Maryland’s Income Tax Already Among Nation’s Highest

July 18, 2007

According to a story on the cover of today’s Washington Post, Maryland Governor Martin O’Malley and other lawmakers are pushing to increase the state income tax. From the story:

Gov. Martin O’Malley (D) and leading lawmakers say they are giving serious consideration to overhauling the state’s tax brackets, which are among the flattest in the nation. “I’m in favor of progressive taxation, where people who make a lot more pay more,” O’Malley told reporters recently.

The Post’s story compares Maryland’s individual income tax structure to those in Washington, DC, Virginia, Vermont, California and New Jersey, citing Tax Foundation data. None of those states have local income taxes, though, and Maryland’s are the highest in the nation.

Maryland taxpayers on average pay a little under 3 percent in local income taxes, according to the Maryland Comptroller. Added on to the top state rate of 4.75, Marylanders are paying an income tax rate in the neighborhood of 7.5 percent. That means only 13 states have a higher top income tax rate than Maryland.

Regionally, Maryland has a significantly higher rate than any of its neighbors: Pennsylvania (3.59 percent), Virginia (5.75 percent), Delaware (5.95 percent), and West Virginia (6.5 percent). Only DC is higher at 8.7 percent. Maryland’s high combined state and local income tax rate is the main reason its individual income tax was ranked below average at 35th in our 2007 State Business Tax Climate Index.

As the new Democratic power base in Maryland looks to increase the progressivity of the state’s tax code, the best way for them to do so without damaging the state’s economic competitiveness is to cut taxes on low wages-not raise them on high wages.

Governor O’Malley is right that the three lower rates (2.0 percent on the first $1,000, 3.0 percent on the next $1,000 and 4.0 percent the next $1,000) are silly. Those brackets could be abolished and replaced with a zero rate-or a larger standard deduction or personal exemption; those are currently $2,000 and $2,400 respectively for single taxpayers with one exemption. For instance, an exemption could be offered that exempts all income below a certain amount– $10,712 for instance– which is the amount someone would earn working a minimum wage job 40 hours a week, 52 weeks a year.

Raising taxes on Maryland taxpayers will only serve to drive people and businesses to other states, especially when lower-tax destinations are in such close proximity. Ultimately, Maryland lawmakers need to restrain spending or they will always be looking for more revenue.

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