Taxes are a hot topic in the unexpectedly close Maryland governor’s race. Republican nominee and former Ehrlich Cabinet member Larry Hogan has proposed cutting the state corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. from 8.25 percent to 6 percent, along with “roll[ing] back as many of the…O’Malley-Brown taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases as we can,” including the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. increase from 5 percent to 6 percent. The Democratic nominee, Lt. Gov. Anthony Brown, has pledged not to raise taxes, but has warned against irresponsible tax cuts that would require “slash[ing] the state budget this drastically [and] harming Maryland families.”
Maryland voters will decide which is right, but here are the numbers. Since 2005, personal income has grown in Maryland by 42 percent but state spending has outstripped that, growing by 61 percent. If you just look from 2008, when Governor O’Malley took office, personal income has grown 23 percent while state spending has grown 31 percent. When O’Malley came into office in 2007, he attacked the recent budgetary spending spree. Rather than scale it back, however, he pushed through a tax increase package (four new top income tax brackets on high-income earners and an increase in sales tax from 5% to 6%). Spending stayed steady for his first term but has risen again in his second (see chart).
Maryland’s state income tax rates are middle-of-the-pack, but only if you don’t count the hefty county and city income taxes that hit 3.2 percent in some places. (The state is fighting in the Supreme Court to keep double-taxing some of this income.) Overall state-local tax burden is 10.6 percent, the 7th highest of the 50 states, and the state ranks 41st on our State Business Tax Climate Index. Alcohol tax increases destroyed what used to be a competitive advantage against the District of Columbia. While Virginia taxes have always been lower than Maryland, D.C. now actually has a lower sales tax and is cutting business and income taxes.
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