June 25, 2018
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What Federal Tax Reform Means For Maryland

Peter Franchot
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February 21, 2018

When Congress passed the Tax Cuts and Jobs Act in December, it left many unanswered questions.

Who will benefit? Who will be harmed? Will corporate tax relief really boost the economy and have trickle-down effects, despite past failures? Will tax bills go down for the long haul or will it be temporary? Are there any unintended consequences?

These are just some of the questions that my agency’s nationally renowned Bureau of Revenue Estimates attempted to address as part of a comprehensive analysis on how federal tax reform will affect Marylanders and the state’s revenues.

Let me first provide some context. The report is the first in the nation to offer a detailed breakdown of what changes to the federal tax code will mean for individual taxpayers and the state’s coffers. It’s a testament to the bureau’s exceptionally talented staff, led by Director Andrew Schaufele, who worked many late nights and weekends to compile a nonpartisan, fact-based assessment that will chart the course ahead for taxpayers and policymakers.

Furthermore, the report is not some hypothetical exercise based on guesswork. The BRE analyzed actual 2014 taxpayer returns to calculate the impact on tax bills and state revenues, beginning with the current tax year.

With that in mind, our examination shows that 71 percent of Marylanders will pay less federal tax with 13 percent paying more and 16 percent seeing no change to their federal obligation. It adds up to a cumulative federal income tax cut in 2018 of $2.8 billion in Maryland. That translates to an average gain of $1,741 per taxpayer.

At the same time, two out of every three filers would pay about the same in Maryland taxes, while 28 percent would pay more and only four percent would see a reduction in state and local taxes. Barring no legislative action, state and local coffers would expand by roughly $572 million in Fiscal Year 2019 and $450 million in Fiscal Year 2020.

What’s behind all the ups and downs? At the federal level, the doubling of the child tax credit, the suspension of the federal personal exemption and the $10,000 limit on the deduction for state and local taxes paid, increases to the standard deduction allowed for each filing status, changes to federal tax brackets and lower tax rates, and a new deduction for qualified business income add up to lower tax burdens for most Marylanders.

State and local income tax bills are greatly affected by more taxpayers choosing to take the standard deduction instead of itemizing (Maryland’s tax code is coupled to the federal government, so taxpayers who choose to take the federal standard deduction must also take the state standard deduction). Additionally, taxable income changes for moving expenses, alimony and 529 College Savings Accounts.

In short, the majority of Marylanders will benefit from this tax legislation – at least initially.

What remains to be seen is whether this plan provides long-term economic growth or if the predicted benefits are front-loaded and disappears in the out years. If future generations are left to foot the hefty bill of the $1 trillion this legislation is projected to add to the federal deficit, history will not be kind toward the tax plan.

We’re already expecting one negative consequence – changes to the tax code will result in fewer charitable contributions because donations won’t carry the same tax benefit as they had previously. These organizations do so much for our local communities and it’s disappointing that they will likely find it harder to raise funds for critical programs.

Perhaps adverse impacts like this could have been avoided had the legislation been subject to committee hearings or public input. Instead, the bill was being amended in scrawled handwriting as the Republican majority rushed to get it passed. This represents the most sweeping changes to the federal tax code in at least a generation, so to think that the final product was rushed to the finish line in a hyper-partisan climate is troubling, to say the least.

But the fact remains that it is now the law of the land, and as Maryland’s chief fiscal officer, it is my hope that this reform lives up to its backers’ lofty promises. It would be irresponsible for any elected official to root against its success, as the law is heavily tied to the success of our nation’s economy and our state’s economy, both of which could use a shot in the arm. Because if it doesn’t deliver, the most affected groups will be those who can least afford it – the poor, the working class, small-business owners, senior citizens and financially vulnerable populations.

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