By Adam Pagnucco.
In Part One, a Montgomery County taxpayer making roughly $55,000 a year calculated that she would pay nearly four times more in income taxes if Governor Wes Moore’s tax plan were passed as written. The reason is because she itemizes deductions, a practice the governor would eliminate and replace with doubling the standard deduction.
Let’s see how many other middle class taxpayers would also pay a tax hike under the governor’s plan.
In an earlier post, I examined 2022 federal income tax data to identify itemizing practices of taxpayers in three brackets: those making between $50k and $75k in adjusted gross income (AGI), those making between $75k and $100k and those making between $100k and $200k. Between a fifth and a third of those taxpayers itemized deductions on their federal returns. (Taxpayers wishing to itemize on their state income tax returns must first itemize on their federal returns.) These taxpayers were eligible to itemize on average about $19,000-20,000 each on their state returns. By comparison, the governor’s proposal to double the standard deduction would make it $5,600 for single payers and $11,200 for joint payers. So many of these itemizers – none of whom are high earners – would pay more state income taxes under the governor’s plan.
What exactly are these folks itemizing? Let’s dig deeper into the tax data.
Middle Class Taxpayers Itemizing Medical and Dental Expense Deductions, 2022
Returns with $50,000-74,999 Adjusted Gross Income
Number itemizing medical and dental expenses: 29,120
Average amount claimed: $14,753
Returns with $75,000-99,999 Adjusted Gross Income
Number itemizing medical and dental expenses: 23,610
Average amount claimed: $15,763
Returns with $100,000-199,999 Adjusted Gross Income
Number itemizing medical and dental expenses: 37,300
Average amount claimed: $20,052
Middle class people who itemize medical and dental expenses have colossal health care bills. (The IRS does not allow deductions on this item unless they exceed 7.5% of adjusted gross income.) Let’s state the obvious: if you make less than $75,000 and you have $15,000 in health care bills, you’re in financial distress. How is it progressive to levy a tax hike on people like this?
Middle Class Taxpayers Itemizing Home Mortgage Interest Deductions, 2022
Returns with $50,000-74,999 Adjusted Gross Income
Number itemizing home mortgage interest: 61,600
Average amount claimed: $8,537
Returns with $75,000-99,999 Adjusted Gross Income
Number itemizing home mortgage interest: 77,070
Average amount claimed: $8,864
Returns with $100,000-199,999 Adjusted Gross Income
Number itemizing home mortgage interest: 185,610
Average amount claimed: $10,763
People with mortgages pay more interest in their early payments and more principal in their later payments. That means people with higher mortgage interest deductions are likely to have recently purchased a home. This could ensnare a lot of younger people who just bought their first house and are struggling to afford it. Governor Moore is rightly concerned about housing costs and so are a huge majority of Marylanders. How is it progressive to make it harder for middle class people to afford owning a home?
Middle Class Taxpayers Itemizing Charitable Contributions, 2022
Returns with $50,000-74,999 Adjusted Gross Income
Number itemizing charitable contributions: 65,940
Average amount claimed: $6,906
Returns with $75,000-99,999 Adjusted Gross Income
Number itemizing charitable contributions: 76,110
Average amount claimed: $7,074
Returns with $100,000-199,999 Adjusted Gross Income
Number itemizing charitable contributions: 183,300
Average amount claimed: $8,766
Middle class people who give this much to charities are doing a real public service. How is it progressive to raise their taxes?
But that’s not all. For this itemization category, let’s add three more income tax brackets to demonstrate the value of these contributions to charities.
Returns with $200,000-499,999 Adjusted Gross Income
Number itemizing charitable contributions: 104,570
Average amount claimed: $11,634
Returns with $500,000-999,999 Adjusted Gross Income
Number itemizing charitable contributions: 18,030
Average amount claimed: $21,734
Returns with $1,000,000 or More Adjusted Gross Income
Number itemizing charitable contributions: 9,460
Average amount claimed: $117,057
Would getting rid of this tax break be progressive taxation? I guess that would be one way of looking at it since it benefits wealthier people, but it also benefits charities that help low-income people. If Maryland’s millionaires are giving more than $100,000 each to charities, the state should absolutely encourage them to do that – and certainly not discourage them.
Overall, Maryland itemizers claimed $5.6 billion in charitable contributions in 2022. That money went directly to help vulnerable Marylanders who need nonprofit services. If some of this money disappears because the state now wants to tax it, what will happen to these nonprofit clients?
State policymakers better think about that before pulling this trigger.
As a matter of fact, they better think long and hard before raising taxes on any of the people discussed above.