Maryland has become the nation’s first state to impose a tax bracket specifically for filers who earn more than $1 million a year. Supporters say the move will bring in more revenue, while opponents say it will do the opposite.
“I call it the ‘Get Out of Maryland Tax Act,'” said economist Stephen Moore, a Wall Street Journal editor and author, with economist Arthur Laffer, of Rich States, Poor States, published a few months ago by the American Legislative Exchange Council.
“Politicians continue to believe they can slay the goose that lays the golden egg, which is wealthy people and business owners,” Moore continued. “Two-thirds of the Maryland residents who will be hammered [by the new tax bracket] are business owners. Most states are trying to cut back on their taxes, and Maryland is going in the opposite direction.”
The new tax rate of 6.25 percent replaces a computer services tax that was approved by lawmakers last year and widely reviled by business interests that paid the bulk of it. Maryland has seven other income tax brackets, starting at 2 percent for incomes up to $1,000 and rising to 5.5 percent on incomes of more than $500,000. State budget officials project the “millionaires” tax bracket will bring in $328.5 million over three years.
Maryland’s Department of Legislative Services has said about 6,300 households filed returns in 2005 with a taxable income of more than $1 million.
Killed Computer Tax
Ed Hale, chief executive of First Mariner Bank in Baltimore, told Baltimore Sun reporter Michael Dresser he lobbied Gov. Martin O’Malley (D) to get rid of the computer services tax in exchange for the millionaires tax bracket.
“Any self-respecting person that was wealthy enough could pay more tax just because of the quality of life in the state of Maryland,” Hale told Dresser. “It’s much ado about nothing for a very few people.”
Delegate Gail Bates (R-Howard County), who opposed the tax hike, said it is much ado about something important.
“The whole class warfare thing is what they’re playing on,” Bates said of the governor and supporters of the tax hike. “We explained to some of our farm people, ‘If you sell land, you are now a millionaire.’ I’m a CPA. I have a client who sold a farm for $10 million. I said, ‘Aren’t we glad we did that last year instead of this year?’
“A lot of people don’t understand it isn’t just your earned income,” Bates continued. “We have people whose income comes through a subchapter S corporation or other business income. It’s an attack on business.”
‘Flatness Is a Virtue’ Ohio University economics professor Richard Vedder, Ph.D. has extensively studied the impact of taxes on where people choose to live. He says there is a clear correlation between rising taxes and out-migration.
Vedder’s studies show “growth tends to be higher the flatter the tax is. Flatness itself is a virtue because people respond at the margins [the places where rates change]. When the maximum federal income tax rate went down from 70 percent to 50 percent in 1982, the number of people reporting $1 million or more on their income taxes almost doubled in a single year. By 1986 we went to a 26 percent top rate, and total tax revenues from that group of people increased substantially.”
Vedder said he expects most of Maryland’s wealthy to look for ways to reduce taxable income as a result of the higher tax bracket. He also expects some to move out of state.
Wealthy Move Away
“We know from migration statistics, it’s very clear that no-income-tax states are receiving massive numbers of immigrants relative to income tax states,” Vedder said. “Those new people are coming from states that have income taxes.”
Bates said the tax bill for Maryland’s millionaires will increase by about $17,000 a year on average, prompting some of them to move elsewhere.
“You’ll find most people in that bracket have multiple homes,” Bates said. “A friend of mine has a home in Maryland and a home in Delaware. He can switch his legal residence in a heartbeat” and has more incentive to do so now that Maryland income taxes will go up.
Moore noted in Rich States, Poor States the ease with which wealthy people can move, citing the example of California, which has a maximum income tax rate of 9.3 percent.
“When California faced a Mount Everest-sized $14 billion deficit in 2003, one of the major causes for the red ink was the stampede of millionaire households from the state,” Moore and Laffer wrote. “Out of the 25,000 or so seven-figure-income families, more than 5,000 left in the early 2000s, and the loss of their tax payments accounted for about half the budget hole.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.