Baltimore Business Journal: Could Maryland weather the tax cuts proposed by Washington?

Editor’s note: The following commentary appeared on bizjournals.com on October 17, 2017.

Mention tax policy and most people roll their eyes or scowl.

But if you care about how much money you earn from a hard day’s work and have available for spending and savings it might behoove you to pay close attention to the contentious discussions unfolding in the White House and halls of Congress regarding taxes.

Details are a bit murky at this stage, but late last month President Donald Trump announced a plan to lower corporate taxes, eliminate estate taxes and to simplify the rules for individuals filing taxes. The proposal is being hailed by the president and some in the GOP as tax reform, but experts say it is about tax cuts.

We all like the sound of “tax cuts” – it makes us perk up and pay attention. But some of the proposals have the potential to hit Maryland’s budget hard and have serious ramifications for the state’s own spending and budget priorities.

Here’s why: Proposals under discussion in Washington include eliminating many itemized deductions, including the deduction for state and local taxes paid. In Maryland, about 45 percent of filers take advantage of the deduction, according to a 2016 report by the Tax Policy Center. Killing the state and local tax deduction would have a big effect on Maryland taxpayers.

“Eliminating the deduction would increase taxes for about 24 percent of taxpayers nationwide, but that percentage would be much greater in some states,” notably Maryland, Connecticut and a few other states, notes the 2016 Revisiting the State and Local Deduction report by the Tax Policy Center.

In other words, if the proposal is passed as it is pending in Congress, individual filers in Maryland would no longer be able to reduce their federal tax burden by deducting state and local taxes from their gross income in calculating taxable income.

 This could result in higher federal and state income tax bills for those who currently take the deduction. As a result, that would mean less money to spend in the economy or save for retirement. It’s the spending part that is the concern for some experts.

The Comptroller of Maryland’s Office says it is studying the potential effect of the Trump tax proposal on the state budget, but official estimates of revenue changes are not yet available.

But logic tells us that if Marylanders have less to spend they are likely to spend less on discretionary items.

The dominoes then could begin to fall. As businesses see sales dip, they may have to make tough choices, such as cutting back on employee hours. They might reconsider spending on capital improvements and projects.

One consequence that seems certain to some experts: Reduced sales will result in reduced sales tax income for the state coffers.

It is important to note that the Washington tax debate comes at a time when the state is already trying to recalibrate its budget forecasts due to a recent slowing of sales tax revenue, due to factors such as sluggish wage growth.

Warren Deschenaux, executive director of the Maryland Department of Legislative Services, has been a key player in decisions about the state budget for decades. He paints a concerning picture of what might happen if the state and local tax deduction is eliminated by Congress.

At the Economic Outlook Conference held by the Greater Baltimore Committee, Deschenaux noted in his presentation that the IRS reports that 1.3 million Maryland tax filers claimed $16.5 billion in itemized deductions.

If tax filers are unable to take the state and local tax deduction due to Congressional action and were to pull back on spending, Maryland’s economy and tax base would be negatively affected.

That would put pressure on elected leaders to “search for offsets to mitigate the impact,” Deschenaux noted in his presentation. Those “offsets” might involve budget cuts or looking for new revenues.

The loss of the state and local tax deductions would be felt most heavily in the high-income counties of Anne Arundel, Howard and Montgomery, Deschenaux noted.

The federal tax reform discussion underway in Washington is one of three risks identified by Deschenaux that create uncertainty to Maryland’s state government. Others include: a possible cutback by the federal government’s large contribution to the state for the cost of Medicaid expansion (fueled by the Affordable Care Act); and the heavy reliance of Maryland’s economy on federal employment and federal spending – 28 percent of the state economy.

These dynamics make the state’s economy especially vulnerable to the whims of Congress and budget battles.

With the efforts by GOP leaders in Congress either dead or stalled on healthcare reform, Maryland seems to have dodged — at least for now — the risk that the Medicaid issue poses. Meanwhile, the state is still adjusting to automatic federal budget cuts imposed in 2013 by the across-the-board cutbacks called sequestration.

What the tax debate in Washington will mean for Maryland is unclear. It’s a headwind that could blow in any direction.

What is clear is that if Congress does pass the Trump tax plan as outlined so far, more than a few Maryland businesses, taxpayers and legislators could be in for stormy weather indeed.

Donald C. Fry is President and CEO of the Greater Baltimore Committee. He is a frequent contributor to the Baltimore Business Journal.

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