Analysts Warn Proposed Tax Hikes Could Hurt Maryland’s Competitiveness

Published January 1, 2008

Tax hikes proposed by Maryland Gov. Martin O’Malley (D) would send tax burdens up and business competitiveness down, according to economist Curtis Dubay of the nonpartisan Tax Foundation, based in Washington, DC.

“Lost in the rush to increase taxes is the crushing impact these tax increases will have on Maryland’s competitiveness,” said Dubay. “Maryland’s increased tax burden and less-competitive business tax climate will severely lessen the state’s ability to attract new or expanding businesses and their jobs.”

O’Malley formally presented his budget proposal October 30. The proposal calls for:

  • raising the sales tax to 6 percent from 5 percent;
  • boosting the top income tax rate to 6.5 percent from 4.75 percent;
  • doubling the cigarette tax to $2 a pack;
  • hiking the state corporate income tax one percentage point to 8 percent; and
  • increasing the gasoline tax 12 cents to 35.5 cents a gallon.

The additional taxes are projected to raise about $1.5 billion, and the budget would include about $500 million in savings by reducing the projected rate of spending growth to cover a $1.7 billion deficit in the $30 billion budget. O’Malley also proposes about $350 million in new spending on higher education and transportation.

‘Cost of Delay Too Great’

“We have put together a comprehensive, long-term solution to the state’s structural deficit,” said O’Malley in a statement. “Under the leadership of Senate President [Thomas V. Mike] Miller and Speaker [Michael E.] Busch, I am confident that members of the General Assembly will come together to move our state forward. The cost of delay is simply too great for us not to take action.”

Miller and Busch, both Democrats, represent Calvert and Prince Georges Counties and Anne Arundel County, respectively.

O’Malley’s budget office estimates the governor’s package would result in 83 percent of Maryland citizens paying less overall to the state.

Increase Is No Cut

Budget watchdogs scoff at that claim.

“It’s amazing how the governor is selling what would be the largest tax increase in Maryland history as a tax cut,” said Christopher Summers, president of the Maryland Public Policy Institute. “He wants to raise gas taxes, sales taxes.

“One of the most dangerous things he wants to do,” Summers continued, “is take what is pretty much a flat state income tax and impose a top-tier income tax to make the rich pay their ‘fair share.’ I think he should be made to say what is fair.”

The proposed top-tier tax brackets of 6 percent and 6.5 percent would kick in at incomes of $200,000 and $500,000, respectively, for couples.

Maryland’s combined state and local tax burden is 10.8 percent of personal income, making it the 23rd heaviest burden in the country, according to Dubay. If the full O’Malley plan were implemented, according to the Tax Foundation analysis, the burden would rise to 11.5 percent, making it the 11th highest burden in the country.

From Surplus to Deficit

The Maryland Taxpayers Association notes two years ago, under Gov. Robert Ehrlich (R), Maryland had a $1 billion surplus. State spending has climbed 18 percent in the past two years.

Much of O’Malley’s plan hinges on slot machine gambling. By 2012 O’Malley envisions $700 million in annual revenue from that source to fund continued spending increases for higher education, transportation, and Medicaid.

“The problem we face is that since 2006, the state has been outspending general fund revenue,” said Delegate Steven Schuh (R-Anne Arundel County). “We’re drawing down on fund balances. Based on current trends, we project a $1.7 billion shortfall in the 2009 budget. We expect revenue to be up 4.9 percent and spending to increase 8.5 percent.”

Tax Hikes ‘Unnecessary’

“These tax proposals are unnecessary,” Schuh said. “All we need to do is slow spending increases to 3.5 percent for the next two years and combine that with substantial upfront payments by slots operators. That’s the Republican alternative. It hasn’t a prayer,” he acknowledged, because of the dominance of the Democratic Party, which backs the governor’s plan.

“My constituents are outraged,” Schuh said. “Email and phone traffic are running heavily against. I’ve never had so many constituent complaints.”

“One thing I find amazing is that raising these regressive taxes is going to hit O’Malley’s constituency base the hardest,” said Summers. “He’s soaking his own base. The public needs to wise up and see what this is. Maryland suffers from a spending problem. A debate on spending priorities needs to happen.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow at The Heartland Institute.