By Philip Rucker
Washington Post Staff Writer
Tuesday, January 1, 2008
Maryland will begin implementing the largest tax increase in state history today, when higher tobacco, vehicle titling and corporate income taxes and sweeping changes to personal income tax rates go into effect.
The overhaul of Maryland's tax structure, which became law in November after a frantic special legislative session, will generate new revenue to help solve the state government's festering budget problems. Lawmakers also passed legislation requiring about $550 million in budget cuts. The cuts and new tax revenue are expected to close a projected budget deficit of at least $1.5 billion next fiscal year.
In addition to helping balance the budget, the new taxes will raise $400 million more a year for transportation improvements, expand access to government-subsidized health care and help fund efforts to clean up the Chesapeake Bay.
House Speaker Michael E. Busch (D-Anne Arundel) said the additional $1.4 billion in annual tax revenue is required to maintain the level of state services.
"I don't know that anybody feels good about it," Busch said. But, he said, "it was a necessary step to take."
Republicans are trying to block the new taxes in court, contending that the Senate adjourned for too many days without proper consent of the House -- an argument Democratic legislative leaders and the state attorney general's office say is frivolous. A Carroll County Circuit Court judge has scheduled the next hearing in the lawsuit for Friday.
Progressive changes to the personal income tax structure will affect the state's wealthiest residents, many of whom live in Montgomery County, and provide a modest break for low-income residents.
Under the previous structure, residents paid a flat rate of 4.75 percent on all taxable income above $3,000. Under the new structure, single filers reporting more than $150,000 in taxable income and joint filers reporting more than $200,000 in taxable income will be taxed at gradually higher rates. The top rate of 5.5 percent will be applied to single and joint filers with taxable income of more than $500,000.
Meanwhile, the personal exemption will increase from $2,400 to $3,200 for individuals reporting taxable income below $100,000 and joint filers reporting taxable income below $150,000. The exemption will gradually decrease to a minimum of $600 for the highest earners.
The state sales tax will increase Thursday from 5 percent to 6 percent. That will make Maryland's rate equal to those of West Virginia and Pennsylvania but higher than those of the District and Virginia, which have sales tax rates of 5.75 percent and 5 percent, respectively, and of Delaware, which does not have a sales tax.
An expansion of the sales tax to include computer services, one of the more controversial measures to pass the special session, will not take effect until July 1. The General Assembly, which convenes next week, could consider repealing the law. Business groups, technology associations and computer executives oppose the tax and say they were caught off guard by its swift passage.
Comptroller Peter Franchot (D), the state's chief tax collector, whose office is responsible for instituting the changes, said he is lobbying lawmakers to repeal the tax on computer services.
"We're urging them to take another look at this particular component of the tax package," Franchot said. "But otherwise, the General Assembly and the governor have established a tax policy and our job is to enforce it, and we're doing that vigorously."
Franchot said his office has undertaken an extensive public education campaign to inform the state's approximately 200,000 businesses of the tax changes to ensure they are prepared by today.
"Will there be some glitches? I'm sure there will be some," Franchot said. "But there's been a lot of preparation that's gone into the implementation of what the legislature and the governor passed."
Maryland's tobacco tax will double, from $1 to $2 a pack of cigarettes. Revenue from this tax will help expand Medicaid to provide health care to low- and middle-income residents who cannot afford insurance.
The tobacco tax increase, coupled with a statewide smoking ban to go into effect Feb. 1, will make Maryland a leader nationally in creating laws to combat the public health effects of smoking, said Vincent DeMarco, president of the Maryland Citizens' Health Initiative.
"It really is very, very significant step for Maryland," DeMarco said. "It's a great public health victory for Maryland."
The corporate income tax will increase from 7 percent to 8.25 percent.
Meanwhile, the vehicle excise tax rate will increase from 5 percent to 6 percent. The law allows a reduction in the amount subject to the tax by the full value of a buyer's trade-in vehicle.
The new reduction could mean that residents who purchase cars with a trade-in pay less in taxes despite the overall increase of the excise tax, said Peter Kitzmiller, president of the Maryland Automobile Dealers Association.
"In many cases, they may be paying less when the rate goes to 6 percent than they were at 5 percent, if they have a vehicle to trade in," Kitzmiller said.