HB924Support

MARYLAND BUDGET & TAX POLICY INSTITUTE

STATEMENT IN SUPPORT OF HOUSE BILL 924

INCOME TAX CREDIT TO OFFSET INCREASED SALES TAX

February 21, 2008

The Maryland Budget and Tax Policy Institute supports House Bill 924 – Income Tax Credit to Offset Increased Sales Tax. The bill will mitigate the regressive effect of sales tax increases enacted during the November 2007 special session in a targeted and meaningful manner.

Background

The revenue package enacted at the special session of the General Assembly included a number of features to improve the progressivity of Maryland’s tax structure: an increase in the Refundable Earned Income Credit; an expansion in eligibility for the credit and an increase in the personal exemption.

Despite these protections, the package hits low-income families the hardest. According to Institute for Taxation and Economic Policy (ITEP) the package will increase taxes on the poorest fifth of state residents (those with income under $20,300) by 0.8% of their income, compared with 0.5% for earners in middle quintile, and 0.33% for the highest-income Marylanders. Moreover, neither the Earned Income Credit expansion nor the personal exemption increase helps low-income families without earned income, a group that includes many elderly and disabled residents, though these families will pay significantly more in sales tax and other taxes.

Even before this, low- and moderate-income families in Maryland faced high state and local taxes — higher, relative to their income, than high-income Marylanders. Instead of improving the overall tax system, the special session’s final product made it more regressive.

The sales tax — especially a sales tax like Maryland's that exempts most services — is an extremely regressive tax, meaning that low-income families pay more than wealthier families as a share of their income. By far the largest revenue raiser in the legislation that passed during the special session is an increase in the sales tax rate from 5 percent to 6 percent; it is predicted to raise about $700 million per year. This heavy reliance on the sales tax is the primary reason for the regressivity of the package overall.

HB 924 Enacts a New Maryland Sales Tax Credit

HB 924 is one good option for mitigating tax increases on low-income families. Because it is targeted towards low-income families, it can provide significant assistance to each family at a reasonable total cost.

To help families meet the cost of sales taxes and help address their regressivity, a number of states have enacted sales tax credits — direct payments or rebates to low- and moderate-income families. These credits range in value from $20 per family member to up to $100 per family member and typically phase out as income increases. Table 1 lists some of the existing state credits.

Table 1. Examples of State Refundable Sales Tax Credits

State	Sales Tax Rate	Value of Credit	Major Eligibility Requirements
Hawaii	4%	Up to $85 per family member, phasing out as income increases	Income must be below $50,000
Idaho	6%	$20 per family member ($35 for the elderly)	Available to elderly residents and to non-elderly residents with income below the filing requirement ($16,900 for a non-elderly married couple filing jointly in 2006)
Kansas	5.3%	$75 per family member if qualifying income < $14,300, $37 per family member if qualifying income is between $14,300 and $28,600	Available to families with children, and the elderly and disabled. Income must be below $28,600
New Mexico	5%	Up to $450 depending on family size and income. Maximum value at AGI of a few thousands dollars, then phases out steadily	Income must be below $21,000
Oklahoma	4.5%	$40 per family member	Income must not exceed $20,000 for singles and married couples with no other dependents. Must not exceed $50,000 for families, the elderly and disabled. TANF recipients are not eligible for the credit
South Dakota	4%	Depends on family size, up to $308 for a family of four.	Income must not exceed 150% of the federal poverty level

HB 924 would create a sales tax credit worth $100 per person in families under the official federal poverty level (about $20,000 for a family of 4), and $50 per person for families between 100% and 200% of the federal poverty level. This would be enough to address most of the harm done to low-income families by the sales tax increase, and in some cases other regressive tax changes. The credit would be larger for larger families, reflecting their increased need to purchase taxable goods.
Based on US Census department data, an estimated 1.09 million Marylanders live below 200% of poverty. Of this total, 428,000 would are below 100% of poverty and would qualify for the $100 credit. Another 662,000 are between 100% and 200% of poverty and would qualify for the $50 credit.

Participation and Costs
Since eligible participants must apply to claim these credits, generating participation is another challenge. There are two key strategies for maximizing participation: designing the application process to make participation as easy as possible for eligible families; and outreach to eligible families.

Experience with small, refundable low-income credits suggests that the participation rate can be well below 50 percent. Kansas's credit, for example, which was worth up to $130 in 1995, was estimated in that year to reach only 33 percent of eligible families. This problem is particularly acute with taxpayers who do not file income tax forms — a group that includes many of Maryland’s poorest taxpayers. And it is further exacerbated when the credit is a small amount of money. Because this proposed credit is larger than Kansas’, the participation rate ought to be higher. If we assume that the participation rate would be 50%, then the total would be $38 million.

The tax increases enacted in the November special session – especially the sales tax rate increase – hit low-income people harder that the middle class and the well-off. HB 924 would do a lot to help. The Maryland Budget and Tax Policy Institute respectfully requests the Ways and Means Committee make a favorable report on House Bill 924.

Contact: Neil L. Bergsman, Director

410-727-6367 x17

nbergsman@mdnonprofit.org

Institute on Taxation and Economic Policy, Maryland Assembly’s Tax Plan: More Revenue, Less Fairness, November 20, 2007. www.itepnet.org. The analysis does not consider possible distributional impact of slot machines.

According to ITEP data, the bottom 20 percent of Maryland families will pay 3.1 percent of their income in sales tax under the law passed during the special session, compared to 0.4 percent for the top 1 percent. That's an effective tax rate more than seven times as high.

Steven D. Gold and David S. Liebschutz, State Tax Relief for the Poor, 2nd Ed. (Albany: The Nelson A. Rockefeller Institute of Government, 1996), pg. 106.