Wealthy residents should face a higher local income tax rate
Across Maryland, local governments are putting together their Fiscal 2024 budgets, and a familiar pattern has emerged. Without the safety net of federal American Rescue Plan funding made available during the peak COVID-19 years and, on the other side of the ledger, expanded K-12 public school costs mandated by the Blueprint for Maryland’s Future, some are finding their resources stretched thin. High inflation hasn’t made it any easier, particularly given the need to give public employees a cost-of-living increase. Nor have supply chain problems and an apparent slowdown in real estate sales (along with the recordation tax revenue that comes with them). It’s all added up to a lot of hand-wringing, much tapping into budget surpluses and warnings that tougher choices lie in the years ahead.
At least one subdivision has taken a proactive approach, and it deserves attention. In Anne Arundel County, the $2.14 billion general fund budget, outlined last week by County Executive Steuart Pittman, raises the property tax rate from 93.3 cents per $100 of assessed value to 98 cents. The increase should be easy to swallow, given that it means the county will still have one of the lowest property tax rates in Maryland (Baltimore County is, by comparison, $1.10 and Baltimore City, more than twice that). But it’s what Pittman proposes to do with the income tax that is most intriguing. Here, Pittman seeks to raise the rate from the current 2.81% to 3.2% — the highest allowed by state law. He may find opposition on the County Council but maybe not. Why? Because he wants to do something every local government should want to do: He’s proposed making the tax rate progressive.
In short, the plan in Anne Arundel is to create three tax brackets. While most counties charge a flat tax rate, Pittman would apply that 3.2% tier only to income over $400,000. It would work like this: The first $50,000 in income would be taxed at 2.7% (a reduction the county adopted just last year). The next $350,000 would be taxed at the current 2.81%, and then anything above $400,000 would be taxed at the top 3.2%. An estimated 98% of income tax filers would not be affected. Only that top 2%. In other words, the rich. And not even all of them, given that joint filers get even more generous treatment with the top rate not kicking in until household income reaches $480,000.
Why isn’t every county taking this approach? First, because it was only made possible by legislation approved by the General Assembly two years ago — twice. Once when the Local Tax Relief for Working Families Act of 2021 was approved and a second time during a special session as lawmakers overrode a veto by then-Gov. Larry Hogan, who was apparently not such a fan of tax brackets. Last year, only Anne Arundel and Frederick counties used this new authority, both to lower income taxes
for lower earners, according to the state comptroller’s office. This year’s effort would appear to be the first example of using the law to raise them. But it’s also uncommon because so many jurisdictions (11 of the 24 subdivisions) already apply the top tax rate to everyone.
State lawmakers can give local government some wiggle room by allowing a higher income tax rate — traditionally a politically unpopular move. Yet, what if taxing the rich at that higher rate could allow lower tax brackets on the middle class? That’s essentially what Pittman proposes, and we suspect it’s a winning strategy, both politically and economically. Not only because it offers tax relief for those who need it most, but because the tax on income is a much fairer tax than, for example, sales taxes or even property taxes, which tend to hit households living on lower or fixed incomes (such as retirees) much harder. Nor does it even require soaking the rich (after all, for a couple bringing home a half-million dollars, it’s only that last $20,000 that faces the highest rate). Anne Arundel’s move is estimated to eventually bring in an added $14 million to county coffers. The added near-nickel on the property tax rate is expected to generate nearly twice as much.
In short, Marylanders living anywhere but Anne Arundel County ought to be asking their elected officials this question: Why should a school bus driver pay the same local income tax rate as a millionaire? We can’t wait to hear their excuses.