By Adam Pagnucco.
As told in Part Two, Maryland counties gained the ability to establish income tax brackets in December 2021. However, Delegate Julie Palakovich Carr and Council Member Will Jawando held a press event last week in which they discussed their “More Local Tax Relief for Working Families Act of 2023,” which they claim is necessary to “provide revenue-neutral tax relief for moderate and low-income residents.” Given that counties can already establish tax brackets, why is this bill necessary?
While it’s true that counties can now establish progressive income taxation, they have an important constraint: the state maximum income tax rate of 3.2% was left unchanged by Palakovich Carr’s amended 2021 bill. Eleven of Maryland’s 24 local jurisdictions already have set their income tax rates at the 3.2% maximum, including Montgomery County. That means under current law, if they want to establish lower rate tax brackets, counties would have to examine their budgets to figure out how to pay for it.
Let’s look at Montgomery County’s budget. Between FY14 and FY23, its total revenues increased from $5 billion in FY14 to $6.4 billion in the approved FY23 budget, an increase of 29%. Its income tax receipts jumped from $1.38 billion in FY14 to an estimated $1.87 billion in FY23, an increase of 36%. It’s possible to establish a low income tax bracket now but it might mean giving up a portion of these revenues and thereby slowing the growth of spending. Apparently this is a problem.
There is also the issue of a likely slowdown in federal aid. The county government has added hundreds of positions in the last four years and, since money is fungible, it was relying on one-time federal money to help fuel its budget growth. With that aid drying up under Republican control of the U.S. House, the county either needs to control its spending or look for more money. Guess which option is more appealing?
The bill promoted by Palakovich Carr and Jawando would raise the maximum income tax rate charged by Maryland counties from 3.2% to 3.7%. Here is a comparison to D.C., Virginia and Delaware of the rates they charge at $500,000 of taxable income. Palakovich Carr’s bill as currently drafted could kick in at $500,000 for single filers or $600,000 for joint filers, but of course that could change with amendments.
District of Columbia: D.C. tax at $500,000 bracket: 9.75%
Montgomery County, MD under Palakovich Carr/Jawando Bill: County tax of 3.7% plus state tax of 5.75% = 9.45%
Montgomery County, MD Current Law: County tax of 3.2% plus state tax of 5.75% = 8.95%
Wilmington, DE: City tax of 1.25% plus state tax of 6.6% = 7.85%
Delaware outside Wilmington: State tax of 6.6% with no county income taxes = 6.6%
Virginia: State tax of 5.75% with no county income taxes = 5.75%
North Carolina: State tax of 4.75% with no county income taxes = 4.75%
The above tax structure under the Palakovich Carr/Jawando bill raises the question of just how much money it would raise. Would it be revenue positive because of the rate increase? Or would enough people move out to save money to make it revenue negative?
All of this reminds me of perhaps the most famous remark by a politician in recent memory concerning regional tax rates. It came from former D.C. Council Member Jack Evans in 2012, who said, “Thank God Maryland keeps raising their taxes… One of these days they’re going to catch up to us.” That day may yet come!
Is it only possible to cut taxes for lower income people by raising them for higher income people? Let’s find out in Part Four.