By Adam Pagnucco.
For decades, Maryland counties could only charge flat income tax rates under state law. But that changed in 2021 despite opposition from Governor Larry Hogan.
Allowing counties the ability to construct income tax brackets had been discussed for many years. In 2020, then-Delegate Nick Mosby (who is now president of the Baltimore City Council) introduced HB1494. The bill would have allowed counties to establish tax brackets subject to three constraints. First, no tax bracket could be less than 2.25%. Second, a county’s tax brackets could not differ from state income tax brackets. And third, a bracket applying to higher income could not have a lower rate than a bracket applying to lower income. (In other words, a county could not use brackets to establish regressive taxation.) The original draft of the bill raised the maximum rate to 3.5% but it was amended to retain the current rate of 3.2%. The amended bill was passed in the House on a 94-35 vote but it never came out of the Senate’s Budget and Taxation Committee.
The next year, Delegate Julie Palakovich Carr followed up with the “Local Tax Relief for Working Families Act of 2021.” Palakovich Carr’s bill was similar to Mosby’s except that it allowed counties to establish tax brackets different from the state’s. Like Mosby’s bill, its original version included a hike in the maximum income tax rate to 3.5%. Also like Mosby’s bill, it was amended to restore the 3.2% maximum and passed both the House and the Senate. But Governor Larry Hogan vetoed it. In his veto letter, he stated:
The most troubling aspect of Senate Bill 133 and House Bill 319 – Local Tax Relief for Working Families Act of 2021 is that it masquerades as tax relief, when in reality there is no requirement for counties that implement a bracketed tax system to actually cut taxes. Instead, certain counties could keep their current rate as the new lowest rate and establish higher rates for higher–income residents, resulting in tax increases on one group of filers without providing any actual tax relief for the majority of taxpayers. In addition, this legislation raises the minimum floor that jurisdictions can set their local income taxes from 1% to 2.25%.
Democrats in the General Assembly overrode Hogan’s veto in December 2021 and Palakovich Carr’s bill is now law. Counties may now establish income tax brackets but they cannot exceed the 3.2% maximum.
Last week, Palakovich Carr and Council Member Will Jawando held a press event discussing new legislation on the subject. Their press announcement stated:
Maryland Delegate Julie Palakovich Carr (District 17) and Montgomery County Councilmember Will Jawando (At-Large) will hold a virtual press conference today, Jan. 12 at 12 p.m. to discuss the introduction of the More Local Tax Relief for Working Families Act of 2023.
The act will give Montgomery County the authority to provide revenue-neutral tax relief for moderate and low-income residents. The act gives counties a tool to create a fairer tax system that lowers taxes on low and moderate incomes and modestly increases rates for higher earners by increasing the maximum allowable income tax rate from 3.2% to 3.7%.
Delegate Palakovich Carr and Councilmember Jawando will provide remarks on the bill and take questions from the press.
Palakovich’s new bill contains two groups of provisions. The first would increase the maximum county income tax rate to 3.7%. The second imposes some parameters on new tax brackets, including a limitation that those containing rates higher than 3.2% would apply to incomes of double the state’s top bracket (which is currently $250,000 for single people and $300,000 for couples).
Because of Palakovich Carr’s 2021 bill, counties can establish income tax brackets now with no further need for legislation. Why is a new bill necessary? We will have more in Part Three.