POLICY PAPER: PROGRESSIVE TAXATION

“Replacing upside-down tax structures with progressive taxes on the highest earners can shore up budgets and create space for legislators to make meaningful investments in infrastructure, public health, green jobs, and more.”

 —Groundwork Collaborative

Introduction

In order for Maryland communities to realize their full potential and for Marylanders to have the essential services that we need to thrive, our state needs a 21st century tax structure with policies that are grounded in fairness. Decades of austerity policies and systematic disinvestment in the public sector at local, state, and federal levels have exacerbated race and gender inequalities, caused economies to contract, and left far too many Marylanders behind. It’s time for people-centered spending that fully invests in public education, restores and expands social services, revitalizes key infrastructure, anchors our democracy, and builds power for the next generation. 

Every dollar we invest now in people, communities, small businesses, and local governments will strengthen the economy and pay big dividends for years to come. This means cleaning up loopholes in our tax code and requiring that large corporations and wealthy individuals pay their fair share. It’s time for Maryland to set an example for the nation on how to build an economy that works for all of us, not just a chosen few.

 

Exacerbation of the Wealth Gap Under COVID-19

The day before Thanksgiving 2020, it was reported that the total wealth gains of America’s 650 billionaires surpassed the $1 trillion mark since the start of the COVID-19 pandemic.

That’s right, during the worst economic crisis since the Great Depression, the total wealth gain of America’s 650 billionaires grew by a third. Put another way, these 650 billionaires now have twice as much wealth as the bottom 50% of all U.S. households.

Zoom’s CEO and Founder Eric Yuan saw his net worth skyrocket to nearly $20 billion. Amazon CEO Jeff Bezos has already grown his net worth during the pandemic by more than $70 billion. lon Musk’s fortune has grown by $100 billion (more than quadrupling). Facebook’s Mark Zuckerberg wealth rose by $46.5 billion. Chairman of Quicken Loans, Dan Gilbert, saw his net worth grow by $37 billion, an astronomical 575%.

To put this in proper perspective, Yuan’s wealth increase of $20 billion alone is equivalent to giving every one of the 13 million unemployed Americans three meals a day for 5.5 months.

Americans for Tax Fairness (ATF) and the Institute for Policy Studies (IPS) reported that the collective wealth of America’s 651 billionaires has jumped by over $1 trillion since roughly the beginning of the COVID-19 pandemic to a total of $4 trillion at market close on Monday, December 7, 2020. Their wealth growth since the onset of the pandemic was more than the $908 billion in pandemic relief proposed by a bipartisan group of members of Congress that Republican said was too costly.  

The $1 trillion wealth gain by 651 U.S. billionaires since the start of the pandemic is:

Included in the $2.2 trillion CARES stimulus package passed by Republicans and against the objection of Democrats was a controversial tax cut that conferred over 80 percent of the benefits to just over 43,000 taxpayers, each earning at least $1 million per year.

A June 2020 report, Progressive Tax Measures to Realize Rights,” from the Tax Justice Network proposes an “excess profit” tax, among other ways of seeking “innovative and progressive means to finance the large-scale social spending needed to protect lives and livelihoods in the wake of the COVID-19 pandemic”:

An excess profits tax could help to fund necessary spending while remedying disparities. Governments would calculate the extra profits earned due to the pandemic by comparing recent profits with averages from previous years. Then, the “excess” profit would be taxed at a very high rate (e.g. 75%). Multinational companies could be taxed on extra profits earned globally, with revenue divided up depending on where real economic activity took place.

Meanwhile, income inequality in the U.S. is the highest of all the G7 nations, according to data from the Organization for Economic Cooperation and Development. The wealth gap between America’s richest and poorer families more than doubled from 1989 to 2016, according to the Pew Research Center.

Today, the wealthiest 1 percent of Maryland households pay a smaller share of their income in state and local taxes than the rest of us do. 

 

Wealth Taxes Support Economic Health 

Implementing a more progressive wealth tax is the right solution. According to the Center for Budget and Policy Priorities

Targeted income tax hikes at the top don’t harm a state’s ability to compete economically with its neighbors, real-world experience shows. Of the eight states (including the District of Columbia) that have enacted lasting millionaires’ taxes since 2000:

  • seven have had per capita personal income growth at least as strong as their neighbors since raising taxes;
  • six have had growth in private-sector gross domestic product about as good as or better than their neighbors (see chart); and
  • five added jobs at least as quickly as their neighbors.

As for state personal income tax taxes in particular, the researchers found evidence suggesting that “states recently reducing their personal income taxes more likely harmed economic growth and states increasing their personal income taxes more likely spurred their economic growth.”

On the other hand, research indicates that high-income tax increases can generate substantial revenues for investments in people and communities that provide economic and social benefits over the long term.

 

Public Attitudes

According to Money Magazine, “Survey after recent survey confirms, quite simply, that most people think the richest Americans should pay more in taxes. The concept seems to have only gained more support since the passage of the Tax Cuts and Jobs Act of 2017.”

State Innovation Exchange conducted a multi-state poll this summer showing that voters want more state investment, even if it means more taxes, by a 3:1 margin.

In 2020, the Maryland Fair Funding Coalition highlighted polling that shows: 

  • A majority of Marylanders polled think that corporations (64%) and high-income households (55%) pay less than their fair share of state taxes.
  • More Marylanders think that middle-to-low income (52% for middle incomes, 38% for low income) households pay more than their fair share of state taxes.  
  • 63% are in favor of closing corporate loopholes and tax breaks, 58% are in favor of taxing the super-rich who inherit the top 3% of Maryland estates, and 46% are in favor of raising taxes on the top 5% of individuals in Maryland

 

Progressive Taxation Policies that Advanced in 2021

Digital Tax: In January, the legislature override Gov. Hogan’s veto of a tax package (HB732) in order to raise $250 million a year for education. The bill includes a first-in-the-nation digital tax that  applies a graduated tax rate based on a company’s global advertising revenue. Current estimates for the education reforms proposed by the Kirwan Commission would require state funding to steadily increase over the next decade until an additional $2.8 billion in state aid would go to schools in 2030. County budgets would also increase during that time period, up to a cumulative $1.2 billion annually.

The digital ad tax was the first major policy pitched by Senate President Bill Ferguson (D-Baltimore City) who says the online companies that profit by collecting Maryland residents’ data should contribute to improving the state.  

From the Post: 

The proposal would levy as much as a 10 percent excise tax on revenue companies receive from selling digital ads that target Maryland IP addresses. Such ads typically tailor content based on users’ demographics and browsing history, among other data collected by Internet companies. It would be up to social media companies to report how much they make off targeting Maryland’s consumers.

Firms with less than $100 million in annual global digital ad revenue would be exempt. The high threshold is designed to target the largest Internet companies, such as Google and Facebook, which research firm eMarketer said account for roughly ­59 percent of the country’s ­$130 billion digital ad revenue market.  

The MD Fair Funding Coalition said in its testimony for the digital ad tax: 

This legislation is a necessary step towards modernizing our tax code, which is still currently based on archaic principles of business. The digital age of advertising has brought profits for large, multi-state corporations who regularly avoid their state tax responsibilities. As a coalition, we see this legislation as part of an overall push to enact modern policy to ensure that these corporations pay their fair share. 

Opponents claim it runs afoul of First Amendment rights, diminishes our efforts to attract and retain a technology sector, and the tax would make digital advertising more expensive for everyone, including Maryland’s small businesses. The coalition opposing the measure includes the Maryland Chamber of Commerce, the state’s chapter of the National Federation of Independent Business, the Maryland Retailers Association, and the MD-DC-DE Press Association. 

The Attorney General feels the bill is legally sound.

In 2021, due to criticism, a second bill was introduced and passed making it clear the tax doesn’t apply to media companies and the cost cannot be passed along to businesses that buy ads.  

 

Progressive Tax Policies that Have Yet to Pass

SB611/HB275Individual Income Tax – Rates and Rate Brackets – Alterations

The Senate bill would have extended the graduated state income tax for individuals making over $500,000 a year. Current state income taxes apply the same rate to all individuals making $250,000 or more. SB611 adds additional tax brackets up to $1.5 million/year.

The House version establishes new tax brackets and increasing tax rates imposed including an increase in the top marginal tax rate from 5.75% to 7.00%. The bill could generate up to $689 million annually, or 2.7 billion over 5 years, according to estimates from the Maryland Center on Economic Policy.

Regarding the equity provisions, MDCEP notes: “House Bill 1190 is expected to raise upward of 40 percent of new revenue from the wealthiest 1 percent of households and about two-thirds from the 5 percent of households whose annual income is more than $292,000. Meanwhile, 1.2 million lower- and middle-income families (those with up to $142,000 in annual income) would pay less under House Bill 1190 than they do today…[this bill] would improve racial equity in our tax code because it asks more of households whose income comes primarily from wealth rather than work.”

HB201 / Income Tax Rates – Capital Gains Income  

This bill implements an additional 1% income tax on net capital gains. Imposing a tax on any of the capital gains reported by taxpayers would increase general fund revenues by approximately $150 million annually. Proponents argue this surtax offsets a small portion of the special treatment households with capital gains receive under federal tax law, which applies a tax rate 17 percent lower on capital gains income than on income from work.

Said the Maryland Fair Farming Coalition on last year’s bill: The special treatment of capital gains income allows wealthy investors to avoid paying their fair share of taxes on their income. It is also a driver of racial and ethnic inequality because the wealthiest 10% of white households controls nearly two-thirds of wealth nationwide. 

HB215/SB288 – Income Tax – Carried Interest – Additional Tax

This bill imposes a 17% State income tax on the distributive share or pro rata share of a pass-through entity’s (PTE) taxable income that is attributable to investment management services provided in the State. Hedge fund and investment managers pay a lower tax rate than restaurant servers, state and county workers, nurses, bus operators, teachers, and everyone else in Maryland that works for a living. Carried interest income is taxed much lower than income derived from wages. This special treatment for those who make money by investing the income of others undermines the value of all our labor. 

HB262/SB113 – Opportunity Zone Tax Deduction Reform Act  

This bill changes the way the state calculates income for tax purposes by undoing a federal tax break for capital gains under the Opportunity Zones program. Under current law, the federal tax break automatically translates into Maryland’s tax code, allowing investors to pay less in Maryland taxes than they otherwise would. This bill passed the House in 2020 and in 2021 and stalled in the Senate.  

HB 357/Income Tax – Pass-Through Entity – Additional Tax  

This bill would limit the special treatment of the income from very large, profitable “pass-through” businesses and generate more than $300 million in state revenue per year. It imposes an additional 4% tax on the distributive share or pro-rata share of income distributed to a member of a pass-through entity (PTE) from the PTE’s taxable income that exceeds $1 million. Pass-through entities are specific types of business structures, including LLCs, partnerships, and S-corporations. By definition, these types of businesses don’t pay corporate income tax. Instead, the business profits flow through to the business owner(s) and are taxed as part of the owner’s individual income taxes. Companies such as LLCs are not required to pay corporate income taxes on their profits and instead pass the business income through to shareholders. Very large businesses are increasingly using pass-through structures to reduce their tax responsibilities. 

At least three states have taken action to close their pass-through loophole. Illinois, California, and Massachusetts impose a surtax on the income of some or all types of pass-through entities. It’s important to note that not all states have a pass-through loophole in their tax code. Among Maryland’s neighbors, West Virginia doesn’t have a loophole, as its corporate and individual tax rates are the same. Neither does Virginia, practically speaking, as the difference in the tax rate for a corporation and a pass-through entity is only 0.25%. The District of Columbia takes a different approach and taxes passthrough entities and corporations at the same rate.

HB172/Corporate Income Tax – Combined Reporting and Subtraction Modification for Combined Groups of Corporations

This legislation prevents companies from reducing their taxable profits by artificially shifting revenue out of state by treating a parent company and its subsidiaries as one corporation for state income tax purposes. Many retail chains earn profits at stores nationwide, but have developed accounting schemes to evade paying their full share of state corporate income taxes. Tax experts believe the practice costs states billions of dollars in lost revenue.  It also gives chains an advantage over locally owned businesses, which must pay state income tax on all of their earnings. 

Combined reporting requirements have been slowly implemented across the country and are now in place in 28 states and the District of Columbia 

HB330/Effective Corporate Tax Rate Transparency Act 

This bill requires a publicly traded corporation required to file a Maryland corporate income tax return to include a confidential statement that identifies the corporation’s effective tax rate. The statement must provide an itemized explanation of how the effective tax rate was calculated and a comparison of the effective tax rate of the corporation both before and after the application of any credits, deductions, subtraction modifications, or other adjustments. The Comptroller must collect this information and report specified information to the Governor and the General Assembly by March 1 each year. 

Maryland cannot credibly claim to have a 21st-century tax system if it does not know, and state publicly, what corporations actually pay.

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Millionaire Tax

Kiplinger, the financial and business publisher, calculates that Maryland has the second highest concentration of millionaires in the country — that is, people with “investable assets of $1 million or more, excluding the value of real estate, employer-sponsored retirement plans and business partnerships” — and the Census Bureau shows population growth of about 300,000 since 2010.

  • Millionaire households: 221,189
  • Total households: 2,274,491
  • Concentration of millionaires: 9.72%
  • Rank: 2 (+2 from last year)
  • Median income for all households: $83,242
  • Median home value: $324,800

In 2011, the state’s 6.25% tax rate on income of more than $1 million expired. Maryland was one of several states that imposed the so-called millionaire’s tax in 2008 along with several other measures to help close a $1.7 billion budget gap. The vote in 2008 split the Montgomery County delegation down the middle, showing that even some of the most seemingly progressive legislators balk at what gets billed by conservative talk radio as just another tax hike. 

Before it expired in 2011, then Del. Jolene Ivey proposed a bill to make the tax rate permanent but the effort failed. Opponents argued it led to a loss of millionaires from the state, but research shows those arguments are flawed and millionaire taxes do not lead to out-migration.

Ben Jealous endorsed a millionaire’s tax in his campaign. The Republican Governor’s Association ran an attack ad criticizing him for wanting to raise taxes. 

This article highlights one argument against such a millionaire tax hike, from a progressive blogger: that wealthy jurisdictions like Montgomery County are disproportionately targeted by such a hike, to the detriment of the county budget. Del. Vaughn Stewart introduced a bill in 2019 that aimed to increase the state’s marginal income tax rates for individuals with taxable income in excess of $1 million by 2 percentage points, and to use the proceeds for subsidized state housing for Maryland. The bill was withdrawn. 

This article lists the states with a millionaire’s tax, as of 2017, and how they are structured. And this article lists some places that have discussed implementing a millionaire’s tax over the past year, with arguments for the tax, with this article fleshing out that list a bit more. 

Montgomery County Country Club Tax

In 2018, seventeen Delegates from Montgomery County voted to kill a local bill proposed by Delegate David Moon that would have eliminated a special tax break for country clubs contained in state law. Only seven delegates voted for it. Neither the County Executive nor the County Council supported the bill. From Seventh State:

The fiscal note on Moon’s bill indicates that MoCo country clubs with SDAT agreements have a combined 3,000 acres currently assessed at $3 million.  In the absence of the agreements, the fiscal note estimates that the club’s assessed land value would be $983.3 million.  So once the agreements are all gone by Fiscal Year 2030, the fiscal note estimates that the state would collect an additional $1 million a year in property taxes from the clubs and the county would get an additional $10 million annually.

David Moon fully unpacked all of the arguments against the bill, which you can read here. 

Estate Tax  

The estate tax is imposed on the transfer of the taxable estate of a deceased person. Until 2001, levying a tax on the transfer of wealth from one generation to the next was something all 50 states agreed on. But the 2001 Bush tax cuts included a phased reduction and eventual repeal of the federal estate tax and phased out the federal credit once allowed for state estate taxes. After the repeal of the federal credit, some states allowed their estate taxes to expire. Others seeking to preserve this important, progressive revenue source led on this issue by “decoupling” from the federal tax repeal and defining the state estate tax to equal the federal credit as it existed on or near 2001—before the passage of the Bush administration’s state tax cuts.

“Right-wingers have successfully convinced many voters that the tax is a cruel burden on ordinary Americans— that all across the nation small businesses and family farms are being broken up to pay crushing estate tax liabilities. You might think that such heart-wrenching cases are actually quite rare, but you’d be wrong: they aren’t rare; they’re nonexistent. The whole “death tax” campaign has rested on eliciting human sympathy for purely imaginary victims.” –Paul Krugman, New York Times

In 2014, then Senate President Mike Miller and then Speaker of the House Mike Busch pushed to raise the estate tax exemption over the next 3 years from its then current level of $1 million to the federal level of $5.34 million. Notably, the estate tax already included important exclusions and protections. From a Progressive Maryland Fact Sheet from 2014:

  • Estates below $1 million (for an individual, $2 million for a couple) owe no tax. For estates above $1M, only the part above $1M is subject to tax.
  • All property left to a surviving spouse, no matter the amount, is exempt from the estate tax.
  • The maximum Maryland estate tax rate is 16%. In general, the amount of tax paid is equal to far less than the maximum rate. For example, estates between $1.0M and $1.5M, which comprise 38% of all returns, pay about $37,000 in estate taxes—about 3% per return. At the higher end, estates over $10 million pay an amount of tax equating to about 6% of the gross estate. Overall, an average of about $140,000 in taxes is paid per return, which equates to about 5% of the gross estate.
  • Contrary to popular belief, the estate tax is not duplicative of the inheritance tax, which does not apply to a list of direct beneficiaries including: child, parent, step-parent, grandparent, spouse, sibling, other descendent, or a corporation if all stockholders are direct beneficiaries. Those paying this tax get a credit against the estate tax.
  • Maryland law protects family farms by exempting up to $5 million of unqualified agricultural property passing from a decedent to a family member who will continue to use the property for agricultural purposes for at least ten years. State law also limits the tax rate imposed (no more than 5%) and provides for a 3-year payment deferral for estate taxes on family farms. Nobody has ever come up with a real modern example of a family farm sold to meet estate taxes
  • Private sector solutions are readily available and widely employed for other family-owned business property.

The bill elicited wide support from the Democratic caucus, with overwhelming numbers co-sponsoring the measure. Proponents argued that only Maryland and New Jersey (at the time) had both an inheritance and estate tax. Then Sen. Rich Madaleno was one of the only people to vocally speak out against the phase out of the state estate tax as misguided and unfair. He noted the General Assembly’s own chief policy analyst had already stated there is no empirical evidence to show that a significant amount of new revenue would offset the lower taxes.

Advocates countered the claims that wealthy, older Marylanders were leaving the state to avoid having their estates pay this tax, citing studies that show Maryland was the number one state per capita for millionaires and a Dec. 2013 report by the Md. Dept. of Planning that highlighted Maryland’s gains in wealthy residents over 55 years old.

“The typical estate subject to Maryland’s estate tax is about $1.8 million with a State estate tax liability of about $60,000, or $3.3%,” said Rockville Attorney Henry Nash, who specializes in estates and trusts law. “It is not believable that large numbers of Maryland’s wealthiest seniors leave their homes, families, and friends to move to a state without an estate tax so their children can inherit, say, $1.8 million rather than $1.74 million.”

In the end, the vote in the Senate was 36-10. The vote in the House was 119-14. Gov. O’Malley signed the measure into law.

While it was a phase out at the time, Maryland still has its own estate tax, separate from the federal estate tax. In 2017, the Republican tax cut approximately doubled the estate and gift tax exemption. Under current law, for deaths in 2020 an estate with a gross value of more than $5 million may owe Maryland estate tax. This threshold amount is much less than the federal estate tax threshold ($11.58 million in 2020 – couples can pass on $22.8 million), which means that an estate may owe Maryland estate taxes but not federal estate taxes. Because of the way the tax is structured, very few people ever have to pay the federal estate tax.

As of 2020, 17 states and the District of Columbia may tax your estate, an inheritance or both, according to the Tax Foundation. Eleven states have only an estate tax: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. Washington, D.C. does, as well. Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania and Rhode Island have only an inheritance tax — that is, a tax on what you receive as the beneficiary of an estate. 

 

Inheritance Tax

While six states impose an inheritance tax, Maryland is the lone state that levies both an inheritance tax and an estate tax. The inheritance tax is a state tax imposed on “the privilege of transferring property,” according to the Maryland Comptroller’s office. This includes property transferred under a person’s will or trust, or if they did not have an estate plan via Maryland’s intestacy laws. In fact, inheritance taxes may apply to other non-probate transfers that occur on a person’s death, such as a “payable on death” bank account or the sale of a home where the deceased was a co-owner. The current Maryland inheritance tax rate is 10%. 

Some individuals are exempt from the inheritance tax in Maryland, depending on their relationship to the decedent. Near the end of the 2000 legislative session, the Maryland General Assembly passed a bill that significantly expands the class of individuals that are exempt from paying Maryland inheritance tax. Currently, property that passes to a spouse, parent, grandparent, sibling, step-parent, step-child, child or other lineal descendant, spouse of a child or other lineal descendant, or a corporation that has only people in this category as stockholders, is entirely exempt from the Maryland inheritance tax. A primary residence owned by domestic partners held in joint tenancy at the time of one partner’s death is also exempt from the inheritance tax. However, property that passes to any other beneficiary than those mentioned is subject to the Maryland inheritance tax.

Also in 2000, another bill attempted to modify the Maryland inheritance tax (House Bill 13/Senate Bill 160) by repealing the tax for decedents dying on or after July 1, 2000. Since the revenue generated from the inheritance tax currently funds the offices of the register of wills in each county, this bill also proposed that, in the future, the county register of wills would receive funding from the state budget. Although the Maryland House of Delegates unanimously approved this bill, the Maryland State Senate rejected this plan by a vote of 36-11, voting unanimously in favor of the plan to eliminate the inheritance tax only for direct descendants.

On the federal level, Sen. Bernie Sanders has a proposal to lower the estate tax exemption to $3.5 million per person. The Tax Cuts and Jobs Act, signed into law in 2017, doubled the exemption for the federal estate tax and indexed that exemption to inflation. The maximum federal estate tax rate is 40 percent on the value of an estate above that amount. The higher exemption will expire Dec. 31, 2025. Relatively few people will pay federal estate taxes this year

This DLS analysis from 2013 further unpacks the history of changes to our estate and inheritance taxes. 

 

Governor Hogan’s Tax Cut Proposals

Gov. Hogan has perpetuated the idea that retirees are moving out of Maryland due to taxation. In 2020, he submitted legislation — The Retirement Tax Reduction Act — purported to provide more than $1 billion in tax relief over the next five years and be the biggest reduction in state taxes in more than two decades. He started floating this proposal in 2014, which Lt. Gov. Brown panned. Under Hogan’s proposal, retirees who earn less than $50,000 would pay no state income tax. Retirees who take in up to $100,000 would see their state tax burden cut by at least half. The bill had bipartisan cosponsors, including Sens. Beidle and Elfreth of Anne Arundel County. According to the fiscal note, general fund revenues decrease by $135.6 million in FY 2023 due to additional retirement income being exempted. Local revenues decrease by $90.5 million in FY 2023 and by $237.9 million in FY 2027. 

Wrote the MD Center for Economic Policy in its testimony:

“The truth is, Maryland already offers larger tax breaks to older adults than most other states, including exemptions for pension and Social Security income and an enhanced personal exemption. Altogether, a married couple in Maryland over age 65 could deduct up to $58,400 as of 2015…While it is positive that the legislation places an income cap on who qualifies, it is still likely that those at the higher end of the income range covered by this bill are likely to receive the greatest share of the benefits. Structuring the tax breaks as deductions tilts the scales toward wealthier households, providing meager benefits for lower-income seniors who pay more in sales and property taxes than income taxes.”

Gov. Hogan’s proposal also failed in 2019 in Senate B&T, on a close vote of 7-6. Republicans have tried and failed to eliminate income taxes on retirees before. In 2014, before Hogan was elected, Republican lawmakers introduced a bill to eliminate retiree income taxes that died in committee. 

Hogan also proposed more tailored tax cuts for retirees in 2020, including a proposal to eliminate taxes on retirement income that’s tied to military service as well as an expansion of the state’s “Hometown Heroes” tax benefit. Under the 2017 Hometown Heroes Act, retired first responders such as police officers and firefighters are exempted from paying taxes on the first $15,000 of retirement income. Hogan’s proposal would eliminate all taxes for those individuals and lower the eligibility age from 55 to 50. From the Post

Hogan proposed tax rebates for first responders, military members and solar projects on public buildings that together would cost nearly $18 million in the fiscal year that starts in July and climb to $47 million annually four years later…Maryland is required to have a balanced budget each year. But analysts said Hogan’s proposal would set in motion a scenario where state spending exceeds its revenue by $709 million in the 2022 fiscal year. Over four years, planned spending would exceed revenue by a total of $3.7 billion, a scenario that requires policymakers to trim programs by that much to balance the books.

Lessons from Arizona & Colorado

Thirty-two states in the U.S. have some form of a progressive income tax. Illinois is one of eight states in the country that has a flat tax. In Illinois, the legislature referred a constitutional amendment to voters that would have repealed the existing constitutional requirement that the state personal income tax be levied at a flat rate. The state passed a measure in 2019 (SB 687) that provides for a graduated income tax structure if voters approve this amendment. The newly structured income tax would raise about $3.6 billion a year. The current flat-rate is 4.95%. The amendment would have applied that rate, or a lower one, to people making less than $250,000. For those earning more than $250,000, the rate would climb and top out at 7.99%. Just 3% of Illinois taxpayers overall earn enough to see an increase under the plan, according to the Illinois Department of Revenue. 

Billionaire Ken Griffin spent $20M to defeat the measure, while Gov. Pritzger spent $50M+ to win approval. You can see the arguments used by the proponents here, and the opponents here, with their focus the alleged harm to small businesses, family farmers and large employers, and distrust for the state government. The Chicago Tribune also opined against it: “The change would free the General Assembly from its obligation to tax all residents at the same rate. Why is it controversial? Because the flat tax serves as extra protection for taxpayers. It’s a much heavier lift for the governor and lawmakers to raise rates unilaterally on everyone than to tinker with graduated rates or tax brackets. That’s why they want the ability to do it. It’s easier.”

The measure failed 55-45%.

Meanwhile, Arizona voters considered proposition 208, which would increase income taxes on higher earners to raise revenue for education funding and teacher salaries. The law would add a 3.5% tax surcharge on taxable annual income over $250,000 for single filers and $500,000 for joint filers (the current marginal rate is 4.5%). The state Joint Legislative Budget Committee estimated that it would generate $827 million in the first full year of implementation.

The Arizona measure passed 52-48%.

Most accounts on why Illinois failed and Arizona succeeded seem to focus on the fact that the Illinois measure was a “blank check” for the legislature to engage in more unchecked spending while Arizona’s proposal specifically raised funding for teacher’s salaries (and Arizona’s teachers are among the lowest paid in the nation). In 2000, Arizonans passed Proposition 301, a sales tax increase to raise money for education. The state Legislature in 2018 extended that tax because it was set to expire in 2021. Under the new law, 50% of the money would go to hiring and raising the salaries of teachers and other certified employees, such as counselors and nurses. 25% would go to hiring and increasing the salaries of student support staff, including classroom aides and bus drivers. 12% would go to career and technical education programs. 10% would go to programs dedicated to retaining and mentoring teachers. 

In Arizona, the Invest in Education campaign, chaired by NEA, dramatically outspent the opposing campaign. The proponents focused their arguments on what the money would be used for — schools, students, hardworking teachers — not a “budget hole.” They also said that strong schools mean a strong economy.  

Writes Elizabeth Bauer for Forbes Magazine on the Illinois loss, “Instead, I suspect that the ultimate reason for voters’ rejection of an amendment that promised a free lunch, is that years and years of fiscal mismanagement, without any genuine reform, meant the tax’s supporters had no credibility with the voters. The Chicago Tribune reminded its readers repeatedly of the state’s failed promises and indifference to reform — everything from the failure to reform pensions, to failures to reform property taxes, rejection of redistricting reform, rejection of consolidation of local governments. In a mid-September editorial, the Tribune listed one abandoned promise after the next made by Illinois’ elected officials, from the pledge that tolling would be removed from Illinois’ tollways, to numerous pledges that “just one more” tax hike would fix the state’s finances, over and over again.”

 

More Resources

See here the Maryland Center on Economic Policy memo regarding how a progressive tax package will positively impact the state budget forecast vs. what things will look like absent revenue reform. Toplines: If policymakers pass a fair tax plan that clean up loopholes in our tax code and ask large corporations and wealthy individuals to pay their fair share, we can protect essential public services and jobs. Revenue reforms would raise $1.4 billion in new revenue in the July 2021–June 2022 budget year, with a four-year gain of $6.1 billion in fiscal years 2022–2025; and eliminate or substantially mitigate budget gaps through FY 2025.

This article has an excellent overview of the history of taxation in Maryland, starting with colonial times. 

This DLS paper from 2002 is a good companion overview of Maryland’ more contemporary tax structure. 

This ballotpedia article fills in some blanks, up to 2015.

The Tax Foundation offers useful background data on Maryland’s tax structure:

  • This link highlights the 50-State Individual Income Tax Rates and Brackets for 2020, so you can see how Maryland compares
  • This link highlights a number of tax rates, ranks, and measures detailing Maryland’s income tax, business tax, sales tax, and property tax systems.

Pew tracks the federal share of state revenue. You can see here how MD compares to other states. 

See here for a Maryland Center on Economic Policy memo detailing that if policymakers pass a fair tax plan that clean up loopholes in our tax code and ask large corporations and wealthy individuals to pay their fair share, we can protect essential public services and jobs. Revenue reforms would raise $1.4 billion in new revenue, with a four-year gain of $6.1 billion.

And this report from MD Center on Economic Policy offers good contrasts on the differentials paid in taxes by racial demographic. Spoiler alert:  Residents struggling the most to make ends meet — Maryland’s poor and minorities — are being taxed to a greater extent than the wealthiest.

A 2019 report from SEIU Local 500 (Funding Our Future: Investing in Public Education, From Cradle to Career, By Ensuring Corporations Pay Their Fare Share) provides valuable information.

In the first quarter of each year, NCSL releases its annual “State Tax Actions” report. State Tax Actions presents information about the tax and revenue changes enacted by state legislatures during the calendar year. It also contains the results of tax measures that were voted on during any elections and special sessions. In addition to aggregate state tax information, the report contains detailed information on the 50 states, including Maryland (see database here). From the most recent report

  • Of the 50 states and District of Columbia reporting, seven—Alabama, Illinois, New Mexico, Ohio, Oregon, Washington and the District of Columbia—increased taxes by more than 1%. One state—North Dakota—reported a net decrease of more than 1%.
  • Motor fuel taxes produced the largest increase, totaling $2.5 billion. Tax changes in Illinois and Ohio primarily fueled this number. All tax categories saw tax increases, except for personal income and corporate income taxes.

And a good footnote of an article about how trickle down economics is bulls*it here

“Large tax cuts for the rich don’t lead to economic growth and employment but instead cause higher income inequality, a new study that examined tax cuts over 50 years suggested. A recent paper by David Hope of the London School of Economics and Julian Limberg of King’s College London found that tax cuts for the rich in 18 countries predominantly benefited the wealthy. “Our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment” in the short and long term, the researchers wrote.

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