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.
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