Maryland Looking to Raise Income Tax on Middle-Earners

Not too long ago, I was on a panel with Nick Johnson of the progressive Center on Budget and Policy Priorities, where we were talking about what states were doing to deal with the recession. I made my case that states ought to focus on reprioritizing expenses to the “new normal,” since it was unlikely that states could return their budget spending to the peak of the boom plus 8 percent budget growth per year. Johnson made his case that states ought to enact tax increases, particularly on high-income earners, until revenues recovered.

At one point, Johnson claimed that an income tax increase causes very few, if any, to move out of a state. (NOTE: This post previously incorrectly stated that Johnson had said “never,” which is now corrected. Additionally, I specifically note that his comment referred to income taxes.) While I agree that taxes are one of many factors that go into deciding where to live, and while I agree that the effect is a modest one if it happens, I mentioned to Johnson that I moved out of Maryland for tax reasons in 2007. He scoffed, saying that it was a tax increase on millionaires, and I’m not a millionaire. I replied that there was also a sales tax increase, and that tax increases on others would happen.

I regret that I’ve been vindicated. Having never brought down the baseline of annual spending ratcheted up in 2007 (Republican Governor Ehrlich’s last year) and under Governor O’Malley, Maryland is now floating across-the-board income tax increases.

Taxing millionaires may be good politics but doesn’t raise a lot of revenue: one taxes middle-income earners because, as robber Willie Sutton once said about banks, it’s where the money is. The Examiner has a great chart breaking down the proposals:

Note: Rates do not include Maryland’s local income taxes, which range from 1.25% to 3.20%.

As my colleague Scott Drenkard noted yesterday:

Further, as evidenced by California, states that rely more on higher income to finance their budgets can have problems with revenue stability during economic contractions. Higher income earners are generally businesses, which have a revenue stream that ebbs and flows with business cycles.

In general, Marylanders should be wary of a tax code that attempts to pick winners and losers out in the economy; and instead choose one that taxes everyone at the same low rate.

More on Maryland here.