Maryland: Tax Proposal Moves Forward

The Senate Budget and Taxation Committee also voted Tuesday to raise an additional $260 million in sales tax revenue, $25 million more in income tax and cut about $485 million from the budget. In another key development, the committee approved the governor's plan to hold a referendum on slot machine gambling in November 2008, agreeing to raise the amount operators will get from 30 percent of the proceeds to 33 percent.

The vote by the committee sends the legislation to the full Senate, which will begin considering some of the legislation on Wednesday. Senate President Thomas V. Mike Miller described the vote as "one step on the journey" to addressing a $1.7 billion budget deficit, because of inevitable differences that will come out in the House of Delegates.

The committee also scrapped an initial proposal to broaden the sales tax to include real estate management, fitness club memberships, tanning salons, and sauna services -- after lobbyists and business owners turned out in force to attack the proposals. The committee amended the measure to include computer services and landscaping. Computer services will include custom computer programing, hardware or software installation, training or maintenance and computer disaster recovery.

Extending the tax to the services O'Malley initially wanted would have raised an estimated $60 million. Taxing the new services would raise an estimated $300 million. The legislation would raise the sales tax from 5 to 6 percent, a key piece of the governor's bid to pay for a $1.7 billion budget deficit.

The loss of the property tax cut and changes to the income tax restructuring were setbacks for the governor, who is championing the first change in Maryland's tax structure in 40 years to make it more progressive. But O'Malley was keeping upbeat after his slot machine gambling proposal -- which he contends will provide a long-term revenue source -- cleared a hurdle.

Maryland's current tax structure is relatively flat. People who make more than $3,000 in taxable income pay 4.75 percent.

O'Malley first proposed a new 6 percent tax rate that would have applied to married couples making between $200,000 and $500,000 a year and single taxpayers who make between $150,000 and $500,000 a year. A 6.5 percent tax rate would have applied to married couples and single people who make more than $500,000.

But the committee amended the bill to lower the rates for the two new tax brackets, after criticism from local officials in wealthy Montgomery County. The committee amended the bill so that single people who make more than $150,000 and married couples who make above $200,000 will pay 5 percent. People who make more than $500,000 a year will pay 5.5 percent.

The first plan would have raised an estimated $162 million, and the new tax structure would raise an estimated $187 million.

Miller conceded that changes make the proposed tax changes less progressive, but he said it was still fair, raising taxes for wealthy Marylanders.

The amendment to increase the amount of slot machine proceeds for operators was made out of concern that 30 percent was on the low end, compared to other states. Sen. Edward Kasemeyer said it was needed to make sure companies would be willing to invest enough to make the enterprise successful.

The committee also voted for about $485 million in cuts in the governor's budget reconciliation bill. The bulk of the cuts come from about $200 million less in Thornton education funding. The proposal also saves about $50 million over two years by not filling 1,000 vacant state jobs.

The committee also approved setting up a Chesapeake Bay Trust Fund to help restore the bay. It will include $51 million, with $21 million coming from property tax transfers and $30 million coming from part of titling taxes shared with local governments.