland history. Legislation expected to be given final passage before adjournment included increases in sales, corporate income, tobacco and vehicle titling taxes, as well as an overhaul of the personal income tax system that would result in high-end earners paying more.

"Common sense and reason went out the window just to give the governor a victory," said Senate Minority Leader David R. Brinkley (R-Frederick). "I think this whole thing has been a debacle, and taxpayers are stuck holding the bill."

Although the increase in tax revenue would be the state's largest in terms of total dollars, taxes were raised by a far greater percentage in the late 1960s. From 1967 to 1968, taxes paid by Marylanders went up by more than 30 percent; the legislation expected to pass last night would increase taxes less than 10 percent, legislative analysts said.

Major bills pushed by O'Malley cleared the Senate more than a week ago, but House leaders struggled to round up votes for several bills, and at times last week, the session seemed close to unraveling.

Momentum emerged in recent days, however, as the House passed a pair of bills needed to execute a proposal by O'Malley to hold a referendum next November on legalizing slots at locations in Baltimore and in Allegany, Anne Arundel, Cecil and Worcester counties.

The second bill, which provided details needed to implement a slots program, passed at 1:40 a.m. yesterday, garnering 71 votes, the minimum needed for passage in the House.

O'Malley proposed letting voters decide as a means of resolving an issue that paralyzed the legislature during much of the tenure of former governor Robert L. Ehrlich Jr. (R). After heavy lobbying, O'Malley was able to persuade enough anti-slots delegates to back a referendum to ensure passage in the House, which has been far less receptive than the Senate to proposals to expand gambling.

Both tax bills squeaked through the Senate by narrow margins, with Republicans mounting a filibuster that took the Democrat-led chamber three votes to break.

Before convening last night, fiscal leaders from the House and Senate met informally to work through a few dozen differences between tax plans that had been passed by the two chambers.

Senate leaders insisted on raising the state's top income rate no higher than 5.5 percent from its current rate of 4.75 percent. O'Malley had proposed 6.5 percent, and the House plan included a top rate of 5.75 percent. The new top rate has been a major concern for leaders in Montgomery County, which is home to more high-end earners than any other Maryland jurisdiction.

House leaders acceded to the Senate on the issue, and senators agreed to several other components of the House income tax plan intended to make the levy more progressive. The House plan, for example, increases the personal exemption that can be claimed by lower- and middle-income taxpayers by as much as $800.

The small group of lawmakers also sought to resolve one of the peskiest issues of the session: whether to expand the sales tax to services that are currently exempt.

O'Malley proposed, and both chambers agreed, to raise the sales tax rate from 5 percent to 6 percent. O'Malley also proposed applying the tax to several exempt services, including health clubs, tanning salons and property management. Those services were changed multiple times in alternative proposals developed by both chambers.

The only service agreed to yesterday by House and Senate fiscal leaders was computer services -- largely because of the nearly $200 million a year in estimated revenue it could generate.

"We feel a little trapped because of the amount of money involved," said Sheila E. Hixson (D-Montgomery), chairman of the House Ways and Means Committee.

Computer services that would be subject to the tax include consulting and programming help, as well as software installation and hardware maintenance. Legislative analysts said at least nine other states tax computer services. The group of legislators agreed to revisit the issue in five years to determine what effects the tax has had.

The group also compromised on raising the corporate income tax from 7 percent to 8.25 percent. The House plan had increased the tax to 8.75 percent; the Senate plan had raised the rate to 8 percent.

The group agreed to drop a House plan to increase the tax on hotel stays from 5 percent to 7.5 percent. Sen. Ulysses Currie (D-Prince George's), chairman of the Senate Budget and Taxation Committee, said raising the tax would send a negative message to hotels planning to open at the National Harbor project in his county.

The legislature also passed the largest expansion of Medicaid in Maryland in years. Middle-class residents who cannot afford insurance also would be helped with state subsidies to small businesses that offer coverage to employees.

The package, pursued by health advocates for years, came close to passage during the session last winter. But it was blocked over concerns that new spending would be irresponsible without a budget solution.

The proposal will expand Medicaid over four years, first to parents with incomes of less than $20,000 for a family of three, then to adults without children.

Although O'Malley got most of what he wanted from the legislature, some of his proposals died during the session, including some aimed at providing targeted tax relief.

Lawmakers balked at O'Malley's plan to roll back the property tax rate by 3 cents per $100 in assessed value. They rejected his plan to provide a $50 sales tax rebate to low-income families and did not act on his proposal to double the personal income tax exemption for the elderly to $2,000.

Legislators also scrapped an O'Malley proposal to peg the gas tax to rising costs of highway and transit construction. Instead, they directed a larger portion of the sales tax to the state's transportation trust fund, which is projected to grow by about $400 million a year under legislation passed this morning.

Staff writers Lisa Rein and Ovetta Wiggins contributed to this report.

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