The Maryland General Assembly and Governor Hogan are clearly hard at work investigating ways to alleviate some of the adverse impacts of federal tax reform on state taxpayers. Will those potential actions affecting state income tax collections impact counties, too?
Yes, they no doubt will.
Personal Income Tax
The state personal income tax is the State’s top source of general revenue. It is also, frequently, the biggest overall target for policy changes. A quick glance of all of the “subtraction modification” bills – bills that offer itemized deductions from state income taxes – proves that rule.
County income taxes, sometimes called the “piggyback tax,” are counties’ second top source of general revenues, after property taxes. County tax rates are independent of the state rates – counties are affected by some state changes, but not all of them. In essence:
- changes to state tax rates do not affect counties, since they don’t affect a taxpayer’s taxable income.
- State income tax credits do not affect counties, since they are funded only with state income tax dollars.
- Changes to exemptions, deductions and subtraction modifications at the federal and state levels affect the taxable income base. These do flow through to county revenues.
Property Tax
The adverse is true for property tax in Maryland. While property tax is the largest revenue source for counties, the State’s “piggyback” or “piggyback-like” property tax is only 0.112 (or 11.2 cents per $100 of assessed value). The revenue from the state’s property tax is dedicated to the State’s annuity bond fund to pay debt service. This revenue is dependent upon the value of the assessable base of real and personal property – assessed by the State Department of Assessments and Taxation (SDAT).
Maryland’s taxation of business personal property (equipment and some inventory) is completely local, with most counties levying a tax but granting several major exemptions authorized (but not mandated) by the state. The state receives no direct revenue from personal property taxation, but does assess filing fees to corporate entities.
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When Do State Tax Changes Spill Over Into County Budgets?