Monday, January 25, 2016

Maryland Has the 7th Highest State and Local Tax Burden

On January 20, 2016, the Tax Foundation released its State-Local Tax Burden Rankings FY 2012 study, co-authored by Liz Malm and Gerald Prante. The rankings show the average state and local tax burden as a percentage of state income – with the No. 1 ranking indicating the state with the highest state and local tax burden as a share of state income and No. 50 indicating the state with the lowest tax burden. New York ranks No. 1 with a 12.7% state and local tax burden and Alaska ranks No. 50 with 6.5%.

Unfortunately, Maryland ranks No. 7 with a 10.9% state and local tax burden. The 2012 data are the most recent figures available from the Census Bureau, the Bureau of Economic Analysis, and the other sources used by the study’s authors. While it is only conjecture at this point, based on the significant tax hikes implemented after 2012 during Governor Martin O’Malley’s tenure, it would not be surprising if Maryland’s tax burden ranking is even higher when the next similar study is published.

This high ranking (and the relatively high tax burden it signifies) is certainly relevant as the General Assembly begins considering Governor Larry Hogan’s budget and tax proposals. For Fiscal Year 2017, Governor Hogan has proposed an operating budget of $17.1 billion, with approximately $480 million in tax and fee relief over the next five years. Given Maryland’s ranking in the Tax Foundation’s latest study (and several others as well) as a high tax state, the modest tax relief proposed by Governor Hogan is welcome. Considering that the $480 million reduction is spread over five years, it is difficult to argue that the tax relief proposal is anything but modest. (From an economic perspective, fees, such as those businesses pay for permits that Governor Hogan proposes to reduce, have the same effect as taxes.)

In considering Maryland’s tax burden, and Governor Hogan’s tax relief proposal, it is also relevant to have in mind Maryland’s position vis-à-vis its neighboring states. Significantly, Maryland is the highest ranked among its neighbors. Pennsylvania (15th; 10.2%), Delaware (16th; 10.2%), West Virginia (18th; 9.8%), and Virginia (25th; 9.3%) all have lower tax burdens as a share of state income. To be sure, the differences among the states are not huge, but they may be large enough to affect the behavior of individual citizens and businesses as they make decisions concerning where to locate, how much to invest in new enterprises, whether to add additional employees, and the like.

Maryland has a lot more work to do to ensure that its long-term economic well-being is secure. For one thing, it needs to improve its business climate by engaging in meaningful regulatory reform. On this score, see this new Perspectives from FSF Scholars by Randolph May and Michael Horney titled “Achieving Efficient Government and Regulatory Reform in Maryland.” With the appointment of his Regulatory Reform Commission and the issuance of its first report discussed in our Perspectives, Governor Hogan has made a good start. Our paper contains some additional regulatory reform proposals.

Likewise, Governor Hogan’s budget, with its proposed $480 million in tax relief, is another positive step, albeit a fairly modest one, in the right direction. There is no reason for Marylanders to take pride in having the seventh highest tax burden in the nation as a percentage of state income.