By Adam Pagnucco.
Last week, Delegate Julie Palakovich Carr and Council Member Will Jawando held a press event to discuss pending new state legislation enabling counties to cut income taxes for low income people. That sounds great, right? But here’s the catch:
It also enables income tax rate hikes. And it gives counties the flexibility to design tax plans that yield increases in overall revenue. That means depending on how much you earn, your taxes could be going up.
First, let’s review how county income taxes work. For many years, state law mandated that counties charge income taxes with a minimum rate of 1.0% and a maximum rate of 3.2%. These were flat rates with no tax brackets allowed. Last year, 11 of Maryland’s 24 local jurisdictions charged the maximum 3.2% rate, including Montgomery County. That’s up from 6 jurisdictions which did so in 2016.
Flat rates do not allow progressive taxation, which is characterized by higher rates on higher earners, but Montgomery County has applied work-arounds to make its tax code more progressive. An important one is the Income Tax Offset Credit (ITOC), which is a flat-dollar tax credit applied to owner-occupied properties. The ITOC has been set at $692 since FY11. Since it is a flat-dollar amount, it offsets a higher percentage of taxes on residences with lower assessments, thus making county taxes more progressive.
The other big progressive tax tool used by the county is the Working Families Income Supplement, which is a 100% match of the state’s earned income tax credit (EITC). Most states have EITCs but local ones are rare. In addition to Montgomery County, San Francisco and New York City have them. Funding for Montgomery County’s earned income tax credit has jumped from $12 million in FY11 to $45 million in FY23.
When combining these two programs with the county’s many property tax credits, the county’s tax code is more progressive than it might appear when simply looking at its flat income tax rate. But in 2021, Maryland counties for the first time gained the ability to create income tax brackets. We will review the details of this change in Part Two.