The state income tax relief plan that Gov. Harry R. Hughes said would save almost a million Maryland taxpayers a total of $34 million next year will save them only one-third of that amount, according to state fiscal experts.
At his budget briefing two weeks ago, Hughes said his proposal to liberalize the standard deduction on state income tax forms would result in savings for the mostly low-income residents of the state who choose not to itemize their returns. If the $34 million had been divided among these taxpayers, the average savings would have been about $34 for each.
Today, however, William S. Ratchford II, the legislature's director of fiscal services, said the actual savings to the taxpayers who take the standard deduction would be $11 million -- or an average savings of $11 for each taxpayer in the next fiscal year.
In an interview last night, Hughes said that the $34 million figure is the total cost of the relief plan, but only " $10 million to $15 million" would be returned to the taxpayers.
"It may have been misleading," he told reporters in his State House office. "It certainly wasn't intentional at all."
Hughes, who was known as one of the legislature's tax experts while serving as a senator in the 1960s, said he may not have clarified that the $34 million figure represented the intitial costs of his plan, not the savings.
"It's true that does not mean direct tax relief of $34 million," he added.
The difference arises through the amount of money the state withhold from paychecks. Many taxpayers have complained that the state withholds more than necessary from each paycheck. Taxpayers do not lose that money because they get it back the following year in the form of a tax refund.
To reduce that excess, the state plans to revise the amount of taxes it withholds from paychecks. In the first year the state will "lose" $23 million it has been collecting and holding until refunds are due.
In the long run, the taxpayer would not benefit, however. Lower withholding rates would give him more spending money in each paycheck, but his tax refund would decrease by a corresponding amount.
Specifically, if a steelworker pays $1,000 a year in income tax and has $1,200 a year withheld from weekly paychecks, he will receive a refund at the end of the year of $200.
If the state revises its withholding tax schedule and takes out only $1,150 -- while keeping the liability at the same level -- the steelworker will have an extra $50 to spend during the year but will receive $50 less in the form of a refund.
"The only benefit is in the cash flow," explained George Spriggs, chief of the state's income tax division. "The state would recoup the difference in the following year."
When Hughes unveiled his tax relief program Jan. 18, he said his plan to raise the maximum deduction from $500 to $1,500 for individuals and from $1,500 to $3,000 for families would end up costing the state $34 million.
He left the press believing after an hour-long briefing that taxpayers would receive $34 million in tax relief benefits.
The next day, he reviewed the program again in his State of the State message, telling members of the General Assembly, "So long as I am governor, Maryland's citizens will be told the fiscal not the figurative truth."
Several legislators who have been pressing for income tax relief over the years were concerned over the actual savings in Hughes' plan. Del. Gerard Devlin (D-Prince George's), who first learned of the savings in a briefing with Ratchford Tuesday, said he was "a little surprised."
"I though it was a little more meaningful tax relief," he said yesterday. "This (Hughes' package) means people are going to get a buck or two more each week and [less] at the end of the year when they were planning to use their refund for a vacation in Ocean City or a new car."