Income Tax Cuts, Including Expanded EITC, Fail to Make it Across Finish Line in Maryland

Tax cuts in Maryland seemed inevitable at times this year, as lawmakers in the House and Senate seemed to be in agreement on some key issues. Both chambers sought to improve the Earned Income Tax Credit (EITC) for childless low- and middle-income working Marylanders while also cutting tax rates for those higher up the income scale. But lawmakers were unable to agree on whether the bulk of the benefit should be distributed broadly, or whether it should be reserved primarily for the wealthiest Marylanders. In the end, all of the personal income tax changes under consideration were left on the cutting-room floor, though it’s worth noting that lawmakers were able to agree on a $37.5 million credit for aerospace company Northrop Grumman.

The central difference between the two tax plans was that the Senate’s version was heavily skewed toward the highest-income Marylanders while the House’s version was tailored to be more consistent in its impact across different income groups (see Figure 1). The Senate plan (PDF) would have cut the state’s top four income tax rates, which affect people with incomes of at least $100,000 or $150,000 depending on filing status, and increased the personal exemption by $200 per person. The House plan (PDF) omitted the personal exemption increase and focused its rate cut on a middle income tax bracket that affects all Marylanders with taxable income of at least $3,000. 

Looking back on the session, Senate President Thomas Miller made the peculiar claim that his chamber’s plan “did tax cuts across the board,” while the House “wanted simply to help the people on the lower end of the economic spectrum.” That difference, said Miller, was the reason that lawmakers failed to reach agreement.

But ITEP’s analysis makes clear that of the two, the House’s plan was actually closer to being an “across the board” cut. The Senate’s plan would have provided roughly $1,700 in tax cuts each year to members of the state’s top 1 percent of earners (a group that averages $1.6 million in income). The House’s version, by contrast, would have given that group a reduction more in line with what lower- and middle-income households could expect to receive: approximately $140 on average versus about $60 for low-income families and $40 for middle-income families. Overall, the Senate’s version gave more than a quarter (27 percent) of the total benefit to the top 1 percent of earners and almost half (48 percent) to the top 20 percent of Marylanders—a far cry from an “across the board” benefit.

While Maryland will be no worse off for its failure to cut income tax rates, these disagreements did have the unfortunate side effect of blocking an expansion to the state’s EITC that was widely agreed upon by lawmakers in both the House and Senate. Similar to a recent innovative change in neighboring Washington, D.C., the expansion would have significantly improved the value and reach of the credit for childless adults, a group largely overlooked by the federal EITC on which the Maryland credit is based.

Figure 2 shows how meaningful the expansion would have been for childless adults at different income levels. For example:

• Currently, a single working Marylander with no children and an income of $11,000 (just below the federal poverty guideline of $11,880) is eligible for a Maryland EITC of only about $77. Increasing Maryland’s EITC from 26 percent of the federal credit to 28 percent (as is already scheduled to occur next year) would only improve this by about $6. But under the expansion proposed in SB 840, that person would have received a total Maryland EITC of $506, which, combined with the federal EITC of $297, would go much further toward lifting this worker out of poverty.
• A single working Marylander with no children and an income of $5,940 – only half the federal poverty guideline – receives a Maryland EITC of just $127 even when the credit increases to 28 percent of the federal credit as scheduled. But this person’s credit would have been $454 under SB 840, a $327 increase that would be very meaningful for someone in such severe poverty.
• A single working Marylander with no children and a full-time $9-per-hour job ($18,720 annually) is currently not eligible for any federal or Maryland EITC because the credit is heavily weighted toward working families with children and very-low-income childless adults. But under the expansion proposed in SB 840, such an individual would have received a state credit of $366, enough to pay for a community college class that could improve their job skills.

The debate in Maryland this year exemplifies the difficult political realities associated with crafting tax policies that are geared toward those most in need. With continued work, hopefully the negotiations this year paved the way for some of the EITC improvements in SB 840 to become law in the future.