Nearly 3 in 10 Maryland taxpayers would owe more in state and local taxes as an unintended consequence of the federal tax overhaul, a new analysis shows. But both Gov. Larry Hogan (R) and Democratic legislative leaders have vowed to find ways for them to be able to keep that money.
Hogan on Thursday announced legislation that would allow taxpayers to continue claiming deductions on their state returns, even if they no longer itemize deductions on their federal returns.
Under state law, only residents who itemize deductions on their federal returns can itemize deductions on their state returns. Congress doubled the standard federal deduction in an effort to make taxes simpler, so that fewer people would seek to itemize deductions.
“Marylanders will not pay one cent more in state taxes as a result of the actions on the federal level,” Hogan said at a news conference. “Our legislation makes sure this money will remain in the pockets of hard-working Maryland families and small-business owners.”
The federal tax overhaul also eliminated personal exemptions on federal returns, but it’s unclear whether Marylanders could continue claiming those in their state filings, state officials said Thursday.
In addition, according to a report released Thursday by Comptroller Peter Franchot (D), more than 500,000 Marylanders will lose some federal tax benefits because of a new $10,000 cap on deductions for state and local taxes.
The Democratic leaders in the state legislature have proposed their own way to address the latter issue: Allow taxpayers to receive a state tax credit for donating to a new, state-run charity that would fund public schools. It’s an idea that is gaining traction in several states hit hard by the cap on the state and local tax deductions.
Hogan, however, said the proposal seemed like a “tax scam” that may not work.
The new U.S. tax code takes effect this year for the returns due by April 2019, and taxpayers and governments are scrambling to figure out how it will affect them.
Franchot’s office analyzed 2014 tax returns to detail how the U.S. Treasury’s loss from the tax cut could be Maryland’s gain.
The federal government stands to lose about $2.8 billion of Maryland earnings, the report said, while state and local governments will receive nearly $450 million more annually. The analysis did not examine the impact on taxpayers after 2025, when the tax cuts are set to expire.
The comptroller’s office estimated that 71 percent of Maryland taxpayers would pay less in federal taxes next year, while 13 percent would pay more and the remainder would see no change.
Two-thirds would pay about the same in Maryland taxes, but 28 percent would pay more and four percent would see a cut.
“The majority of Marylanders are going to benefit from this tax legislation, at least in the short term,” Franchot said.
In their tax legislation, Senate President Thomas V. Mike Miller Jr. (D-Calvert) and House Speaker Michael E. Busch (D-Anne Arundel) are proposing to lower the threshold on taxing inheritances left by wealthy residents, while the federal government plans to increase the amount of inheritance that can be exempt.
Their bill also would clarify that Marylanders could claim personal exemptions on state tax returns.
Hogan said he agrees on personal exemptions, but does not view the estate-tax issue with the same urgency.
The governor said Thursday that five of his advisers — all former lawmakers — would negotiate with lawmakers on how to address state taxes and a spike in health insurance premiums.
Taxes are a signature issue for Hogan, who won in an upset in 2014 after campaigning heavily on the idea that Maryland residents and businesses were giving up too much of their earnings to the government. He is seeking a second term in November.
“We simply cannot afford to slam our state into reverse and return to the days of burdensome, crippling tax hikes,” Hogan said.
Here are more highlights from the comptroller’s office on winners and losers in the federal tax overhaul:
●Of the 71 percent of Marylanders set to get a federal tax cut, they will save $1,741 on average. That ranges from savings of $268 for those making under $25,000 to nearly $50,000 for millionaires.
But a quarter of millionaires in the state are looking at an average tax hike of $130,000. And nearly 300,000 Marylanders who make less than $100,000 would see their federal tax bill go up.
●In all, nearly 800,000 would pay more in state and local taxes, which amounts to an average tax increase of $523. Wealthier taxpayers are the most likely to see the increase.
More than half of people making more than $250,000 would be subject to higher state and local taxes, compared to about a fifth of people making less than $50,000 and a third of those making between $50,000 and $100,000.
●The boost to the federal standard deduction would strip a financial incentive to give to charity, because fewer taxpayers will itemize such gifts on their returns.
The comptroller’s office says that 574,000 who itemized charitable donations gave $1.5 billion in 2014 — and are likely to switch to the standard deduction.
“These charitable organizations are going to find it much more difficult to raise funds for critical programs,” Franchot said.