Donald Fry: Special session could produce uneven income tax increases

 

By Donald C. Fry

When members of the General Assembly meet next week in a special session, they will have a specific “To Do” list crafted by Governor Martin O’Malley, Senate President Mike Miller and House Speaker Michael Busch for fixing the so-called “Doomsday” budget that was enacted by default last month.

In enacting a budget that will increase state spending by 2.6 percent in FY 2013, lawmakers apparently will be asked to pass legislation that could impose income tax increases of between 4.5 percent and 15 percent for Marylanders earning more than $100,000.

That’s the effect of the tax bill that had been crafted in conference committee when time ran out on the session’s last day, April 9. We’ll have to wait for Governor O’Malley to file the specific legislation on Tuesday, but if the income tax proposal includes the conference committee’s most recent proposed tax rates, it would impose substantial tax increases on major segments of the state’s taxpayers.

It would also create a tax structure with at least one curious inconsistency.

The governor and legislative leaders are absolutely correct in noting that the proposal under consideration will not increase income taxes for single taxpayers earning up to $100,000, nor will tax rates increase for joint taxpayers earning up to $150,000.

But from there, it takes taxpayers on a vacillating experience, a roller-coaster ride of percentage increases.

Single filers
Single filers making between $250,001 and $300,000 would experience the largest percentage tax increase of 15 percent while those earning between $150,001 and $250,000 would have a 10 percent increase. Yet, those earning between $125,001 and $150,000 would endure a slightly higher 10.5 percent increase.

Taxpayers earning between $100,001 and $125,000, and those earning more than $500,000 would experience the smallest percentage increases of 5 percent and 4.5 percent respectively.

Joint filers
Joint filers making between $300,001 and $350,000 experience a tax increase of 15 percent – the largest percentage increase.

Now for the curious inconsistency: Joint earners with incomes between $150,001 and $300,000 get a wild ride. For example, joint earners of $175 thousand, $200 thousand, $225 thousand, and $300 thousand would experience income tax increases of 5.3 percent, 10.5 percent, 5 percent and 10 percent, respectively.

Taxpayers jointly earning between $350,001 and $500,000 would experience a 9.5 percent increase. Tax rates would increase 5.3 percent for joint earners of between $150,001 and $175,000 and 4.5 percent for joint earners of more than $500,000.

With one strange exception, the bell curve for tax increases for both single filers and joint filers peaks, for the most part, in middle brackets, imposing income tax increases of 10 percent or more on single filers earning between $125,000 and $300,000 and most joint filers earning between $175,000 and $350,000.

These days, people with these kinds of income levels aren’t poor, but they are far from wealthy. And many are small business owners and job generators.

The first question we have to ask is: In this economy, does anybody deserve an income tax increase of 10 percent or more? A second pertinent question: Is this kind of tax structure good for our business climate?

It would appear to violate a core pillar of a competitive state environment for economic growth and job creation: “A tax structure that is fair and competitive.” This key tenet was among eight core pillars advanced by state economic development experts and business executives and compiled by the Greater Baltimore Committee in its “Gaining a Competitive Edge” report.

At least let’s hope somebody considers the impact on economic growth and job creation before enacting an uneven income tax structure.

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