Tallying The Targets at Tax Reform

After long nights of noodling over multiple, changing forecasts of additional revenues to the State and counties as a result of federal tax reform, the General Assembly appears to be teetering closer to watching and waiting, instead of acting to hold all taxpayers harmless – citing uncertainty as a primary reason for refraining from taking action this year.

On Tuesday, the budget conference committee released its final report, marking the end of negotiations over the State’s operating budget. The Senate finalized its budget decisions in mid-March, and the House finalized its decisions last week.

The report shows the Bureau of Revenue Estimate’s forecast of $547.1 million in additional income tax revenues coming to the State in fiscal 2019. Of that, $200 million is dedicated to future education costs. The report does NOT suggest passage of any particular pieces of legislation addressing tax reform, but rather, states “TBD.”

One bill impacting income tax revenues has advanced through both the House and Senate: HB 365 / SB 184, “Income Tax – Personal Exemptions – Alteration.” The bill clarifies that state taxpayers can still take personal exemptions in Maryland, even if these exemptions are zeroed out at the federal level. According to the analysis by the Department of Legislative Services,  the bill is simply clarifying in nature, and does not have a meaningful fiscal impact on the State or counties. The House added language requesting an update to the Comptroller’s 60-Day Report, which the Senate voted to remove last Friday.

In addition, both houses have signed off on SB 646 / HB 308, Maryland Estate Tax – Unified Credit, which specifies that the value of the federal unified credit used to calculate the Maryland estate tax is equal to the amount corresponding to an applicable exclusion amount of $5.0 million. This increases general fund revenues by at least $38 million beginning in fiscal 2020.

The Senate has passed SB 318,  Income Tax – Standard Deduction – Alteration – which increases standard deductions to $2,500 for single taxpayers and $5,000 for taxpayers filing jointly. This is estimated to cost the State $87 million in fiscal 2019, $61 million in fiscal 2020, and $31 million in fiscal 2021 – and counties $51 million in fiscal 2019, $36 million in fiscal 2020, and $18 million in fiscal 2021. This bill, if passed by the House, would have the most significant impact on state and local income tax revenues. The House did not factor this revenue into its version of the budget, and does not appear included in the Conference Committee’s final report.

Instead, the House factored in a handful of subtraction modifications, including:

 

  • HB 58, which, as amended, expands the existing pension exclusion by allowing the deduction of otherwise eligible employee retirement system income which has been rolled over to an IRA ($10 million in fiscal 2019);
  • HB 296, which expands the existing State subtraction modification for “Hometown Heroes” to correctional officers ($1.2 million in fiscal 2019);
  • HB 327, which expands the existing military retirement income tax subtraction modification by exempting all military retirement income from state and local income taxes by 2022 ($0 in fiscal 2019, but $32.4 million by fiscal 2023); and
  • HB 570, which as amended, indexes the Maryland standard deduction to cost of living ($5.3 million in fiscal 2019).

 

In addition, the Senate has passed SB 647, “Earned Income Tax Credit – Individuals Without Qualifying Children – Repeal of Minimum Age Requirement” – which extends eligibility of the State and local earned income tax credits to individuals who do not have qualifying children and are between the ages of 18 and 24 years. This is estimated to cost the State approximately $7.5 million in fiscal 2019, and $6-7 million annually thereafter. The House has passed HB 856, which only extends eligibility of the credit to individuals between ages 21 and 24 – and costs the State even less.

The Senate has also passed SB 134, the Administration’s Small Business Relief Tax Credit, which  creates a credit against the State income tax for a small business that employs fewer than 25 employees and provides specified employee benefits to a qualified employee who earns $30,000 or less a year. This is expected to cost the State $5 million in fiscal 2019 (with no carryover effect to local income tax revenues).

The House may still pass SB 318, increasing the standard deductions – and the Senate may pass some, or all, of the House’s subtraction modifications. The conference committee left a closing balance of $201.4 million, and the Spending Affordability Committee only set a closing balance goal of $100 million.