Senate Passes Tax Exemption Clarification

The Maryland Senate took the first step towards addressing the impacts of federal tax reform on state taxpayers this week. Senate Bill 184, sponsored by Budget and Taxation Chair Edward Kasemeyer, passed the Senate unanimously and has crossed over to the House. Its cross file, House Bill 365, sponsored by Revenues Subcommittee Chair Jay Walker, had its hearing on Wednesday of this week.

The bill clarifies that taxpayers can deduct personal exemptions for themselves, their spouse, and eligible dependents under the state and local income tax, even though they cannot do so at the federal level anymore.

According to the Department of Legislative Services and Comptroller’s analyses, the bill is merely clarifying in nature and does not have a real fiscal impact. While certainly codifying current practice, the state of Maryland exemptions was unclear after the federal government passed its tax reform bill and zeroed out federal exemptions. If taxpayers could no longer take the exemptions at the state level, local governments would have gained an additional $490 million.

The Baltimore Sun reports:

Still, even if the personal exemptions are preserved, Marylanders’ tax bills stand to rise by more than $400 million if lawmakers do not step in to preserve tax deductions eliminated on the federal level. Gov. Larry Hogan and the Democrats who lead the General Assembly have pitched dueling plans to return that money to taxpayers.

This legislation is widely seen as the least controversial of many proposals to address the windfall of revenues to state and local governments as a result of tax reform. Other proposals include but are definitely not limited to:

  • decoupling the requirement to itemize at the state level with the need to itemize at the federal level,
  • raising standard deductions,
  • raising exemption amounts or indexing them to inflation, and
  • ensuring that property taxes are still deductible from state and local income taxes.