Income Tax Spillover Effect: Nearly $400 Million

The Comptroller’s Office released its estimate of the Maryland effects of recent federal tax changes — and their nearly $400 million estimate figures to shake fiscal decision-making during the legislative session.

From the Comptroller’s media release:

The impact on individual taxpayers’ state and local tax bills depends on whether they aim to minimize their combined federal-state-local tax burden or focus on their federal tax. Assuming most taxpayers prioritize greater overall savings, 68 percent of Marylanders would see no change in the amount of state and local tax owed, 28 percent would pay more and 4 percent would pay less.

As for the impact on the state’s coffers, the report estimates Maryland’s general fund would increase by $28.7 million and $392.5 million in fiscal years 2018 and 2019, respectively. The Education Trust Fund would realize an additional $867,000 and $5.1 million, respectively.

The driving factors behind the changes to state and local income tax bills are the taxpayer shift to the State standard deduction – a consequence of taxpayers’ choices to no longer itemize at the federal level – and related changes to itemized deductions for such things as real estate taxes and home equity indebtedness. In addition, taxable income changes for moving expenses, alimony and 529 College Savings Accounts.

Governor Hogan quickly responded by pledging to shield these Maryland effects. From coverage in the Washington Post (limited free views available):

Hogan on Thursday announced legislation that would allow taxpayers to continue claiming deductions on their state returns, even if they no longer itemize deductions on their federal returns.
Under state law, only residents who itemize deductions on their federal returns can itemize deductions on their state returns. Congress doubled the standard federal deduction in an effort to make taxes simpler, so that fewer people would seek to itemize deductions.

“Marylanders will not pay one cent more in state taxes as a result of the actions on the federal level,” Hogan said at a news conference. “Our legislation makes sure this money will remain in the pockets of hard-working Maryland families and small-business owners.”

The Governor’s press release details his intent to negotiate with legislative leaders on a reaction:

Secondly, acknowledging that multiple legislators have put forward proposals to address this issue, the governor called on the Maryland General Assembly to work with his administration to devise a collaborative solution. The governor named Budget Secretary David Brinkley, Labor Secretary Kelly Schulz, Health Secretary Bobby Neall, Chief Legislative Officer Chris Shank, and Senior Advisor Keiffer Mitchell – all of whom joined him for the announcement – to work directly with legislative leaders to negotiate an agreement that both the administration and the legislature can support before the Fiscal Year 2019 budget is passed.

Because the state-level effects after mainly a function of the definition of “taxable income,” these carryover effects alter Maryland county income tax liabilities as well.

income tax chart
From The Bureau of Revenue Estimates’ Powerpoint, 1/25/18

Read the Comptroller’s full report online.

See the quick summary of state and county effects.

Listen to more analysis of tax effects on this week’s MACo’s Conduit Street Podcast.