Maryland Gov. Wants More Revenue? Who Do You Go To? Smokers, Business, and Rich People, of Course

September 19, 2007

Maryland Governor Martin O’Malley wants to raise more revenue for the state, and, of course. he is seeking to do it in a way that is most politically feasible. In other words, he wants a tax plan that will tick off the fewest voters. How do you do that? Go after corporations and smokers. From the Baltimore Sun:

Marylanders would pay more in sales taxes and higher titling tax when they buy cars, and corporations and smokers would pay more under Gov. Martin O’Malley’s plan to fix a budget shortfall he now estimates at $1.7 billion.

But those increases would be coupled with a cut in the property tax and reductions in the income tax rate for most Marylanders, though top earners would pay more, according to legislators O’Malley briefed Tuesday.

Despite his plans to add hundreds of millions in new spending to build new roads, protect the Chesapeake Bay, expand access to health care and hold down college tuition — a total package of $2 billion or more — the governor said most people would wind up paying less. He offered no figures to support that claim.

Reasons why this proposal is bad fiscal policy:

Raising cigarette taxes for the purpose of raising revenue merely shows a lack of courage on the part of politicians. While those who typically call taxation “theft” are exaggerating the extent to which government is taking from taxpayers without providing them sufficient benefits in return, choosing one segment of the population to pay for general government spending that benefits everybody may be deserving of such a “theft” label.

Cutting property taxes and raising other taxes is merely a bait-and-switch. You appease the voter’s hatred of property taxes, a very transparent tax, by raising other more-hidden taxes they wind up paying — like the corporate income tax and sales taxes. Raising the sales tax from 5 to 6 percent needs to also be analyzed in the context of possible border activity since much of Maryland’s population lives within driving distance of another state. Maryland is bordered by a state with a 5% sales tax (Virginia), two states with a 6 percent rate (Pennsylvania and West Virginia), and one with no sales tax (Delaware).

Subsidies for higher education sound good because everyone favors more education in the abstract. But college is preposterously expensive, and it’s a very different animal from K-12, so let’s follow the money. Vast amounts of Income are already being transferred from one set of taxpayers to another, and to non-taxpaying schools. Who gets the short end of this stick? Really, why should a plumber who skipped higher education and spent ten years in apprenticeship be forced to pay higher taxes so that the child of a lawyer can go to the University of Maryland to major in theater? Is there really a “public good” in that? No. The public at large benefits from K-12 education, but aside from some vo-tech and possibly R&D in medical and science schools, the argument for huge subsidies to colleges is weak.

Finally, raising corporate income taxes at the state level will result in lower wages for Maryland workers. The incidence of the federal corporate income tax is controversial due to different assumptions regarding the mobility of capital across boundaries. However, there is little dispute over the fact that capital is highly mobile between two states, and labor still is, albeit less so. Therefore, it is likely that labor would bear a large burden of the increase in Maryland’s corporate income tax, likely offsetting much of the gain that resulted from lower income taxes that O’Malley has proposed for low-income earners.

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