By Adam Pagnucco.
In her landmark memo proposing to rewrite County Executive Marc Elrich’s recommended FY27 operating budget, which includes increased property and income taxes, Council President Natali Fani-González proposed restructuring the county’s income tax.
Is this a good idea?
Before answering that question, let’s get into the specifics of what Fani-González would like to do. Until recently, the State of Maryland allowed counties to levy individual income taxes, but they were restricted to imposing the same rate on all taxpayers. Decades ago, Montgomery County instituted two measures that effectively made its tax structure more progressive.
The first measure is the county’s Earned Income Tax Credit (EITC), which it calls its Working Families Income Supplement. I explained the origin of this credit five years ago:
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MoCo’s EITC (called the Working Families Income Supplement) was first proposed in 1999 by then-County Executive Doug Duncan. Freshman Council Member Phil Andrews had introduced living wage legislation for county contractor employees that Duncan opposed, so Duncan came up with an alternative package including a county EITC. In the end, the county council passed both the living wage law and the EITC and both remain on the books today.
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The county currently matches 56% of the state’s EITC. Elrich wants to raise the income tax from 3.2% to 3.3%, but to offset the impact on low-income workers, he would like to increase the county EITC match to 60% of the state’s level. That would cost the county $4.8 million, but that can easily be covered by the projected $24.4 million in new revenue from the income tax hike.
The second measure is the Income Tax Offset Credit (ITOC). Even though the name of this credit refers to the income tax, it has applied a flat $692 credit to property tax bills of owner-occupied homes for the last 15 years straight. Because the credit offsets a higher percentage of tax bills for lower-assessed properties than higher-assessed ones, it introduces a bit of progressivity into the tax structure.
Five years ago, the General Assembly passed a law allowing counties to establish income tax brackets. That is a potential game changer. Since then, Anne Arundel and Frederick counties have both established brackets but they were able to do so because both charged significantly below the then-state permitted maximum of 3.2%. By going up to the 3.2% maximum for higher earners, these counties were able to lower rates on lower income earners without losing revenue.
Another change occurred last year, when the General Assembly raised the maximum allowable county income tax rate to 3.3%. Elrich wants to apply that rate to everyone. Fani-González instead wants to create these tax brackets.
Here’s the catch. In order to pay for these brackets, which would raise less money than the current rate structure, Fani-González would like to abolish both the county EITC and the ITOC. There are three rationales for doing so. First, a new progressive income tax would formally establish progressivity whereas the two credits accomplish it in a roundabout way. Second, the two credits must be applied for by taxpayers, some of whom may not be aware of their existence. The new rates would be automatic and would be calculated through income tax returns. Third, the ITOC applies only to homeowners, whereas Fani-González’s lower rates in lower income tax brackets would be received by everyone in those brackets.
So is this a good idea?
That’s a hard question to answer with the limited amount of data available. I would like to see a net tax bill distribution incorporating all three measures for multiple adjusted gross income levels. That would illustrate the true impact of the whole package and lay out how progressive it is – or potentially is not.
Another thing to consider is that the income tax increase in Elrich’s budget only raises $24.4 million while his property tax hike would raise $165 million. It’s much easier to just say no to the income tax increase and look for offsetting budget adjustments than to go without the property tax hike. That means there is little if any short-term fiscal urgency to considering the council president’s proposal. This is more about what kind of tax structure we would like to have – an important, but fundamentally long-term matter.
I am cautious about Fani-González’s proposal. Here’s why.
The council president would trade rate adjustments for the abolition of two important tax credits. Let’s understand that both the ITOC and the EITC are established in county law, leading me to wonder whether legislation is necessary to abolish them or resurrect them. Even if legislative action is unnecessary, I’m betting that if those credits are abolished, they won’t be coming back. As for Fani-González’s rate changes, they could easily be undone by a future council. This is MoCo, after all – it’s a whole lot more likely that taxes will go up than down.
What happens if our credits are gone and our rates go right back up to what they once were? Taxpayers would clearly be worse off under that scenario. It’s best to avoid it.
If there is any way to make the income tax more progressive and to retain these two credits without losing revenue, county leaders should explore it. But that’s going to be tough and would take time to devise. We can’t get that done in two weeks.
Fani-González deserves credit for raising discussion about the county’s income tax structure. But let’s stick to solving the current budget problems and return to this issue later.