Maryland Senate Democrats have coalesced around a plan to jettison Gov. Martin O’Malley’s array of proposed tax increases on six-figure earners in favor of a simpler, but no less controversial, across-the-board hike to Marylanders’ personal income taxes.
A majority of the Senate’s Budget and Taxation Committee, which could vote on the plan as early as this week, said in interviews Friday that they have felt too much public resistance to O’Malley’s (D) plan to cut the state’s structural deficit by capping personal deductions and exemptions for residents making $100,000 or more.
O’Malley’s proposal has been derided by homeowners groups and lobbyists for real-estate agents and home builders. They have cast it as the first step toward the state doing away with mortgage-interest deductions, widely considered one of the largest financial incentives to homeownership.
Sen. Edward J. Kasemeyer (D-Baltimore County), the budget committee’s chair, said that the panel is working to finalize proposed rate increases and that they would hit high-income earners more than low-income earners.
According to several sources, the committee is likely to propose changes that would amount to roughly a quarter-of-a-percent increase to most residents’ state tax bills, a proposal likely to meet resistance in the House of Delegates, where there is strong support for a plan similar to O’Malley’s.
The Senate’s proposal would add up annually to a couple of hundred dollars in additional taxes for Maryland’s high-middle-income earners and much more for its millionaires and the ultra-rich, according to one estimate. Low-income earners may pay as little as $30 extra a year.
The increase would initially generate more than a half-billion dollars in the first year for the state, or roughly half of the $1 billion projected annual shortfall for much of the remainder of the decade.
That’s more new tax revenue than would have been collected by the state under O’Malley’s plan. But unlike his proposal, the across-the-board approach would not provide additional income for counties, which under the governor’s spending plan would also be required to begin paying for half the cost of county teachers’ pensions.
If the Senate’s plan requires the state to spend part of a tax increase to help counties offset the new pension costs, it’s unclear how much may remain to put toward the state’s shortfall of roughly $1 billion next year — meaning deeper cuts may also be necessary.
In the House, where lawmakers also say O’Malley’s plan would have taxed too many middle-class families, legislators are homing in on a plan that would phase in deduction and exemption restrictions at higher incomes: $150,000 for single earners and $250,000 for married couples.
“We’re still pretty much in the posture of, on our side, looking at high-end tax-rate increases,” said Speaker Michael E. Busch (D-Anne Arundel).
“I think it’s a tough sell to ask many of the working-class families in the state of Maryland, the vast majority of Marylanders, to pay more right now when they see their energy costs escalating and their consumer dollar not going quite as far,” Busch said.
Politically, a broad-based income-tax increase would also undercut O’Malley’s efforts to echo President Obama’s call to make the rich pay a “fair share” to balance government budgets. It could also give the state what might be perceived as an unwelcome distinction: A quarter-of-a percent increase could put Maryland’s top state-county combined tax bracket near 9 percent, among the highest nationwide.
The Senate plan is based on a bill introduced by Sen. Roger Manno (D-Montgomery), a member of the budget committee. The plan has gained traction among his colleagues as a fairer approach and as a message easier for lawmakers to explain. Even though Maryland’s income-tax code was altered to be more progressive five years ago, Manno’s bill is titled as a “repeal” of the legislature’s 1997 quarter-percent tax cut.
Rick Abbruzzese, an O’Malley spokesman, said Friday that the governor still thinks his proposal is the best.
“The governor proposed a reasonable, balanced approach to cap deductions in a modest way,” he said. According to administration estimates, the governor’s caps on deductions and exemptions would cost most families making under $200,000 annually less than $200.
With a protracted fight over the right income-tax increase likely between Senate and House Democrats, which both have commanding majorities in their chambers, the legislature may not have enough time to agree on O’Malley’s proposals to increase the state’s gas tax, “flush” tax and other initiatives.
Bonnie Casper, president of the Greater Capital Area Association of Realtors, said she was hopeful that the deductions measure is dead. “We’re cautiously optimistic, but it is not over until the last out of the last inning,” Casper said, adding that the issue was bigger than the small tax increases that some taxpayers would have seen. “People are quibbling about numbers, but this is not really a numbers issue. It is bad economic policy.”
Staff writer Michael Fletcher contributed to this report.