Governor Hogan’s Tax Relief Package: State, Local Fiscal Effects

This week, Governor Larry Hogan announced broad tax cut proposals for retirees, lower-income wage earners, and businesses. According to the governor, the “largest tax relief package in state history” will deliver $4.6 billion in tax relief to Maryland residents and businesses.

While details of the proposals are not yet available, here, Conduit Street references official state budget documents and analyses to try and quantify the state and local fiscal impact for three significant elements of the governor’s tax relief package.

Eliminating 100% of State Retirement Taxes

The “Retirement Tax Reduction Act” would eliminate 100 percent of state retirement taxes. While the bill text is not available, the governor’s proposal would expand the existing pension exclusion by exempting 100% of retirement income, phased in over multiple tax years, beginning in tax year 2022, according to a press release.

Current Law

Current law provides a pension exclusion (in the form of a subtraction modification) for individuals 65 and older. Under this subtraction modification, up to a specified maximum amount of taxable pension income ($34,300 for 2021) may be exempt from tax. The maximum exclusion allowed is indexed to the maximum annual benefit payable under the Social Security Act and reduced by any Social Security payments received (Social Security offset).

State/Local Fiscal Impact

For context, HB 166 (2021) proposed to exempt 100% of eligible pension income, phased in over three tax years, and allowed for additional plans or retirement income sources to qualify for the subtraction modification.

From the Department of Legislative Services fiscal note for HB 166 (2021):

Permanently Expanding and Increasing Value of Maryland Earned Income Tax Credit

The “Working Marylanders Tax Relief Act” would make permanent the enhanced earned income tax credit (EITC) in the RELIEF Act of 2021, which temporarily increased the refundable EITC to 100% for workers without a qualifying child and 45% for other workers. The EITC refunds tax money to lower-income wage earners.

Current Law

For tax years 2020 through 2022, the refund value for qualified individuals increases from 28% to 45% of the federal earned income tax credit, minus any pre-credit State income tax liability. The credit value increases to 100% of the federal credit for individuals without qualifying children, subject to a maximum of $530.

State Fiscal Impact

For context, according to the Department of Legislative Services, temporarily increasing and expanding the value of the State EITC will reduce State general fund revenues by $160.4 million in fiscal 2022 and $162.3 million in fiscal 2023.

Nixing Business Filing Fees

The governor will propose legislation to eliminate the filing fees for businesses that submit their annual report online with the Maryland State Department of Assessments and Taxation (SDAT), including the $300 annual filing fee for companies, LLCs, and other legal entities (and $100 for family farms).

Current Law

Under current law, business filing fees go to the State’s general fund.

State Fiscal Impact

For context, according to the Maryland Board of Revenue Estimates, the State’s fiscal 2022 general fund forecast includes $103 million in corporate filing fee revenues.

Read more about Governor Hogan’s tax relief proposals.

State Budget Picture

As previously reported on Conduit Street, the Board of Revenue Estimates last month voted to increase the revenue projections for fiscal 2022 to $21.6 billion, representing a $495 million increase from the September estimates. Additionally, the Board adjusted the official revenue forecast for fiscal 2023 upwards by $543 million to $22.8 billion.

This latest revision follows the Board’s actions in September, writing up fiscal 2022 revenues by $995 million and predicting an additional $1.37 billion in revenues for fiscal 2023. That came days after Maryland closed the books on fiscal 2021 with a $2.5 billion general fund balance.

All told, state budget writers and policymakers have roughly $6 billion in unanticipated revenue as they construct the fiscal 2023 state budget.

Spending Affordability Committee Recommendations

Maryland’s Spending Affordability Committee approved several recommendations to help guide state budget decisions in the months ahead, including bringing the State’s Rainy Day Fund up to 9 percent of revenue, repaying unfunded liabilities, and prioritizing one-time construction costs.

After assuming a 5 percent balance in the Rainy Day Fund, estimated cash balances will total $4.3 billion at the close of fiscal 2022.

Recognizing that the fund balance is one-time in nature, the committee recommends against making ongoing investments with the cash surplus. Instead, ongoing needs can be accommodated within the significant structural surplus forecast for fiscal 2023 and beyond.

Recommendations include addressing long-standing deferred maintenance and facility renewal needs in Department of General Services (DGS) operated facilities and at State parks and allocating $200 million to the public four-year institutions of higher education and regional higher education centers for deferred maintenance and facility renewal.

In addition, the committee recommends investing in pay-as-you-go (PAYGO) capital to fund previous commitments and making one-time purposes such as improving cybersecurity and accelerating the replacement of outdated information technology systems.

Stay tuned to Conduit Street for more information.

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