April 9, 2008

Maryland Puts Final Touch on Historic Tax Hike

Today Maryland Governor O'Malley signed into law the final piece of the state's major tax overhaul, an eighth tax rate and bracket on personal income.

"We see no record of any state having raised all three of its major tax rates in one fell swoop, but Maryland has done just that," said Bill Ahern, referring to the hikes in the sales tax, the corporate income tax, and the personal income tax that received its final change today. The study is Tax Foundation Fiscal Fact, No. 124, "Maryland Flouts Regional Tax Competition with Historic Tax Hike."

The study points out that middle-income people in Maryland were and still are paying higher income taxes than in any border state, and that in only five U.S. states—California, Hawaii, Iowa, Maine and Oregon—could a couple with $75,000 in taxable income be in a higher tax bracket than an average Maryland couple. The Maryland rate for middle-income workers is about 7.5 percent (4.75% state plus 2.73% local).

From a regional vantage point, the study asserted that Maryland is flouting tax competition by enacting much higher personal income tax rates than are found in any border state.

"The State of Maryland will probably end up ‘paying' incoming or expanding businesses with generous tax breaks to make up for the high rates," predicted Ahern. "That's not uncommon, nor is the angry reaction of resident businesses who resent seeing the state's economic development office roll out the red, tax-exempt carpet for newcomers."

Other points from the study:

• Maryland's personal income tax system has an unusually large marriage penalty.
• For people in the $150,000-to-$500,000 range, the rising state-local tax deduction that they will be claiming on federal form 1040 may push them into the federal alternative minimum tax.

The study is available at http://www.taxfoundation.org/publications/show/23101.html.