Do’s and Don’ts for Fair and Effective Maryland Tax Reform

Fixing Maryland’s tax code to raise much-needed revenue and promote broad prosperity remains critical amid drawn-out budget negotiations and disastrous federal cuts. To make sure the eventual deal is both fair and effective, policymakers should focus on the following dos and don’ts:

• Maryland’s current budget crunch has been a long time coming. While the American Rescue Plan and other COVID 19 relief measures temporarily boosted our economy and shored up tax revenues, nonpartisan analysts have warned for nearly a decade that long-term revenue growth is insufficient to support essential services like education, health care, and transportation.
• We’re now facing massive economic uncertainty – and unlike the pandemic or the Great Recession, today’s crisis is being deliberately inflicted from above. A special legislative session may be necessary to contain the fallout.
• It would be foolish to put off tax reform until a special session. There is essentially zero chance that our fiscal position will improve in the coming months. Now is the time to act.

• Maryland’s tax code is upside-down: Today, the wealthiest 1% (those taking home more than $700,000 per year) pay a smaller share of their income in state and local taxes than any other income group.
• Moreover, we’re behind the curve in making sure big businesses pay their fair share. About one-third of the state’s largest corporations pay $0 in corporate income tax each year, partly due to loopholes most other states have already closed.
• Moore’s tax plan takes major steps in the right direction, such as asking more of those with annual taxable income over $500,000 and adopting domestic (“water’s edge”) combined reporting for multistate corporations.
• The Fair Share for Maryland Act goes further by cracking down on offshore profit shifting with worldwide combined reporting, closing the LLC loophole that allows giant companies to get out of paying the corporate income tax, and other strong measures.
• Both the governor’s plan and the Fair Share for Maryland Act also boost working families’ incomes by strengthening refundable tax credits.
• Unaffordable housing, exploding utility costs, and tariff-driven price hikes are squeezing families’ pocketbooks in ways not seen in decades. Asking more of ordinary Marylanders while continuing to let wealthy individuals and big corporations off the hook would be the wrong choice.

• Moore’s tax reform plan is a strong foundation, but it is not enough. Even in January, the governor’s budget slashed support for child care, education, and more – and left a multibillion-dollar gap that would require deeper cuts by the end of the decade.
• The need for more ambitious reforms is even more urgent now, as the Trump/Musk buzzsaw is expected to destroy nearly 30,000 Maryland jobs and wipe out about $300 million in projected revenue over the next two years.
• Building on the governor’s plan with provisions from the Fair Share for Maryland Act would prevent more harmful budget cuts and bring our economy into closer alignment with our values. Other measures, such as decoupling from the Foreign Derived Intangible Income deduction (“FDII,” part of the 2017 Trump tax law) would also help.
• Policymakers should consider removing poorly targeted tax cuts from the governor’s plan, such as his proposals to reduce the corporate tax rate and repeal the inheritance tax.
• On the other hand, lawmakers should resist calls to chip away at Gov. Moore’s revenue plan. The governor’s proposal to replace itemized deductions with a more robust standard deduction – a sound approach to simplifying our tax code – has drawn particular fire.
• The fact is, the governor’s plan would cut income taxes for two-thirds of Maryland households. Among the 80% of households with less than $170,000 in annual income, five out of six would either receive a tax cut or see no change at all.
• Still, doing away with itemization entirely is not the only option. Narrower reforms, such as phasing out itemized deductions for the wealthiest households, or retaining write-offs for medical costs, are viable compromises – if accompanied by other measures to make up the lost revenue.
• Doing too little now may make much-needed reforms harder to accomplish in the near future.

• Raising sufficient revenue is essential for Maryland’s current and future economic strength. When surveyed about their prioritieswhen choosing where to locate, business leaders focus on assets that depend on public investments.
• For example, access to skilled workers – made possible by high-quality public schools – ranked as the second-most important site selection factor in Area Development magazine’s most recent corporate executive survey (2023), and ranked in the top five factors in every one of the last five survey installments – consistently higher than any tax policy factor.
• In the same survey series, the corporate tax rate did not appear in the top five once. While shareholders and executives may prefer lower taxes in isolation, taxes are not among the most important location factors at the end of the day.
• Moreover, Maryland’s tax code is currently highly favorable to business. According to an annual report prepared by the global accounting and consulting firm EY for the pro-business Council on State Taxation, all state and local taxes on businesses are a smaller share of the private-sector economy in Maryland than in most other states – and a smaller slice of our revenue pie than in any other state.
• Taxes are also not the most important factors when families decide where to settle down. In fact, after the District of Columbia enacted fair income tax reform in 2021, the number of wealthy residents increased – to the highest level ever.

• Maryland’s sales tax is outdated, relying almost exclusively on tangible goods that account for a shrinking slice of our economic pie. Modernizing the tax base to include more services would make it more effective, but current proposals along these lines are misguided.
• A proposed 2.5% tax on business-to-business services like payroll and vehicle fleet repair has recently dominated the conversation in Annapolis. Experts across the ideological spectrum near-unanimously advise against taxing business inputs.
• Taxing business inputs is not an effective way to ensure large corporations and wealthy shareholders pay their fair share, as it is easy for businesses to pass these on to consumers in the form of higher prices. Taxes on profits are a better tool for this job, as it is mathematically much harder for businesses to pass these on to consumers without sacrificing their own after-tax profits.
• While we exempt household essentials like groceries from the general sales tax to avoid placing undue responsibilities on working families, a tax on business inputs would likely raise prices across the board – making our sales tax both more lopsided and less transparent.
• Furthermore, while reforms like worldwide combined reporting and closing the LLC loophole target the biggest companies, taxing business services would disproportionately hit small businesses that typically outsource administrative and support functions. It could even make some businesses impossible to operate profitably – something a tax on profits mathematically cannot
• If policymakers wish to modernize the sales tax, a better approach is to transparently apply it to consumer services like spas and car repairs, just as it applies to tangible goods like cosmetics and automotive supplies.
• However: While a well-designed sales tax reform lacks the downsides of a tax on business inputs, it would still fall most heavily on working families. For this reason, it should be considered only as part of a broader package that closes corporate tax loopholes, asks wealthy individuals to pay their fair share, and strengthens tax credits for working families.