Taxes and Revenues

State Budget Outlook: The Sky’s Staying Put

Barbara Zektick State Budget and Fiscal Issues, Taxes and Revenues

Maryland’s budget shortfall is much lower than expected, learned members of the General Assembly’s Spending Affordability and budget committees yesterday from Warren Deschenaux, executive director of the Department of Legislative Services. Deschenaux, in his final presentation to a group of this size before his pending retirement, said the anticipated fiscal 2019 budget gap of $740 million is now $250 million. This results from favorable bond premiums, lower state employee health care costs due to vacancies and a reduction in Medicaid obligations.

He advised the General Assembly members to take a hard look at Maryland’s sales tax system. Sales tax revenues have fallen for some time due to boosted popularity of e-commerce, and a general transition from spending on goods to services.

From The Washington Post:

“The outlook is better than I expected it to be,” Deschenaux said.

To cover the smaller shortfall, he suggested that the General Assembly consider “freezing everything at current levels” except for mandated spending such as K-12 education and reimbursements for care providers who work with the disabled.

While the news was rosier than in previous years, analysts noted that the forecast did not include the devastating impact that federal changes to health care or the tax code could have on state revenue.

Helpful Links

Briefing document

Coverage by The Washington Post

The Costs of Luring Amazon

Barbara Zektick Economic Development, Taxes and Revenues

building-2762319_1920It seems like everyone is talking about luring Amazon’s second headquarters to their jurisdiction, and the State is no exception. With Amazon’s deadline for proposals coming this week, Douglass Mayer, spokesman for Gov. Larry Hogan, has said that Maryland will propose “the biggest incentive offer in the State’s history by a mile,” reports The Baltimore Business Journal. 

From that coverage:

Already, the state has invested more than $50 million in tax incentives for two Amazon distribution centers in Baltimore and Cecil County. Another package totaling at least $16.2 million is awaiting a deal under negotiation in Baltimore County at the former Sparrows Point steel mill site.

In total, Amazon has netted $1.24 billion in taxpayer backed incentives across the U.S., a special report by the Business Journals highlighted this week.

Mayer said Hogan had sanctioned the pie-in-the-sky tax break package as part of the ongoing push for HQ2 and monitors the developing bids daily. The historic incentive package no doubt will blast past the $317 million offered to the Federal Bureau of Investigation to move its headquarters to Prince George’s County last year.

Amazon’s deadline for proposals fors its estimated $5.5 billion investment and 50,000 jobs is this Thursday, October 19. Prince George’s, Howard and Baltimore City have all indicated their intentions to place bids.

More on the competition for Amazon:

UMD System Waives Tuition Rule For Amazon Employees

Baltimore submits city as a contender for Amazon’s 2nd HQ search

Governor To Seek Hometown Heroes Tax Break Expansion

Barbara Zektick County News, Taxes and Revenues

Last Friday at the Western Correctional Institution in Allegany County, Governor Larry Hogan announced that he plans to seek legislation this upcoming session to expand the Hometown Heroes state and local income tax breaks to retired correctional officers. He also said he wants to expand the tax break to cover all pension income, not just the first $15,000 – a move that could cost counties significant amounts in local income tax revenues.

Last session the General Assembly passed Senate Bill 597/House Bill 100, referred to colloquially as the “Hometown Heroes Act” and substantially similar to the Governor’s Senate Bill 322/House Bill 388 of that name. The Act provides for a subtraction modification for the first $15,000 of retirement income for individuals at least 55 years of age who are retired law enforcement officers or fire, rescue, or emergency services personnel. MACo opposed this legislation on the grounds that it would cause local revenues to decrease by $2.5 million in FY 2018 and by $2.8 million in FY 2022. After many years of consideration by the legislature, the bill passed this year and the Governor signed it – making the tax deduction available for the 2017 tax year.  Bill Information | MACo Coverage

From the Governor’s press release:

The 2017 legislation exempted retired law enforcement and fire, rescue, and emergency response personnel from state income taxes on a portion of their retirement income. The Hometown Heroes Act of 2018 will expand the previous law to include correctional officers who perform some of the most difficult jobs in the public safety sector. In addition, the bill will exempt all retirement income received from these occupations from state income taxes.

The Washington Post covers the story.

Gain Easier Access to Local Finance, State Aid Reports on New Website

Robin Clark Eilenberg County Budgets, County News, Education, Intergovernmental Relations, State Budget and Fiscal Issues, Taxes and Revenues

The Department of Legislative Services has re-designed its webpages, providing a more direct route to legislative, budgetary, and other statewide reports.

Screenshot 2017-10-12 12.03.58.png

The Department of Legislative Services develops a number of annual reports on local finances, demographics, and state aid to local governmental entities. The reports may be found through the General Assembly’s webpage, but the Department’s new website now provides a simpler route to them.

Check out the Department of Legislative Service’s Publications page.

Reports provided include 2017 fiscal year information on:

2018 fiscal year information will be released toward the start of the General Assembly Session in December 2017 and January 2018.

 

 

Betting Sports Betting Makes Legislature’s Agenda

Barbara Zektick Business Affairs, Taxes and Revenues

Representatives of Maryland’s casino industry delivered a message to the Joint Committee on Gaming Oversight yesterday: authorize sports betting, and move on this now.

The federal Professional Amateur Sports Protection Act (PASPA), passed in 1992, prohibits sports betting in most states, including Maryland. However, a number of states have considered legislation recently to allow or at least evaluate sports betting, including include Connecticut, Michigan, New York, Pennsylvania, South Carolina and West Virginia. Last session in Maryland, Delegate Jason Buckel sponsored House Bill 989, Gaming – Wagering on Sporting Events – Study and Implementation, which would have created the Task Force to Study the Implementation of Sports Gaming, and under certain terms, allowed the State Lottery and Gaming Control Commission (SLGCC) to issue sports gaming licenses.

The State of New Jersey actually passed laws in 2012 and 2014 meant to allow sports betting at state casinos and racetracks, and over the summer, New Jersey Governor Chris Christie signed into law a bill that imposes a 10.5 percent tax on winnings for companies that operate daily fantasy sports leagues. New Jersey’s activities triggered litigation that has arrived before the Supreme Court. Last June, the U.S. Supreme Court announced that it will hear the New Jersey case challenging the constitutionality of preempting most states from authorizing sports betting. It is expected to hear the case next spring.

But waiting until the Supreme Court makes a decision may be too late, argues the Maryland gaming industry.  The Baltimore Sun reports:

[Joe] Weinberg, chief executive of Cordish Global Gaming, urged members of the Joint Committee on Gaming Oversight to take up the issue in 2018 so that a constitutional amendment may be put on next year’s general election ballot. …

Weinberg warned that Maryland’s competitors for casino tax dollars already are lining up to change their laws in case the Supreme Court rules on a pending case to allow more states to offer sports betting.

“If we wait for 100 percent clarity on federal law, we will be two to three years behind the surrounding states,” he said.

The bottom line: if authorized, sports betting could materially affect the State’s – and possibly counties’ – bottom lines. All would welcome the additional tax revenue, we bet.

Conduit Street Podcast, Episode #2 – How Would Federal Tax Reform Affect Maryland?

Kevin Kinnally County Budgets, County News, Intergovernmental Relations, NACo and Federal Issues, News You Can Use, State Budget and Fiscal Issues, Taxes and Revenues

Federal tax reform is a hot topic in Washington, and two potential changes could wreak havoc on county finances. Congress is considering eliminating both the deductibility of state and local taxes (SALT) and the tax exemption for municipal bonds to pay for other priorities.

On the latest episode of the Conduit Street Podcast, Kevin Kinnally and Michael Sanderson discuss how the latest tax reform proposal would affect Maryland.

MACo has made the podcast is available through iTunes by searching Conduit Street Podcast. You can also listen on our Conduit Street blog with a recap and link to the podcast.

Listen here:

Suit Challenges County “Tax Cap” Override, State’s Authority

Michael Sanderson County Budgets, Education, Taxes and Revenues

Taxpayers in Prince George’s County are suing, arguing that a 2015 tax rate increase adopted under state-passed provisions violates a citizen-enacted charter limitation. The lawsuit has advanced through preliminary motions, and will be heard in Circuit Court in December. The litigants seek to place the 2015 measure onto the ballot in 2018, for approval by county voters.

From coverage on the WTOP website:

The county is confident the courts will find it acted lawfully, a county spokesman said.

“The property tax increase that was implemented and voted on by the Prince George’s County Council was done in accordance to state law, which allows for property tax increases in jurisdictions that have tax caps, as long as it is restricted to funding education,” said Scott Peterson, spokesman for Prince George’s County Executive Rushern Baker.

The central argument in the case, apparently, will be the state’s authority to legislate a provision that overrides elements of a county charter. Four counties currently have rigid tax limitations in their charters, but 2012 legislation authorized counties to exceed those limits if they did so to support public education. The Attorney General opined soon after that bill’s passage that the provision was legal.

Counties’ Leased Vehicles Tax Exempt Beginning Oct. 1

Barbara Zektick County Budgets, County News, Taxes and Revenues, Transportation and Public Works

A number of laws passed last session come into effect on October 1. One such law is a Motor Vehicle Administration (MVA) bill, Senate Bill 34, which in part exempts vehicles leased by counties from the state excise tax.

Under existing law today, counties do not pay excise tax on vehicles they own – but the law does not explicitly exempt county leased vehicles from the excise tax.  MVA currently titles vehicles leased by counties in the particular county’s name, preventing its subjection to the excise tax, according to Senate Bill 34’s fiscal note. MVA lists the lessor as a lienholder, rather than the title holder.

Because of this, the new law probably does not save any counties any money – at least not right away. The bill’s passage, however, ensures that future administrations cannot change this practice and begin subjecting leased county vehicles to the excise tax – good news for counties with leased vehicles. It also allows MVA better flexibility in how they title the vehicles, without negatively impacting counties’ bottom lines.

 

 

What’s Going On With Tax Reform? Part 3

Barbara Zektick Employee Benefits and Relations, Finance and Procurement, NACo and Federal Issues, Taxes and Revenues

Yesterday, Steven M. Rosenthal of the Tax Policy Center opined on a potential element of tax reform that understandably has received less attention from local government advocates than elimination of the deductibility of state and local taxes (SALT) and the tax exemption for municipal bonds. Yet, White House National Economic Council Director Gary Cohn has argued that this element of tax reform will most benefit “the policemen … the firemen and the teachers.”

What is it? Is this true? And as employers of the policemen, the firemen and the teachers, should local governments care?

Cohn was referring to potential tax relief to U.S. corporations for reincorporating their off-shore earnings into the U.S. tax system. This provision would allow corporations holding off-shore profits to repatriate previously untaxed foreign earnings with a U.S.-based parent firm at a special low rate. Cohn argued that this tax relief would benefit the “biggest owners of equities in the world,” the “biggest public pension funds” – and, therefore, the beneficiaries of those pension funds, like public safety officers and teachers.

But, Rosenthal says this isn’t actually the case:

Now for some pension background: There are two basic forms of retirement plans—defined benefit (DB) plans which are typically thought of as traditional pensions and defined contribution (DC) plans, which include 401(k) plans and IRAs.  Defined benefit plans pay annuities to retired workers but these payments are promised by employers and based on years of work and earnings – they do not depend on the returns on assets held by the plan or by the employer directly.  (However, the windfall from a reduced tax rate on accumulated offshore earnings might increase the likelihood that employers meet their promised retirement obligations to their employees). By contrast, the returns on assets held in DC plans and IRAs flow directly to the beneficiaries.

At one time, private and public employers mostly provided defined benefit plans, but now most DB plans are provided by public employers for public servants, like those police officers, fire fighters, and teachers.  ….

A retroactive tax cut for U.S. corporations goes solely to existing shareholders. The Tax Policy Center estimates that 76 percent of the benefits, including the benefits through retirement plans, of a retroactive cut in corporate taxes would go to people in the top fifth of the income distribution (those with annual incomes above $150,000) and 40 percent to the top 1 percent (above $725,000).

Cohn is correct when he says retirement plans would benefit from a lower tax rate applied to accumulated foreign earnings, since they hold a large share of stock in US corporations. But, the DB plans do not pass additional returns through to police officers, fire fighters, and teachers. Only DC plans pass additional returns through to beneficiaries.

Bottom line: this tax break could potentially help counties meet their retirement obligations. But, according to Rosenthal, our retired police officers, firefighters and teachers with traditional pensions shouldn’t start spending all their nest eggs quite yet.

What’s Going On With Tax Reform? Part 2

Barbara Zektick NACo and Federal Issues, Taxes and Revenues

Last week, in the blog post, What’s Going On With Tax Reform? Part 1, I mentioned that the U.S. House of Representatives could potentially see draft tax reform legislation as early as this week. One of two potential changes under consideration could mean serious consequences for Marylanders and their counties: elimination of the deductibility of state and local taxes (SALT) from individual federal income tax payments.

What Is SALT? 

The state and local tax deduction allows taxpayers to deduct state and local taxes paid from their federally taxable income. Deductibility of these taxes prevents double taxation, since state and local taxes are mandatory payments.

In 2015, at least 95.8 percent of all itemizers took the SALT deduction. That tax year, over 36 million individuals and families making less than $200,000 claimed the deduction.

The SALT deduction has existed since 1913, when the original federal tax code came to be, with its grand total of three pages.

This one-pager sums it up well.

Americans Against Double Taxation

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The National Association of Counties (NACo) has joined 20 other organizations, including the National Governors Association, National League of Cities, U.S. Conference of Mayors, Government Finance Officers Association (GFOA), and a wide range of other trade associations representing realtors, firefighters, government employees, educational institutions and more to fight against elimination of the SALT deduction. They call their coalition the Americans Against Double Taxation.

From their Coalition Announcement Letter:

We, the undersigned organizations, urge you to maintain the deductibility of state and local taxes in any comprehensive tax reform legislation. …

Eliminating or capping federal deductibility for state and local property, sales and income taxes would represent double taxation on local residents … Elimination would effectively increase marginal tax rates for certain taxpayers, shrink disposable income and harm housing markets, damaging the U.S. and local economies. Finally, any alterations to the deduction would upset the carefully balanced fiscal federalism that has existed since the permanent creation of the federal income tax over 100 years ago.

Discussing the potential for release of more details on potential tax reform this Wednesday, Treasury Secretary Steven Mnuchin told CNN last Sunday:

We’re getting rid of lots of deductions. We’re trying to get rid of state and local deductions to get the federal government out of subsidizing it and yes I can tell you the current plan, for many, many people — it will not reduce taxes on the high end.

Americans Against Double Taxation responded:

Secretary Mnuchin’s comments on the state and local tax deduction (SALT) today are 100% wrong and backwards. SALT protects state and local governments and 44 million taxpayers from exactly the kind of federal money grab the Administration  appears to be proposing. Indeed, SALT was incorporated in the emergency Civil War tax in 1862 and was one of only six deductions in the first federal income tax in 1913, where it has remained ever since, in order to guard against what Hamilton warned in the Federalist Papers could be a ‘federal monopoly, to the entire exclusion and destruction of the State governments.’

What SALT Means In Maryland

Elimination of the SALT deduction would impact Marylanders more than the residents in any other state, according to the GFOA in The Impact of Eliminating the State and Local Tax Deduction Report.  According to the report, 45 percent of taxpayers in Maryland currently benefit from the deduction, more than any other state. The average SALT deduction in Maryland is $5,604. Read more in the post, Local Tax Deduction Elimination: “SALT” In Maryland’s Wounds.

Find data on the SALT deduction for your county here.

This is part of a blog series on federal tax reform. Read on: Part 3. Here’s Part 1.