Mind the Gap
Who will pay $200 million a year to close Maryland's deficit?

Monday, March 17, 2008

MARYLAND LAWMAKERS are wrestling with the consequences of their slapdash move late last year to single out computer services firms by whacking them with a 6 percent sales tax. The levy, approved with virtually no debate, hearings, consultation or forethought, is almost without precedent in other states, and there is good reason to think that it will drive businesses out of Maryland if it goes into effect July 1 as scheduled.

The tax should be repealed, as Gov. Martin O'Malley (D) finally acknowledged on Thursday. The question is how to compensate for the $200 million in annual revenue that it was to yield at the expense of computer programmers, installers, repair companies and other specialists.

Of course, one answer is to slash state spending. But since last summer, more than $1 billion in anticipated expenses already has been eliminated, a consequential amount in the context of the general fund for next year of under $16 billion. A Republican proposal for further budget cuts was defeated.

Any initiative to close the $200 million gap will be painful. The least bad option is to do what the legislature balked at doing when it was overhauling the state's tax code in December: impose a genuinely progressive state income tax. A Democratic bill under consideration in Annapolis would apply a 6 percent state income tax for residents making more than $750,000 and a 6.5 percent rate for taxable income of $1 million or more, compared with 5.5 percent now. Under that scheme, a taxpayer making $1.5 million annually might pay an extra $5,600 a year (taking into account deductions and exemptions) through 2013, when the surcharge would be scheduled to end.

The higher taxes, which would go most of the way toward raising the necessary $200 million annually, would apply to perhaps 12,000 taxpayers around the state, of whom as many as 5,000 live in Montgomery County. That has given some Montgomery lawmakers cold feet and drawn opposition from County Executive Isiah Leggett (D). But Montgomery officials offer no politically viable alternative. Mr. Leggett would prefer to raise the state's gas tax, but that's a non-starter in Annapolis.

Granted, taxpayers who clear $1 million a year make a convenient target. But an increase in the income tax is preferable to arbitrarily soaking the computer services industry, which is one of the state's most promising avenues for economic development.