OPTIONS FOR PROTECTING MARYLAND S LOW- AND MODERATE-INCOME FAMILIES FROM REGRESSIVE TAX INCREASES

Transcription

1 820 First Street NE, Suite 510 Washingtn, DC Tel: Fax: Octber 26, 2007 OPTIONS FOR PROTECTING MARYLAND S LOW- AND MODERATE-INCOME FAMILIES FROM REGRESSIVE TAX INCREASES By Nichlas Jhnsn and Jasn A. Levitis Executive Summary Maryland faces large budget deficits in the cming fiscal year and fr the freseeable future. Putting the state n secure fiscal fting will almst certainly require significant tax increases. Many f the tax increases currently under cnsideratin wuld impse a disprprtinate cst n Maryland s lw- and mderateincme families. Maryland shuld seek t mitigate these tax increases n lw- and mderate-incme families fr the fllwing reasns: A brad package f tax increases is likely t cst the typical lw-incme family several hundred dllars per year. This represents a significant amunt f mney t a family struggling t make ends meet. Lw- and mderate-incme families in Maryland already face high state and lcal taxes higher, relative t their incme, than high-incme Marylanders. Grwing incme inequality has left these families with a smaller share f the pie. These families have benefited far less than higherincme Marylanders frm recent federal and state incme taxes. KEY FINDINGS Tax increases being cnsidered t balance Maryland s budget will have a disprprtinate impact n lwincme families. A typical lw-incme family in Maryland is likely t face a tax increase f a few hundred dllars a significant amunt fr a family struggling t get by. T mitigate these tax increases, Maryland culd d ne r mre f the fllwing (with varying degrees f effectiveness): Increase and expand Maryland s refundable Earned Incme Credit. Create a new refundable sales tax credit. Increase and refrm Maryland s standard deductin; and/r Expand the prperty tax circuit breaker fr hmewners and renters sfp3.dc

2 This paper describes fur ptins fr mitigating tax increases n-lw families: Increase Maryland s refundable Earned Incme Credit frm 20 percent t 25 f the federal credit and revke the exclusin f wrkers withut children living at hme; Create a new refundable sales tax credit; Expand the prperty tax circuit breaker fr hmewners and renters; and Increase and refrm Maryland s standard deductin. Because these ptin are t varying degrees targeted n lw- and mderate-incme families rughly the prest 20 percent t 40 percent f the state s ppulatin they can prvide significant assistance t each family at a reasnable fiscal cst. Backgrund Maryland faces a General Fund deficit f abut $1.7 billin r 10 percent f the General Fund in the cming fiscal year, with n imprvement freseen in future years. T address this shrtfall in keeping with Maryland s balanced budget requirement, a number f prpsals have been advanced. The mst prminent prpsal is Gvernr O Malley s, which calls fr a cmbinatin f spending cuts, tax changes, and new revenue frm expanded gambling. The tax increases included in the gvernr s plan including increases in the sales tax, tbacc tax, and car titling tax wuld be quite regressive, meaning that lw-incme families wuld pay a higher share f their incme t cver them than wuld wealthier families. Likewise, gambling is generally thught t be a regressive revenue surce, because n average lwer-incme husehlds spend a higher prprtin f their incmes n gambling than d higher-incme husehlds. The Case fr Mitigating Regressive Tax Increases The gal f mitigating tax increases n lw-incme families with crrespnding tax relief is apprpriate fr a number f reasns: A tax increase f few hundred dllars, as might befall a lw-incme family under a brad package f tax increases, represents a significant amunt f mney t a family struggling t make ends meet. A few hundred dllars might cver a mnth s rent, r tw mnths f grceries, r six mnths f hme heating. Lw- and mderate-incme families in Maryland already face very high state and lcal taxes, and pay mre, relative t their incme, than their high-incme neighbrs. Accrding t the Institute n Taxatin and Ecnmic Plicy (ITEP), in 2006 the 40 percent f Maryland families with the lwest incmes paid rughly 9.3 percent f their incme in state and lcal taxes, while the tp ne percent paid nly 6.8 percent f their incme twards these taxes. This suggests that a typical family f fur with incme f $20,000 apprximately the federal pverty line 2

3 already pays sme $1,900 per year in state and lcal taxes, which is a large expense fr such a pr family. Lw-incme families in Maryland fr the mst part have nt benefited frm the present ecnmic expansin. Over the last five years, even as the state s median incme has risen, the number f pr families has grwn as well, accrding t the Census Bureau. T add new, regressive tax increases t the ecnmic challenges facing lw-incme families withut mitigating them in sme way wuld be inapprpriate. Lw-incme families in Maryland have benefited far less than wealthy Marylanders frm recent changes in federal and state incme taxes. In 2007 alne, the wealthiest 1 percent f Maryland taxpayers is expected t receive an average federal tax cut f $45,981 frm the tax cuts enacted since 2001, accrding t ITEP. That s mre than 80 times the average tax cut received by the bttm 60 percent f Maryland taxpayers. The Maryland incme cut passed under Gvernr Glendenning als helped lw-incme Marylanders less than it did wealthy nes. In additin, since the prpsals described belw are targeted n lw- and mderate-incme families rughly the prest 20 percent t 40 percent f the state s ppulatin they can prvide significant assistance t each family at a reasnable fiscal cst. It shuld be nted that a targeted apprach is preferable t mre brad-based tax cuts such as acrss-the-bard persnal exemptin increases r incme tax bracket bradenings, which wuld assist many middle- and upper-incme families but at such high cst that the verall revenue-raising impact f the package wuld be impaired. 1 Hw much assistance will lw-incme families need t meet the prpsed tax increases? A number f the tax increases included in Gvernr O Malley s package and likely t be enacted are quite regressive. Fr example, ITEP data suggest that a ne-cent increase in the sales tax rate might cst a typical lw-r mderate-incme Maryland husehld $80 t $140 a year mre fr larger families. Expanding the sales tax t mre services might add anther $10 t $20. A nedllar-per-pack cigarette tax increase might cst the average lw- t mderate-incme family between $40 and $50 per year. A car titling tax increase wuld run these families $20 t $30. Anther ptin that may be advanced, a 10-cent gasline tax increase, wuld cst these families anther $30 t $55. Other tax increases are als being cnsidered. Depending n what taxes are included in a package, tax increases culd easily add up t $300 fr lw- t mderate-incme families, and much mre fr families with mre than tw children, rural families that drive a lt, and families that include smkers. Apprpriate tax measures culd be designed t reflect, rughly, this ttal. Anther way t assess whether lw-incme tax relief is adequate is t cmpare it t the verall revenue frm a regressive tax increase. Accrding t ITEP, the prest 20 percent f taxpayers 1 Hwever, a persnal exemptin increase fr all taxpayers r just fr senirs culd be designed in such a way that it phases ut as a family s incme rises. The federal persnal exemptin and a number f states incme taxes have similar phase-uts; if designed crrectly, such a persnal exemptin change culd be part f a package f lw-incme tax relief. 3

4 wuld pay rughly 7 percent f a sales tax increase r a similar share f a gasline tax increase (a prprtin that far exceeds thse taxpayers share f the state s incme). The prest 40 percent f taxpayers wuld pay rughly 21 percent f a cnsumptin tax increase. Therefre, a sund strategy wuld be t dedicate between 7 percent and 21 percent f revenues raised frm regressive tax increases t lw-incme tax relief. Optins fr Mitigating Regressive Tax Increases Optin I. Imprve Maryland s Refundable Earned Incme Tax Credit. Maryland, like the federal gvernment and 22 ther states (cunting the District f Clumbia as a state), ffers an EITC t supprt lw-incme wrking families with children. The EITC has been recgnized as ne f the natin s mst effective anti-pverty tls. Uniquely, Maryland ffers bth a refundable EITC equal t 20 percent f the federal EITC and a separate nn-refundable EITC equal t 50 percent f the federal credit; they interact in such a way as t cmplement each ther. (A refundable credit is ne that can benefit families even if their incmes are t lw t have any incme tax liability, because the credit can be paid t the family. A nnrefundable credit benefits nly families with incme tax liability.) There are tw changes t the EITC that wuld benefit lw- and mderate-incme wrking families. Increase the refundable EITC frm its current level f 20 percent f the federal credit t 25 percent r 30 percent f the federal credit. An increase in the refundable credit will benefit well ver 200,000 Maryland wrking families with children, particularly thse wrking families whse incmes are t lw t have any Maryland incme tax liability. Increasing the refundable credit frm 20 percent t 25 percent f the federal EITC wuld prvide the average eligible family with between $100 and $200 in additinal tax relief r incme supplement, depending n family structure. This prpsal is included in Gvernr O Malley s plan. It was als cntained in Senate Bill 526 (2007), whse fiscal nte estimated its cst at $33 millin. 2 An increase t 30 percent wuld prvide greater tax relief (and carry a larger fiscal nte). Let taxpayers withut qualifying children claim the refundable EITC. The federal EITC, as well as 21 state credits based n it, ffer small benefits t single and married lw-incme, nn-elderly, wrking adults withut qualifying children living in their hmes. 3 Maryland is ne f just tw states that exclude these wrkers frm its refundable EITC. 4 Making these wrkers eligible fr the refundable EITC wuld prvide them as much as $85 per year ($107 if the refundable credit were increased t 25 percent f the federal EITC). Implementing this measure wuld be extremely simple and als wuld simplify Maryland s tax instructins. This 2 See sb0526.htm. 3 In general, nly a child wh lives with the taxpayer cunts as a qualifying child fr purpses f the EITC. S the federal EITC recipients whm Maryland nw excludes frm the state refundable EITC may include nncustdial parents. 4 The ther state that excludes wrkers withut qualifying children is Wiscnsin. New Jersey and Illinis passed legislatin in 2007 making such families eligible fr their refundable EITCs. 4

5 change wuld cst less than $4 millin. 5 Fr mre infrmatin abut Maryland s EITC, see CBPP s legislative testimny n the subject, available at Optin II. Enact a New Maryland Sales Tax Credit A number f states have experimented with sales tax credits direct payments r rebates t all lw- and mderate-incme families t help families meet the cst f sales taxes. (The largest, mst lng-standing such credit is New Mexic s Lw Incme Cmprehensive Tax Rebate, which prvides up t $310 t a family f fur.) In Maryland, such a credit culd als have the functin f mitigating increased gasline taxes r ther regressive taxes. A credit s value is smetimes set based n the incremental csts frm increases in cnsumptin taxes: perhaps $50 per family member fr families with incmes belw the pverty line, with lesser amunts fr families with incmes just abve the pverty line and n credit fr middle- r upper-incme families. Gvernr O Malley s plan, by cntrast, includes a flat $50 per family credit fr families earning under $30,000 per year. Fr taxpayers wh are filing incme tax frms, the credit culd be administered thrugh the incme tax system. A separate ne-page frm culd be made available t families that are eligible fr the credit but d nt file incme taxes. The great challenge with sales tax credits is that many families may nt claim the credits fr which they are eligible. Bth the limited data n the subject and anecdtal evidence indicate that the participatin rate fr small refundable credits tends t be well belw 50 percent. In Kansas, fr example, a credit wrth up t $130 and intended t balance ut the state s sales tax n fd was estimated t reach nly 33 percent f eligible families in This prblem is particularly acute with taxpayers wh d nt file incme tax frms a grup that includes many f the state s prest taxpayers. And it is further exacerbated when the credit is a small amunt f mney, as it wuld be likely in Maryland. Fr these reasns, if such a sales tax credit were enacted, it shuld be accmpanied by a substantial utreach and publicity effrt, and it shuld be large enugh t create a strng incentive t claim it. Even s, it wuld be reasnable t expect a fairly lw participatin rate, particularly amng thse wh wuldn t file tax returns. This wuld reduce the efficacy f such a credit, but, n the ther hand, it wuld make the credit mre affrdable t the state. Indeed, the Gvernr s estimate f $10 millin fr his prpsed credit is likely t high, as it appears t be based n the assumptin f full participatin. 5 Fr additinal infrmatin n this ptin, see A Simple, Inexpensive Way fr Maryland t Prtect Certain Lw- Incme Wrkers frm Tax Increases, Center n Budget and Plicy Pririties, Octber 25, Steven D. Gld and David S. Liebschutz, State Tax Relief fr the Pr, 2 nd Ed. (Albany: The Nelsn A. Rckefeller Institute f Gvernment, 1996), pg

6 Optin III. Imprve the Hmewners' Prperty Tax Credit and Renters' Tax Credit (Als Knwn as Circuitbreakers ) The Hmewners' Prperty Tax Credit and the Renters' Tax Credit are administered by the Department f Assessments and Taxatin. They reduce prperty tax liability fr Marylanders with high prperty taxes relative t their incmes. (Fr renters, it is assumed that a certain prtin f their rent ges tward prperty taxes.) High husing csts can be a majr factr in making it difficult fr families t make ends meet, and prperty taxes are a cntributr t husing csts. Sme 48,000 Maryland hmewners and 10,600 Maryland renters received the credits in FY The credits are available t hmewners with incmes up t $60,000, renters wh are senir citizens r disabled with incmes up t $30,000, and nn-senir/nn-disabled renters with incmes up t the pverty line (e.g. abut $16,000 fr a family f three in 2006). T claim the credit, taxpayers must submit a special applicatin each year t the Department f Assessments and Taxatin; renters get a rebate check and hmewners get a credit against their prperty taxes. The credits culd be imprved fr lw- and mderate-incme families in the fllwing ways: Make the credits larger. The frmulas fr determining the amunt f the credits culd be adjusted s that the credits equal a larger share f tax liability. Under current law, a hmewner with incme f $16,000 and prperty tax liability f $500 receives a credit wrth just $80. A hmewner with incme f $20,000 and a $750 prperty tax bill receives n credit at all. The credit fr renters is even less generus. 7 The amunt f the credits culd be increased and they culd be expanded t mre hmewners and renters. A mdest refrm adjusting the frmula t increase the hmewners' credit by abut $100 fr mst families wuld prvide up t $6 millin t current recipients f the credits, in additin t making mre families eligible. Increase participatin rates. The Department f Assessments and Taxatin already cnducts a limited utreach campaign; additinal funding culd be allcated t such a campaign, ptentially with the assistance f the Cmptrller s ffice, cunty tax ffices, nnprfit rganizatins, prfessinal tax preparers, senir rganizatins, media utlets, mrtgage cmpanies, landlrds, and thers. A line shuld be added t the state incme tax frm n which taxpayers (especially renters) can claim the credit, rather than requiring submissin f an entirely separate frm. The increased credit size described abve als culd make eligible families mre likely t try t claim the credit. The Department f Assessments and Taxatin has nt estimated hw many families nw fail t receive the credits fr which they are eligible. Therefre, it is hard t knw what the verall benefit frm an increased utreach campaign culd be. But it culd be substantial. 7 Specifically, the current frmula fr hmewners allws a credit equal t the amunt f prperty tax paid, t the extent that the tax exceeds the fllwing amunts: 0 percent f the first $8,000 f the cmbined husehld incme, plus 4 percent f the next $4,000 f incme, plus 6.5 percent f the next $4,000 f incme, plus 9 percent f all incme abve $16,000. The credit is further limited as fllws: the amunt f prperty tax that can be cunted in this frmula is limited t the prperty tax levied n hme with an assessment f $300,000. Husehlds with net wrth exceeding $200,000 are excluded. The exact amunts are shwn in the applicatin frm at The current frmula fr renters is similar, but results in slightly lwer credit amunts; the frmulae fr renters and hmewners culd be made cnsistent as part f an expansin. 6

7 Optin IV. Increasing and Refrming Maryland s Standard Deductin Maryland's standard deductin which is currently $3,000 t $4,000 (depending n incme) fr heads f husehld and married cuples, and $1,500 t $3,000 fr single filers has nt been adjusted fr changes in the cst f living since the late 1980s. Its value has erded 38 percent since Maryland s standard deductin is als unusual amng states in that it is smaller fr taxpayers with lw incmes (e.g., married cuples with incmes belw $26,000) than fr higher-incme families. Mst states have a flat-rate standard deductin. The federal standard deductin fr a married cuple is a flat $10,000. Increasing the standard deductin wuld benefit mstly mderateincme individuals and families, because upper-incme filers itemize at much higher rates. Of the rughly 1 millin Marylanders wh claimed the standard deductin in 2005, mre than three-furths had incme belw $40, Maryland culd increase the standard deductin and set it at a flat rate. HB 1373 in 2004 included such a prpsal, increasing the standard deductin t $9,500. The estimated fiscal impact at that time was $156 millin (plus an additinal impact n lcal incme tax cllectins). The cst f such an increase wuld be larger fr 2008 but a smaller standard deductin increase wuld, f curse, have a smaller cst. The revenue impact, bth fr the state and fr lcalities, culd be further limited by phasing dwn the standard deductin fr higher-incme taxpayers, as at least ne ther state (Alabama) has recently dne. Each $1,000 increase in the standard deductin wuld reduce state incme tax fr affected families by up t $47.50 at current tax rates (plus ptentially up t $30 in lcal incme tax). Cnclusin: Using multiple appraches Each f the appraches described abve wuld assist tens f thusands r hundreds f thusands f lw- and mderate-incme Maryland families meet the increased csts assciated with cnsumptin tax increases. But they are nt identical in the specific taxpayers that wuld be assisted. The Earned Incme Tax Credit benefits nly taxpayers with earnings, s sme lwincme taxpayers including lw-incme retirees 9 wuld nt benefit frm increases in the credit. Increases in the standard deductin generally wuld leave ut families with incmes t lw t have incme tax liability under current law (the exceptin wuld be sme f the current recipients f the refundable EITC, whse credit wuld be increased due t its interactin with the standard deductin). Imprvements in the hmewners and renters credits wuld leave ut lw-incme families with relatively lw husing csts. And sales tax credits wuld leave ut many lw-incme families, particularly thse wh d nt file state incme tax returns, due t expected lw participatin rates. A sund apprach, therefre, culd be t include mre than ne f the prpsals abve. Such a package wuld assist a wide range f lw- and mderate-incme families wh will face increased csts as a result f regressive tax increases. 8 These figures include nly taxable returns, that is, thse that have psitive net taxable incme after exemptins and deductins. 9 Senirs wh are wrking and raising children in the hme, hwever, can receive the EITC. 7