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May 16, 2 PM UPDATE: The House has passed SB1302 and it now heads to Gov. O’Malley’s desk, where he is expected to sign it.

Maryland lawmakers are on the verge of bucking a national trend.  While most of the biggest state tax debates in 2012 have focused on proposals that would cut taxes and tilt state tax systems even more heavily in favor of the wealthy, Maryland appears poised to do exactly the opposite.  On Tuesday, the state Senate voted to raise tax rates and limit tax exemptions for single Marylanders earning over $100,000 and for married couples earning over $150,000 per year.  The House is expected to follow suit by passing the same bill (SB1302) as early as Wednesday.

If enacted into law, these changes will allow the state to avoid a variety of cuts to vital public services, as detailed by the Maryland Budget and Tax Policy Institute.  But in addition to improving the adequacy of Maryland’s tax system, a new analysis from our sister-organization, the Institute on Taxation and Economic Policy (ITEP), shows that the income tax changes contained in SB1302 would also lessen the unfairness of a regressive tax system that allows Maryland’s wealthiest residents to pay less of their income in tax than any other group.  Among ITEP’s findings:

  • Because the income tax changes are limited to taxpayers earning over $100,000 or $150,000 per year, only 11 percent of Maryland taxpayers would face an income tax increase in 2012 as a result of SB1302.  (It’s worth noting, however, that increases in tobacco taxes, fees, and other provisions would affect additional taxpayers—though these increases make up just 3 percent of the bill’s total revenue.)
  • 54 percent of the income tax revenue raised by SB1302 would come from the wealthiest 1 percent of state taxpayers—a group with an average income of nearly $1.6 million per year.  87 percent of the revenue would come from the top 5 percent of taxpayers.
  • The changes in families’ income tax bills—even at the top of the income distribution—would be very modest.  After considering the “federal offset” effect, the tax increase faced by the top 1 percent of taxpayers would equal just 0.16 percent of their total household income, and taxpayers outside of the top 1 percent would face an even smaller increase.  Given the small size of these tax changes, Maryland’s tax system would undoubtedly remain regressive overall.
  • The progressive nature of SB1302 means that it’s well suited to take advantage of the “federal offset” effect mentioned above, whereby wealthier taxpayers write-off their state tax payments and receive a federal tax cut in return.  17 percent of the revenue raised by SB1032—or $28 million in tax year 2012—would come not from Marylanders, but from the federal government in the form of new federal tax cuts for Maryland taxpayers.

See ITEP’s full analysis here.