Adam Pagnucco on the Budget: Part II

Adam Pagnucco of Crossing Georgia has been kind enough to share this detailed analysis of the budget. If you missed Part I, you can read it here.

Part Two: Is the Governor’s Plan Progressive or Regressive?

First, let’s finish looking at the remaining elements in the Governor’s proposal. Then we will be able to determine the plan’s relative reliance on progressive and regressive measures.

Corporate Income Tax

The Governor proposes to increase Maryland’s corporate income tax rate from 7% to 8%, raising $110 million in FY 2009. The new higher rate would still be lower than Pennsylvania (9.99%), the District (9.975%), New Jersey (9%), West Virginia (8.75%), and Delaware (8.7%), but higher than North Carolina (6.9%) and Virginia (6%). Given the facts that Maryland could easily raise its corporate income tax even more and still be close to most of its neighbors and that 66% of Post poll respondents approved of this hike, the state’s business community should be relieved that the increase is not larger.

Corporate Income Tax: Progressive, 7% of Package

Expansion of Sales Tax Base

Maryland’s sales tax does not apply to most services. According to the Federation of Tax Administrators, of 168 potential services to be taxed, Maryland taxes just 39. The District of Columbia taxes 70 and Virginia taxes 18. The Governor proposes to apply the sales tax to tanning salons, health club membership, massage services and real estate management, bringing in $74 million in FY 2009.

Because there are well over 100 types of services that would still be untaxed, there are vast opportunities for more revenue in this category. Jeffrey Birnbaum and Alan Murray’s brilliant book Showdown at Gucci Gulch (which should be required reading for all tax policy-makers) tells the story of how Congressman Dan Rostenkowski, Senator Bill Bradley and the Reagan Administration teamed up to lower marginal income tax rates by closing loopholes and exemptions in 1986. A similar approach to the sales tax might at least partially ameliorate a rate increase.

While real estate management might be passed on partly to renters, it is hard to say that the other services are used disproportionately by the poor. Overall, I assign this a neutral impact.

Expansion of Sales Tax: Neutral, 4% of Package

Property Tax and Sales Tax Relief

The Governor actually cuts two taxes in his proposal, losing revenues for the state. He proposes reducing the property tax rate by 3 cents per $100, costing $54 million in FY 2009 (and much more in later years). He also offers two sales tax-free weeks on clothes and two tax-free weekends on energy efficient appliances, costing $13 million per year.

The property tax decrease will disproportionately benefit people whose wealth is concentrated in their homes, many of whom are seniors or middle class. The tax-free periods will tend to benefit the poor and middle class. Since both measures cost the government money rather than raise it, I list them as offsets to the regressive features of the proposal.

Property Tax and Sales Tax Relief: Regressive Reduction of 4% of Package

Corporate Loopholes

The Governor would like to close two corporate loopholes. First, he would like to implement “combined reporting,” which would make it more difficult for corporations to reduce Maryland taxable income by assigning it to other states. Second, he would like to do away with commercial real estate owners’ use of shell companies to sell property without paying transfer taxes. Both measures are expected to raise a combined $36 million each year.

Corporate Loopholes: Progressive, 2% of Package

Slots

The Governor originally proposed a slots plan which he said would be loosely modeled on a bill passed by the House of Delegates in 2005, which would have authorized 9,500 machines. He estimated the plan would produce just $27 million of revenue in FY 2009 but would eventually bring in $550 million by FY 2012.

Opponents depict slots as regressive, alleging that poor people would gamble higher proportions of their income than the rich. Is it possible to have “progressive” gambling? Instead of relying on slots, the state could sell licenses for table games to luxury hotels requiring fifty dollar minimum bets. Wealthy gamblers could be seduced by endless champagne, sushi and Godiva chocolates. Some might even come in from Pennsylvania and Virginia which (so far) do not have table games. But such a proposal would fail because it would not generate as much revenue as the “one-armed bandits” and slots opponents tend to oppose all gambling, not just machines.

There is now a chance that the legislature will propose a slots referendum to be voted on next year rather than a slots bill. If that happens, there may be even more machines (perhaps 15,000) to compensate for the delay in the revenue stream. Sixty-eight percent of Post poll respondents supported slots, giving any referendum a fair chance of passage. If the referendum fails, state politicians may have to consider more taxes and/or cuts in 2009, something none of them wants to do so close to an election year. In any case, slots produce more money in out years than in the near term.

Slots: Regressive, 2% of Package (Rising to 24% of Package in FY 2012)

How Progressive is the Package?

Our calculations of the Governor’s deficit reduction proposal in FY 2009 are:

Amount in $ millions (Percentage)

Progressive Measures

Income Tax Restructuring: $162 (10%)
Corporate Income Tax Hike: 110 (7)
Closing Corporate Loopholes: 36 (2)

Total Progressive: $308 (18%)

Neutral Measures

Budget Cuts (non-education): $268 (16%)
Sales Tax Expansion: 74 (4)

Total Neutral: $342 (20%)

Regressive Measures

Sales Tax Hike: $730 (43%)
Tobacco Tax Hike: 170 (10)
Lower Education Spending Growth: 169 (10)
Slots: 27 (2)
Offsets for Property Tax,
Sales Tax Relief: -67 (-4)

Total Regressive: $1,029 (61%)

Total, All Measures: $1,679

The deficit reduction package is primarily regressive, principally because of its heavy reliance on the sales tax. The situation would be worse in FY 2012 as slots rise to 24% of the deficit reduction package, making it 70% regressive overall.

In Part Three, I propose an alternative revenue raiser that could be used to reduce the plan’s reliance on regressive solutions.

Adam Pagnucco is the Assistant to the General President of the United Brotherhood of Carpenters and has been employed in the labor movement since 1994. The views in this column are his alone and do not represent official statements from the union.