Maryland Considers Raising Sales Tax Rate, Would Tie Second Highest in Nation

Earlier this year, Maryland governor Martin O’Malley made a splash in headlines by proposing a plethora of various tax proposals to close a budget gap. These have included a proposal to increase income taxes (this has already been placed in the budget), a proposal to apply the sales tax to gasoline, a proposal to raise cigar taxes, and even a quirky attempt at doubling the “flush” tax, a septic system levy. See our podcast on the tax proposals here.

Today, I got a tip from a source close to the Maryland statehouse who says that there is now a reinvigorated attempt to increase the sales tax in Maryland from 6 percent to 7 percent. O’Malley seems to be laying the groundwork for this increase in his recent speaking appearances.

In support of his case, O’Malley has been touting a misleading claim (here and on Twitter) that “Marylanders have the 9th lowest sales tax in the nation according to the Tax Foundation.” In fact, the truth is that Maryland’s sales tax structure scores ninth on our State Business Tax Climate Index (which accounts for the structure of the sales tax), but the statewide rate in Maryland is actually the 16th highest in the nation. After accounting for local sales taxes, Maryland fares a bit better, ranking 36th in the nation.

However, if Maryland raised their rate to 7 percent, their national standing would jump precipitously. A 7 percent rate would tie Maryland for the second highest rate in the nation, trailing only behind California’s 7.25 percent statewide rate. After accounting for local taxes, Maryland would rank 20th in the nation.

More troubling perhaps is the fact that a sales tax increase would put Maryland out of step with their geographical neighbors. Below is a map of how Maryland would match up:

Maryland would be even less competitive with bordering state Delaware, which has no sales tax (a fact which they proudly display on their roadside welcome sign).

New Jersey, which already has a 7 percent statewide rate, is well aware of this problem, and in a reaction to cross-border shopping, implicitly acknowledged that their sales tax is uncompetitive by halving the state sales tax rate in Salem County (on the Delaware border) from 7 percent to 3.5 percent.

If Maryland wants to stay competitive, tax increases won’t help.

More on Maryland here.