Hogan Vetoes Local Income Tax Flexibility

Governor Larry Hogan has vetoed HB 319, a bill that evolved and passed through the late stages of the 2021 Legislative Session to provide counties with the proper tools and flexibility to levy the local income tax with greater equity and fairness.

Unlike state income taxes, which levy progressively higher rates on larger incomes, the county income tax is currently set by Maryland law at one flat rate applying to all taxable income, regardless of income level. As amended and approved by the General Assembly, HB 319 / SB 133 – Local Tax Relief for Working Families Act of 2021 authorized local governments to impose the local income tax on a bracket basis, just like like most income tax systems (including the federal and state taxes on Marylanders).

MACo supported the bill with technical amendments to ensure the State would maintain its commitment to the disparity grant program.

In general, MACo stands for local self-determination. Counties, led by their elected leaders who are directly accountable within the community, are in the best position to make decisions on local affairs – ranging from land use to fiscal matters. This bill would have provided counties with the proper tools and flexibility to levy the local income tax with greater equity and fairness.

As amended, the bill authorized counties to impose the local income tax on a bracket basis. Under the bill, a county that chooses to impose the local income tax on a bracket basis must set, by ordinance or resolution, the income brackets that apply to each tax rate and inform the Comptroller prior to the year in which a new bracket is established.

Further, a county could apply a higher or equal tax rate to a higher income bracket than a rate applied to a lower income tax rate but could not apply a lower rate. Finally, the bill specified that a county could request data from the Comptroller to assist in determining a revenue-neutral bracket structure.

In his veto letter, Governor Hogan said the bill “masquerades as tax relief” and that the legislation “raises the minimum floor that jurisdictions can set for their local income tax rates from 1 percent to 2.25 percent.”

Raising the minimum local income tax rate to 2.25 percent was necessary because the Budget Reconciliation and Financing Act of 2004 (Chapter 430) established a tax on nonresidents who are subject to the state income tax but are not subject to the county income tax. The tax imposed is at a rate equal to the lowest county income tax rate in Maryland (currently equal to 2.25 percent).

Revenues generated by the special nonresident tax are distributed to the State’s general fund. About 170,000 nonresident returns paid a total of $133.3 million in tax year 2018.

“I was disappointed to learn that Governor Hogan has vetoed the Local Tax Relief For Working Families Act of 2021. The bill passed with support from the bipartisan Maryland Association of Counties and votes from representatives of both political parties,” said Anne Arundel County Executive Stuart Pittman, who testified in support of the bill.”

The lead sponsor of the House bill, Delegate Julie Palalovich Carr, took to Twitter to express her disappointment with the governor’s decision to veto the bill, which passed the the General Assembly with an apparent veto-proof supermajority.

 

Stay tuned to Conduit Street for more information.

Useful Links

MACo Testimony: HB 319 / SB 133 – Local Tax Relief for Working Families Act of 2021

Previous Conduit Street Coverage: Counties Ask for Flexibility with Local Revenues, Certainty for Disparity Grant Program

Previous Conduit Street Coverage: Sun Supports County Income Tax Flexibility

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