On April 7, the Tax Foundation
released its "State and Local Tax
Burdens, Calendar Year 2022" report, and I have some good
news – Maryland modestly improved its tax burden and its rank among the fifty states.
Maryland's tax burden dropped to 11.3% from its 2020 high of 12.6%, and its
ranking improved from 43rd to 35th among the states.
We shouldn't break out the most
expensive champagne. Maryland is still a bottom-half performer. However, there
are some positive signs for the future, as Governor Hogan recently signed almost $2 billion worth of tax
cuts into law. So, for now, we celebrate.
The Tax Foundation's metric for
"tax burden" is the percent of income the average resident of each
state paid in state and local taxes for a calendar year. Or, in the language of
tax wonks, the Tax Foundation divides the total "state and local taxes
paid by a state’s residents divided by that state’s share of net national
product."
Maryland has long been a
low performer on this report, often posting tax burdens above 12% in recent
years and throughout the late 20th century. While Maryland's 2022
tax burden (11.3%) was its lowest in a while, it had a lower tax burden as
recently as 2010 (10.9%) and 2000 (10.6%), so there is plenty of room for
improvement. Nonetheless, the state is heading in the right direction for now, and
the fresh tax cuts Governor Hogan just signed could add to the momentum.
Notably, the Tax Foundation
cautions that Maryland's consistently high tax burden is partly explained by
the fact that the state is also one of the nation's biggest spenders. To the
extent that Maryland provides its residents with consistently high quality
government services – a proposition about which there is legitimate debate – the
state's high burden may be somewhat justified. That means that,
perceivably, achieving a meaningfully lower tax burden could require fewer
government services or serious crackdowns on waste, fraud, and abuse. But
not right now.
Maryland's current high tax burden
will be more difficult to defend because it also has an overflowing budget surplus.
Free State Foundation President Randolph May's recent Maryland Reporter op-ed
urging broader tax cuts explained that the Maryland's Bureau of Revenue
Estimates projects a $7.6 billion surplus through the end of fiscal year 2023.
That estimate has ballooned by $1.6 billion since the Bureau's previous
estimate of $6 billion just five months ago in December 2021.
As Mr. May explained, a massive
budget surplus and high tax burden makes now the appropriate time for tax
reform. That Governor Hogan and the Democrat-led supermajority in the state
legislature agreed to almost $2 billion in tax cuts shows Mr. May hit the nail
on the head. While those tax cuts fell short of Hogan's original $4.6 billion
proposal, some meaningful tax cuts are surely better than none. Mr. May urged passage of Governor Hogan's original, broader
proposal in the Washington Post.
However, some of the cuts in the
reform package signed by Governor Hogan may worsen Maryland's tax structure. This
should be no surprise – poor tax structure is about as native to Maryland as OLD BAY®
on blue crabs. As I detailed back in December 2021, Maryland plunged
to an all-time low of 46th place on the Tax Foundation's State Business Tax Climate Index, a separate
report that grades each state on the prudence of their tax structure
rather than tax burden. One of many reasons for Maryland's low tax structure grade
is that the state has about a million sales tax exemptions, which drives up
overall sales tax rates by narrowing the sales tax base. A multitude of sales
tax exemptions can also distort business decisions and increase compliance costs
– especially for businesses that sell a mixture of taxable and exempted goods
and services.
The tax cuts Governor Hogan signed
included new sales tax exemptions for consumers goods that might be characterized
as family necessities, such as diapers, baby bottles, oral hygiene products,
diabetic care products, and certain medical devices, so the impact on structure
is not so clearly positive. Cutting taxes on family necessities is certainly appealing,
and likely popular, but contributes to poor tax structure. However, the sales
tax exemptions are a relatively small piece of the package, so the overall effect
could still be positive.
Maryland's improvement on the Tax
Foundation's "State and Local Tax Burdens, Calendar Year 2022" report is welcome news. A dig through the FSF
Blog archives will show much negativity over the years regarding Maryland
taxation because there has been little to celebrate. The burden has remained
high and the structure has remained poor. And our usual refrain has been
lamenting worsening performance or chastising failure to improve, a beat that
Free State Foundation Director of Policy Studies Seth Cooper maintained for the FSF Blog for over a decade.
So today, we relish the good news,
and I look forward to Maryland's hopefully smaller tax burden next year in
light of the implementation of Governor Hogan's tax cut package.