FROM THE moment of enactment, it was clear that the sweeping federal tax overhaul would have big repercussions for the states. The first step in responding is to get a more specific idea of just how large the impact may be and which taxpayers will bear the brunt. In Maryland, Comptroller Peter Franchot (D) provided a credible first estimate Thursday, in response to a request from Gov. Larry Hogan (R). The bottom line: Maryland state and local taxes go up sharply under the new Republican-drafted law, to the tune of $572.3 million during the first full fiscal year the law is in effect, which begins this October. The state’s share of that would be $392 million. For reference, the state general fund collected $16.7 billion in fiscal 2017; income taxes accounted for roughly half of that.
Most Marylanders — 68 percent — will see no change in their state and local taxes, and 4 percent will get a cut, according to the report. The 28 percent who pay more will generally consist of middle- and upper-middle-income households. Many such taxpayers itemize their deductions under current law but would have an incentive to take the new, larger federal standard deduction ($24,000 for a married couple filing jointly). Under Maryland law, anyone who takes the federal standard deduction must also take the state’s standard deduction on their state return — but that has not been increased. A fix to this and other new wrinkles, such as the elimination of federal personal exemptions, which were previously incorporated into Maryland’s tax code, must be found if Mr. Hogan’s promise of no net state tax increase for anyone is to be kept.
Mr. Hogan said Thursday that the way to do that is to permit people to continue itemizing on their state returns even if they don’t do so at the federal level. It might work — while making filing a lot more complex. For their part, Democratic leaders in the General Assembly seem to have had second thoughts about spending some or all of the windfall for state programs, and they have come up with proposals to return much of the revenue to taxpayers. Del. C. William Frick (D) of Bethesda, who is also running for Montgomery County executive, proposes establishing a nonprofit charity for the public schools, to which people could donate in return for a state tax credit. Whether the Internal Revenue Service would enable such a workaround by giving the new entity federal tax-exempt status, and how state politicians would allocate the “charity” among various jurisdictions, are major questions.
Maryland politicians now face the politically fraught job of rewriting the state tax code in an election year. It’s a job they didn’t ask for, but they are going to have to tackle it nonetheless, for the sake of basic democratic accountability. The alternative would be to let the Republican federal tax plan impose higher state taxes on about a quarter of Marylanders — which is the sort of thing that should never happen by accident.