Md.'s Richest May Profit From Tax Cut
Washington Post Staff Writer
Saturday, March 6, 1999; Page A1
At the request of a generous philanthropist and campaign donor, Maryland lawmakers have proposed a tax cut that would apply to about 700 of the state's richest residents at a potential cost of millions of dollars a year in lost revenue.
The bill was written as an incentive for retirement-home mogul John C. Erickson, who moved from Maryland two years ago to avoid paying several million dollars in state capital gains tax. Erickson chose to establish residency in Florida, a state that does not tax capital gains, before selling off extensive real estate holdings.
But Erickson has told Maryland lawmakers that he would consider returning to the state if the legislation passes, providing a significant tax break to residents who realize annual capital gains income of at least $1.3 million. He has warned that the charitable foundation bearing his name would begin focusing more on causes in his new home town of North Palm Beach, Fla., if he remains much longer in his adopted home state.
"It is a big tax break for rich people, but these are rich people with foundations [that] do philanthropic work in Maryland," said state Sen. Barbara A. Hoffman (D-Baltimore), who is sponsoring the bill at Erickson's urging. "Rich people have a place in our society. In fact, it's good if we can get them to be Maryland residents. There's nothing wrong with being rich."
At a time when Maryland has offered $58 million in incentives to the Marriott Corp. to keep the company from moving to Virginia, Erickson's requested tax cut has struck some lawmakers as more financial assistance for those who need it least.
"These are millionaires and, in many cases, multimillionaires," said Sen. Paul G. Pinsky (D-Prince George's). "For the state to underwrite these transactions is absurd. It's eating truffles at the public trough."
The legislation passed the Senate last year but died in the House without a powerful shepherd. This year, however, Rep. Sheila Ellis Hixson (D-Montgomery), the House Ways and Means Committee chairman, is carrying the bill on the House side. House Speaker Casper R. Taylor Jr. (D-Allegany) spoke favorably about the idea last year. Since then, Erickson contributed $2,400 to Taylor's reelection campaign.
"We're doing it from an economic development standpoint," said Hixson, who said the state budget surplus made her reconsider her opposition to the bill. "I'm not sure it's going to do all the things we hope, but statistics show that these people contribute much more to the state when they are treated this way."
Hoffman and others say the legislation is part of a much-needed reform of Maryland's burdensome tax code, which is driving away wealthy individuals who support the state tax base and use their disposable wealth to improve the community.
Erickson has donated generously to the Archdiocese of Baltimore and the University of Maryland Baltimore County, where the Erickson Foundation is spending $14 million to build much-needed student dormitories. He has also given $4,400 to Gov. Parris N. Glendening (D) and $500 to a slate committee charged with electing Democratic senators.
"Money tends to go where you go," said Erickson, whose company Senior Campus Living LLC is about to break ground on a huge project in Silver Spring called Riderwood Village. "So Florida would be the beneficiary of that money. The application [of this tax break] is that I would consider moving back."
Maryland is one of 24 states that tax capital gains profits generated by the sales of stock, businesses or property as regular income after phasing out a credit during the financial crises of the early 1990s. The District and Virginia tax capital gains the same way.
The new law would cap capital gains taxes that qualified taxpayers would pay to state and local governments at $104,000. To get the break, a taxpayer must realize at least $1.3 million in capital gains in a tax year through the sale of stock or an out-of-state business.
According to 1998 estimates, about 705 Maryland residents have the personal wealth to qualify for the tax break, more than half of whom live in Montgomery County, where officials are deeply concerned about the potential effect of such a tax cut.
Maryland counties levy their own "piggyback" income tax equal to as much as 60 percent of the state share. By reducing the amount wealthy residents pay in state capital gains tax, Maryland lawmakers also would be squeezing counties, which would have far less to tax. The cap would mean that even in counties with the highest piggyback rates, wealthy residents would never pay more than $104,000 in nonfederal capital gains tax. They still would pay regular income taxes.
The amount of lost tax revenue would vary from year to year, based on the number of residents who sell off stock or property. One state financial analyst compared it to the death tax, which generates varying annual revenue based on the wealth of people who die in a given year. The Glendening administration is waiting for a more detailed fiscal analysis before taking a position on the tax.
Based on 1996 state tax returns, 231 people would have qualified for the tax break, and the state would have lost an estimated $45.8 million. Montgomery officials, basing their projections on the rapid growth of the stock market over the past three years, say the state now stands to lose closer to $100 million. Montgomery alone would suffer a $15 million loss, according to county estimates.
"Where is the cut going?" said Montgomery County Executive Douglas M. Duncan (D), who fears the bill could threaten his own plans to cut taxes. "If they have $100 million statewide, shouldn't they accelerate the income tax cut, which would help middle- and lower-income tax people?"
Margot Williams, Metro resources director, contributed to this report.
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