MD just reported a $504 million surplus, driven by a robust national economy and capital gains receipts from record high stock market valuations. Governor Hogan and Comptroller Franchot deserve credit for strong fiscal management after O’Malley’s tax and spending binge.
The good news- the state’s current surplus should increase even more next year. The bad news- at least $600 million of next year’s surplus will come from two major stealth tax increases on MD residents.
- MD consumers will start paying at least $300 million in sales tax for online purchases following the recent Supreme Court decision allowing states to tax out-of-state sales.
- MD taxpayers will pay approximately $300 million a year more to the state due to Federal Tax Reform’s elimination of various deductions.
This year’s $500 million cyclical surplus should be used mostly for investments, not permanently ramping up spending. The $600 million coming from stealth tax increases should be refunded to taxpayers. After O’Malley’s record spending binge, the legislature needs to protect MD residents from paying even more of their income to Annapolis.
This is a good government approach to fiscal policy. Which is why Annapolis machine pols like Del. Lafferty oppose it. Instead, they will try to permanently increase the size of government during these good times, fully knowing that they are setting up a major tax increase when the economic cycle inevitably turns.
Current Surplus should be Focused on Investment
Most of the $500 million surplus will be non-recurring, I propose allocating the bulk of the surplus to the following major spending categories, which should also be non-recurring:
Increase Capital Investment in School Construction
Every Baltimore County legislator should support an increase in state aid to Counties for school construction. Without this, the County will have difficulty funding much needed renovation of aging schools like Towson High without a property tax increase. Increasing state aid also frees up County education spending for other initiative
Paydown Pension Debt
MD has a $19 billion unfunded pension liabilities. Although we’re not facing the fiscal calamity that afflicts “blue” states like CT, IL, CA or NJ, our pension liability still works out to $8,600 in debt for every family in MD, much higher for Towson residents who pay proportionately more than average taxes.
We need to fund pensions today to make good on past promises to state employees and retirees. We need to stop politicians’ habit of kicking the cost of today’s promises onto future taxpayers.
Protecting MD Residents against Coming “Stealth” Tax Increases
O’Malley increased state taxes by approximately $3 billion a year. The coming stealth tax increases will add another $600 million to that total.
We should use the coming “stealth” tax revenue to begin reversing some of O’Malley’s most harmful taxes, focusing on taxes that put MD at a competitive disadvantage to its neighbors. I’d try to focus tax reform efforts on the following categories:
Reduce Business Income Tax: $120 million
O’Malley increased business taxes from 7% to 8.25%, exacerbating the competitive disadvantage with our neighbors. VA’s business tax rate is 6% and PA is 3.4% for LLC’s. Reversing 7%, MD’s tax structure will become less of a competitive disadvantage versus our neighbors.
Reverse O’Malley’s 2012 Income Tax Hike: $250 million
O’Malley increased income taxes multiple times, most recently in 2012 when exemptions were eliminated and tax rates raised from 4.75% to 5.25%. Even after this modest step, over half of O’Malley’s personal income tax increases would remain in place.
Retiree Income Tax Cut: fiscal impact TBD ~100 million
Gov. Hogan exempted the first $15,000 of public safety officer’s retirement income from state taxes. We should extend this exemption to all retirees. PA does not tax retirement income at all. VA has a $12,000 exemption. MD should help retirees who often live on fixed incomes and contribute tax revenue without utilizing costly services like schools.
Steve McIntire is candidate for House of Delegates in 42A. He studied Public Policy and Finance at the Wharton School of the University of Pennsylvania and has been a CFA Charterholder.