Category Archives: taxes

House of Delegates Tax Bill Vastly Superior

The Maryland Senate has passed a tax cut that is directed at the top 11.1% of taxpayers. It would reduce marginal tax rates for individual taxpayers who make more than $100,000 and joint taxpayers who make more than $150,000, while the people who earn less than this receive no cut in their rates and get peanuts – or more specifically, money enough to buy a meal at Chipotle.

In contrast, the House of Delegates has passed far superior tax legislation. Instead of focusing the benefits on wealthy Marylanders, the House bill would lower the marginal rates on income earned between $3001 and $100,000 (and up to $150,000 for joint taxpayers). The wealthy would still get a break but this bill, appropriately, directs far more of the benefit to the much-squeezed working and middle classes. Like the Senate bill, the House bill also expands the Earned Income Tax Credit (EITC).

Politically, it should be a no brainer to junk the Senate bill and adopt the House legislation, particularly for Democrats. While maintaining the EITC changes much needed by the working poor, the House bill distributes the tax cut far more widely and equitably. Let’s hope that the House and the Speaker stand firm.

Who Supports the Senate’s Tax Cut for the Wealthy? Bueller? Bueller?

The Maryland Senate passed a cut in marginal tax rates that will only benefit the top 11.1% of Maryland taxpayers. It’s a tax cut that literally gives the wealthy enough to buy a nice iPad but leaves the middle class with barely enough to buy a meal for one at Chipotle (but they only get even that if they have exemptions).

The bill has crossed over to the House of Delegates. Lots of people and groups testified against the bill at the hearing before the House Ways and Means Committee, including:

Maryland CASH Campaign
Maryland Center on Economic Policy
Maryland Nonprofits
Health Care for the Homeless
Maryland State Education Association
Advocates of Children and Youth
Maryland Alliance for the Poor
League of Women Voters of Maryland
MD/DC State Council of SEIU
Maryland Working Families
AFSCME

The following groups also signed on to a letter protesting holding the increase in the Earned Income Tax Credit (EITC) hostage to a tax cut for high earners:

Advocates for Children and Youth
AFSCME Council 3
Baltimore CASH Campaign
Baltimore County Arts Guild
Baltimore Neighborhoods, Inc.
CAFÉ Montgomery
CASA of Baltimore County
Council for Bile Acid Deficiency Diseases
Fuel Fund of Maryland
Health Care for the Homeless
Job Opportunities Task Force
Laurel Advocacy and Referral Services
League of Women Voters of Maryland
Maryland CASH Campaign
Maryland Center on Economic Policy
Maryland Disability Law Center
Maryland Education Coalition
Maryland Nonprofits
Maryland PTA
Maryland State Education Association
Maryland Working Families
NAMI Maryland
National Association of Social Workers, Maryland Chapter
Pain Connection-Chronic Pain Outreach Center, Inc.
Public Justice Center
Progressive Maryland
SEIU Maryland Council
The Way Out Program

So who testified on the bill at the House Ways and Means Committee hearing?

Not Governor Larry Hogan. His office didn’t even bother to send anyone to support the tax cut for the wealthy.

In fact, no one testified in favor of the tax cut. Maybe the House should take that as a hint and shelve it.

Chump Change for the Middle Class

In 2020, when the tax cuts proposed in the Senate bill supported by the Governor and Senate President have been completely phased in, an individual that earns $375,000 will receive enough money annually to be able to pay for this brand new iPad Air 2 with 64GB of storage (price: $524 including tax):

ipadAn individual who earns $50,000 to $100,000 will receive nothing (price $0) unless they have exemptions. For each additional exemption, an individual will be able to buy this Chipotle Chicken Burrito (Barbacoa is too expensive) along with Chips and Guacamole:

chipotle1Good news! This middle-class taxpayer will also be able to buy a large coke (total price: $15.68, including tax).

chipotle sodaI suppose the good news is that the 2127 calories are more than enough for one person for the entire day.

Senate Votes Tax Cut for the Wealthy

The Maryland Senate has adopted a bill that provides significant tax cuts for wealthy Marylanders.

Marginal Tax Rates

Changes in marginal taxes rates for individual taxpayers:

First, there is no change in the lower rates:

2% on income of $1 through $1000
3% on income on $1001 through $2000
4% on income on $2001 through $3000
4.75% on income on $3001 through $100,000

All of the change is in the higher brackets:

Rates were previously set at 5% on income $100,001 through $125,000. The Senate bill reduces them to 4.975% in 2016, 4.95% in 2017, 4.925% in 2018, 4.90% in 2019, and 4.875% after that.

Rates were previously set at 5.25%  on income $125,001 through $150,000. The Senate bill reduces them to 5.20% in 2016, 5.15% in 2017, 5.10% in 2018, 5.05% in 2019, and 5.00% after that.

Rates were previously set at 5.5% on income $150,001 through $250,000. The Senate bill reduces them to 5.45% in 2016, 5.40% in 2017, 5.35% in 2018, 5.30% in 2019, and 5.25% after that.

Rates were previously set at 5.75% on income in excess of $250,000. The Senate bill reduces them to 5.725% in 2016, 5.70% in 2017, 5.675% in 2018, 5.65% in 2019, and 5.60% after that.

Changes in marginal taxes rates for joint taxpayers are similar except that the brackets are different. Again, there is no change in the lower rates:

2% on income of $1 through $1000
3% on income on $1001 through $2000
4% on income on $2001 through $3000
4.75% on income on $3001 through $150,000

All of the change is in the higher brackets:

Rates were previously set at 5% on income $150,001 through $175,000. The Senate bill reduces them to 4.975% in 2016, 4.95% in 2017, 4.925% in 2018, 4.90% in 2019, and 4.875% after that.

Rates were previously set at 5.25%  on income $175,001 through $225,000. The Senate bill reduces them to 5.20% in 2016, 5.15% in 2017, 5.10% in 2018, 5.05% in 2019, and 5.00% after that.

Rates were previously set at 5.5% on income $225,001 through $300,000. The Senate bill reduces them to 5.45% in 2016, 5.40% in 2017, 5.35% in 2018, 5.30% in 2019, and 5.25% after that.

Rates were previously set at 5.75% on income in excess of $300,000. The Senate bill reduces them to 5.725% in 2016, 5.70% in 2017, 5.675% in 2018, 5.65% in 2019, and 5.60% after that.

Impact of Marginal Tax Rate Reduction

Here is the net change in what individuals will pay at different income levels due strictly to the Senate’s proposed changes in marginal rates:

Tax Changes

As you can see, people who earn $500K will see their taxes go down by $719, while people who earn $100K or less get no break.

Benefits to Lower and Middle Income Marylanders

No doubt its advocates will point out the the bill also increases the value of each exemption from $3200 to $3250 in 2016, $3300 in 2017, $3350 in 2018, and $3400 in 2019. Of course, wealthy people can claim these exemptions too, though they will comprise a lower share of their incomes.

More importantly, the bill will increase the Earned Income Tax Credit (EITC) to the benefit of the poorest set of working Marylanders. So poor Marylanders will pay less in taxes and even see increases in refunds if they owe no taxes.

Bad Legislation

The bill reduces the already modest level of progressive taxation in Maryland’s tax code. The largest gap in the marginal rates was only 1% between low and high income earners. That will decline to 0.85%. The difference in the overall rate (shown in the table) paid by low and high income tax payers will decline by roughly 10%.

Moreover, I don’t see why we need to give wealthy people significant tax breaks in order to increase the EITC. As the economy has picked up, the wealthy have seen the lion’s share of the benefit. Affluent Marylanders hardly need a break not only because they already have more but because they’ve gained a lot lately.

In contrast, working and middle-class Marylanders have seen their earnings stagnate or decline. The money used to give high-end tax payers a break could instead be used to augment the EITC or give a break to middle-income tax payers.

The economic rationale is poor as well. No one who earns $500K a year is going to pick up stakes and move for $700 per year. And the talk about helping the “job creators” is pure hokum. As anyone who took basic economics knows, we’re all “job creators” when we spend money whether rich or poor. Indeed, the poor likely do more to help stimulate the economy precisely because they will spend more of it to meet daily needs.

Who Opposed the Tax Cuts for the Wealthy?

Lee
Madaleno
Manno
Muse
Pinsky
Ramirez
Raskin
Rosapepe

The eight liberal legislators are all are from Montgomery and Prince George’s Counties.

Manufacturers Say Proposed Tax Cuts Hurt Manufacturing

RMIProponents of the manufacturing tax cut pushed by Governor Larry Hogan and many legislators in the General Assembly received major pushback from existing manufacturers. The Regional Manufacturing Institute (RMI) of Maryland has issued a letter with a detailed critique of a proposal for manufacturing tax cuts. Here is a copy of the complete letter from RMI.

Key aspects of the proposed tax cut include (1) a ten-year exemption from state taxes for new manufacturers, and (2) a ten-year exemption of workers in these companies from state taxes who earn up to $65,000. In the version of the bill referenced in the letter, the tax cuts would occur only in special zones designed to attract heavy manufacturing to Maryland.

RMI fears that the proposal would undermine existing manufacturers in the State:

A major unintended outcome will be that Maryland companies will lose workers who would seek positions with companies that qualify for 10 years of no income tax for workers. This would be a serious blow to smaller and medium sized companies that in some areas would put companies out of business. Engineers, machinists, line workers, technicians working in manufacturing would jump at the chance to work for a company and not pay state taxes for 10 years. Maryland has a serious shortage of workers and this would make it worse for existing companies. Companies who employ machinists would be hard hit if the new companies hire machinists.

Instead, RMI suggests an array of incentives to keep existing manufacturing in Maryland and to encourage these manufacturers to move subsidiaries here. Their suggestions include several designed to aid not just the firms but also workers, such as support for training and college tuition for workers and their families. Additionally, RMI supports drug rehab centers with manufacturing training and access to available manufacturers.

Hogan Throws Commerce Secretary Under the Bus

gill with hoganNo longer all smiles between Governor Larry Hogan (center) and Secretary of Commerce Michael Gill (right)

From the Daily Record:

A proposal to create a tax incentive for manufacturers to relocate to Maryland represents a change of course for at least some in Gov. Larry Hogan’s administration.

The governor’s announcement earlier this month reverses a position expressed less than a year ago when Michael Gill, Hogan’s recently appointed secretary of what is now the state Department of Commerce, penned a letter urging lawmakers to focus on existing manufacturing in the state.

But late Friday, after The Daily Record posted online a story referencing Gill’s letter, a Hogan spokesman said the governor was unaware of the letter and that it was not authorized.

“It does not represent the views of the governor,” said Douglass Mayer. “The governor has been a long-time supporter of Governor [Andrew] Cuomo’s effort and program in New York.”

In the words of Cool Hand Luke, “what we’ve got here is a failure to communicate.”

I hope to have more assessment of this tax proposal shortly and look forward to hearing from the Governor what he plans to cut in the budget to fund this proposal. Sen. Roger Manno (D-19) had already planned to introduce a similar idea this session.

What Are You Doing with Your $5.99?

mcdonalds-Quarter-Pounder-with-CheeseAfter buying this McDonalds Quarter Pounder with Cheese ($4.78) with your tax cut, you likely won’t have enough left for fries or a soda.

Gov. Larry Hogan’s budget is remarkable for how little it appears to do, at least at first glance. For a governor who trumpeted his desire to cut taxes, the tax cuts are unexciting:

The proposal would also deliver $36 million in fee and tax reductions this year, partly by speeding up tax breaks already approved by the legislature and partly by making new cuts. . . .

Hogan has described his tax plan as “modest.” Legislative analysts suggest it would reduce revenues by more than $100 million a year when fully implemented.

Modest is indeed the word. This year’s tax cut amounts to $5.99 per Maryland resident based on last year’s population estimates. I suppose it’s a little more exciting at $16.02 per household.

Budget Director David Brinkley said that “Taxpayers would see ‘more money in their pockets.'” Just don’t try to take the family to McDonalds on the savings.

More commendably in uncertain times, the Governor is setting aside much of the projected surplus for savings:

The operating budget leaves about $450 million unspent, even after the state stashes more than 6 percent of its surplus in its ‘Rainy Day Fund.’ Bond agencies recommend saving 5 percent.

On the other hand, the Governor’s budget: (1) raises college tuition by 2%–nearly three times last year’s estimated 0.7% rate of inflation, (2) once again plans foolishly to take public money and give it to private schools, and (3) does not yet include any money for Baltimore to knock down vacant homes.

Independent Transit Authority Proposed for MoCo

At the request of Montgomery County Executive Ike Leggett, the County’s legislative delegation has filed a bill (MC 24-15) to allow the County to create a new, independent Transit Authority. The bill is already generating controversy and an online petition against it on change.org (or, in this case, don’t change.org).

If passed, the bill would permit (read again: permit, not require) Montgomery County to create a Transit Authority. The new authority could potentially run anything from the current Ride-On system to a new BRT (bus-rapid transit) system to parking lots and roads around the County.

The County Executive would appoint the members of the Transit Authority board subject to confirmation by the County Council. This independent body would then carry out independently a transit program as passed by the Council. This program could be relatively narrow (e.g. take over the existing Ride-On system) or broader (e.g. construct and operate a new BRT system).

Taxes and Finances

As written, the bill would allow (again: allow, not mandate) the County to pass a property tax that is designated to raise funds specifically for the Transit Authority. These monies would not count toward the County Charter limit.

Additionally, if transportation expenditures (e.g. Ride-On) are moved over from the County budget, the County could reduce taxes  or spend the money on other needs because they would no longer be counted as within the Charter limit.

Less Different Than You Think

The County already has the power to do much of this through special taxing districts that have the power to construct transit (i.e. make capital expenditures) and raise funds outside the Charter limit. However, special taxing districts cannot operate transit.

Though the Transit Authority might spend monies on building and operating new systems, it would also likely realize some savings elsewhere. For example, a new transit line would likely result in needing to spend less on Ride-On buses.

Advantages

The clear advantage of this proposal is that it would allow Montgomery to take greater control its transportation future. Monies raised in Montgomery would stay in Montgomery. The County could choose to build projects that the State is not ready or able to fund. Ideally, the County would adopt a program that would help reduce traffic and help Montgomery grow.

Ironically, it might conceivably save money at the State level by reducing the need to construct another project elsewhere in the State in order to build the political support needed. Unlike the Montgomery-Prince George’s Purple Line and the Baltimore Red Line, Transit Authority projects would not need to move in tandem with other projects to gain support.

Disadvantages

No one likes seeing their taxes go up. While some would be willing to pay to see the money spent here in Montgomery on transportation, other will undoubtedly oppose anything that allows the County to increase its taxation authority.

Other may view the Transit Authority’s greatest strength–its ability to operate more insulated from politics–as its greatest weakness, perceiving it as less accountable to the public. Tradeoffs like these often exist in government. The Federal Reserve Board operates infinitely better for being independent of Congress and the President but it is also less responsive to the vicissitudes of public opinion.

County Executive and Council influence over transportation would simultaneously increase and decline. It would increase because they could fund and mandate new projects, giving the County much more muscular authority over transit. But the independent authority would be more independent once a funding mechanism is in place and a program adopted.

To Build What

A new Transit Authority would likely be able to move forward with the widely supported Corridor Cities Transitway (CCT) and additional bus-rapid transit lines gradually for the County. BRT is much less costly than light rail (Purple Line) or heavy rail (Metro).

It would almost certainly not be enough to move forward with the Purple Line because that project is just so expensive ($2.4 billion and rising). I am hearing that the Transit Authority would not be intended to build the Purple Line but to move forward with the CCT and other transit improvements.

Of course, I’d like to see numbers so I could figure out what is possible and what is not. This is impossible for the simple reason that the taxation rates and general program of any Transit Authority would be up to the County Council.

Preliminary Thoughts

My initial reaction is that the Transit Authority may well be a good idea. Montgomery County has major transportation needs that should be more broadly addressed. The Authority would provide both the means and the opportunity to do so. Councilmember Nancy Floreen, a former Council President, said that the idea had “a certain amount of sense” when I spoke with her.

People certainly should be interested and make their views known regarding the proposal. But I am concerned that the petition and emails circulating suggest large tax increases that simply are not realistically in the cards. This is a critical issue and we should use the bill as an opportunity to discuss our future–not dismiss it out of hand.

The proposed Transit Authority may well allow Montgomery to  tackle its transportation needs much as similar tax increases in northern Virginia have aided road and transit construction south of the Potomac. No doubt people will want more information. The County Executive should tell us more about why he requested that this bill be filed. At the same time, there is a limit on what can be provided as the County has not begun to debate publicly if and how it would use its new power.

On Taxes, Part III

This three-part series on tax policy concludes with a discussion of stability, purpose and balance. (Read Part I and Part II.)

Stability
Progressive taxes tend to be the most volatile, that is they tend to go up and down with the economy.  When rich people are doing well, they really rake in the cash but the drop off in bad times is precipitous. This outcome is unsurprising as the income of wealthy taxpayers is more sensitive to the performance of volatile assets.

For this reason, the least progressive taxes tend to be the most stable during recessions. While this is an argument against solely relying on taxes on the wealthiest taxpayers, it is not one against progressive taxation. As one senior legislator explained to me, a good way to look at taxes is that they are a portfolio. You have to have a mix of progressive and stable non-progressive tax revenue sources. Spending below the State’s means in good times (i.e. a rainy day fund) is also good insulation against inevitable downturns.

Purpose
The central purpose of taxes is to raise revenue to pay for government services. More broadly, they should be designed to encourage economic prosperity. On occasion, they can also help to encourage or to discourage an activity (e.g. smoking, energy use). Their purpose is not to punish people for doing well—something sometimes forgotten in the new focus on economic inequality.

At the same time, this does not prevent tax policy designed to protect people with lower incomes (i.e. low taxes) or make it easier through spending to make it possible for people who work hard to live decent lives (e.g. health care, earned income tax credits, educational spending).

Balance
Relatedly, part of the danger of increased polarization can be a lack of proportion in approach. Funding government services costs money. Few enjoy paying taxes but they are the price we pay to have police, fire, schools, roads, etc. While the conservative desire to shrink government is perfectly legitimate that desire goes far overboard with those who attack all taxation and view any taxation as virtually illegitimate.

On the other side, some progressives seem to talk about corporations and profits as if both are inherently illegitimate rather than as employers or engines of economic activity. Moreover, the goal of progressive tax policy should not be endlessly higher taxation or to kill economic growth. As former President Bill Clinton loved to remind Democrats, low unemployment was the best anti-poverty program.

On Taxes, Part II

The second in a series on tax policy. (Read Part I here.)

Redistribution at the State Level
Different counties have different per capita tax bases. As a result, it makes sense that school aid to Maryland counties should take wealth into account with the key caveat that each county must raise its fair share of taxes. This is one of the key ideas behind the much-debated Maintenance of Effort law. Poor counties cannot simply pocket aid from the state without raising their fair share in terms of their tax base. Nonetheless, school aid should not be on a simple per student basis.

Additionally, in estimating the amount redistribution between counties or individuals, we need to take into account both taxes and spending. Expenditures on colleges and universities disproportionately help middle-income and wealthy taxpayers.

Redistribution at the County Level
In all the discussion of economic inequality, it often seems lost that the greatest redistribution occurs towards those with children in the public school system. Educational spending takes up an enormous share of county budgets and overwhelms spending in other areas. This is why double-income no kids families are such desirable residents—they contribute a lot in taxes but demand less in the way of services. Sure, we all benefit from having an educated population but paying for it is a transfer from those without to those with kids.

Subsidy Abolition
The competition among states through subsidies for large companies is execrable. Conservatives should hate them because they are economically inefficient and businesses should go where it makes sense. Progressives should hate them for the additional reason that they result in levying higher tax rates on businesses that do not have the leverage to advocate for them. It’s probably just a pipe dream but the states should negotiate a compact to end them.

Internet Taxes
We subsidize businesses located out of state by de facto exempting them from state taxes. (De facto because you’re supposed to pay state and local taxes on these purchases but nobody does.) The effect is that brick-and-mortar stores that actually employ people in Maryland must collect taxes but Internet businesses located elsewhere do not. This makes no sense to put it mildly and is increasingly economically distortive as more business occurs in the form of e-commerce.