Maryland legislators are in the midst of a major discussion on tax reform, one that includes corporate income tax reform and the possible implementation of a flat tax, which would replace the state’s current personal income tax structure, eliminating hundreds of deductions and greatly simplifying the state’s tax code.
Currently, Maryland’s personal income tax code has eight different tax brackets, which are graduated based on income. At the low end of the income scale, taxpayers with household earnings of $1,000 or less pay taxes at a rate of 2 percent. At the high end of the scale, taxpayers earning over $300,000 pay 5.75 percent. Households earning between $3,000 and $150,000, which includes most middle-income earners, pay 4.75 percent. Rates are a little higher for individual filers.
A new proposal being considered in the Maryland Senate would implement a flat tax of 3.9 percent for everyone earning more than $30,000. Households earning less than $30,000 would not be required to pay anything. The sponsors of the legislation, led by state Sen. Andrew Serafini (R-Washington), argue the flat tax rate would result in lower rates for most taxpayers, a simpler filing process, and they say it would generate the same revenue as the current system.
Flat taxes are beneficial for several reasons. They avoid penalizing the citizens who produce the majority of jobs and economic activity with higher tax rates. Flat taxes simplify the tax code by eliminating credits, exemptions, and deductions, taxpayers will no longer need to hire expensive tax accountants or use expensive computer programs to file their state taxes. While main critics of flat taxes argue they represent a tax cut for the rich, even under a flat tax, those who earn higher incomes pay more in taxes, achieving the “social justice” progressive tax proponents claim to seek.
Tax revenues are more volatile under progressive tax systems than with flat taxes, making budgeting more difficult. Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic recessions.
Major tax reform is needed in Maryland, which has fallen far behind neighboring states in creating a tax environment that encourages relocation, investment, and economic growth. Maryland ranked only 41 in the Tax Foundation’s 2016 State Business Tax Climate Index, a study that compares states across multiple areas of taxation that impact business. Maryland’s neighboring states all ranked higher, including Delaware at 14, Pennsylvania at 32, Virginia at 38, and West Virginia at 21.
Sound tax reform should adhere to four basic principles, argues John Nothdurft of the Heartland Institute: taxes should be applied to a broad base, kept at a competitive and low rate, be open and transparent to taxpayers and not distort the economic choices of consumers and businesses. The flat tax is also revenue neutral, the state should would still be able to collect its current individual income-tax revenue at the lower rate.
Instead of creating and increasing discriminatory taxes, states should focus on tax reform which lowers rates, puts dollars back into the pockets of taxpayers, and tightens states’ by creating new, reasonable limits on spending. Serafini’s flat tax would lower rates, simplify the tax code for Maryland taxpayers, and it represents an important step in the right direction for tax reform in Maryland.
The following articles examine the flat tax from multiple perspectives.
A Brief Guide to the Flat Tax
https://heartland.org/policy-documents/brief-guide-flat-tax
Everything you wanted to know about the flat tax is provided in this PolicyFax by Dan Mitchell of The Heritage Foundation. Mitchell says the flat tax eliminates special-interest favoritism and prevents taxpayers from finding tax loopholes by hiring an army of lawyers, accountants, and lobbyists.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Flat Tax: Will It Be Coming to Your State?
https://heartland.org/policy-documents/reseach-commentary-flat-tax-will-it-be-coming-your-state
This Heartland Institute Research & Commentary explores the growing trend of states and nations moving toward flat-rate income tax systems.
The Flat Tax’s Silver Anniversary
http://www.hoover.org/publications/digest/6731056.html
Alvin Rabushka, the David and Joan Traitel Senior Fellow at the Hoover Institution, offers a history of the flat-rate income tax. “First proposed 25 years ago, the flat tax has proven most influential in the unlikeliest of places: state capitals—and the capitals of other nations.”
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The eighth edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
The Inequity of the Progressive Income Tax
http://www.hoover.org/publications/policy-review/article/72291
Kip Hagopian of the Hoover Institution contends the most compelling argument against the use of the progressive income tax is that it is inequitable: “Under a progressive income tax, the welfare of one group in a society has been increased at the expense of the welfare of a different group.” Hagopian dismantles arguments for the progressive income tax and proposes a new doctrine of tax fairness.
The Effect of Progressive Tax Codes
http://heartland.org/policy-documents/effect-progressive-tax-codes
Bill Ahern of the Tax Foundation discusses the effects of different kinds of progressive taxes on taxpayers and the economy.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
