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Archive - Budget and Taxes
Balancing Act: Cutting Taxes to Benefit Marylanders At All Income Levels
Summary
- Marylanders with low and moderate incomes bear a higher state and local tax burden than wealthier Marylanders. Families with income below $35,000 pay an average of 11 percent of their incomes in taxes. By contrast, average families with income above $410,000 per year pay about 8.3 percent of their incomes in taxes.
- Over the last several years, tax changes in Maryland have tended to be at least somewhat balanced. Tax increases in the early 1990s included both excise tax hikes that were most burdensome on the poor and a rate increase that was most burdensome on the rich. More recently, the income tax cut of 1997 - which benefitted Marylanders with higher incomes - was balanced by a new Refundable Earned Income Credit to benefit poorer families.
- By itself, the proposed repeal or reduction in the state's inheritance tax would not be balanced across income groups. Many Maryland estates contain no significant assets and therefore would not benefit at all from repeal of the inheritance tax. An substantial number of small estates have some inheritance tax liability, but most of the revenue from the tax is paid by well-to-do families. As a result, a large portion of the benefits of repeal would go to a small number of fairly large estates.
- A more balanced tax cut package might include reform rather than repeal of the inheritance tax cut so that a larger share of the benefits go to smaller estates. Such a package might also include expansion of the earned income credit; or it could include tax reductions for families that claim the state's standard deduction.
Introduction
Over the last several years, policymakers in Maryland have often sought to spread any tax changes among a wide range of Marylanders of all income levels. The tax increases of the early 1990s, for instance, hit both upper- and lower-income Marylanders; the tax cuts of the middle and late 1990s likewise contained benefits for families at all income levels.
To this point in the 2000 legislative session, Governor Glendening and the legislative leadership have proposed a single major permanent tax change: repealing or reducing the state's inheritance tax. Such a tax change would reduce state revenue by an estimated $50 million per year, with most of the benefits going to a relatively small number of well-to-do Marylanders -- a few thousand at most. Although many small estates pay inheritance tax, most of the revenue from the tax -- and hence most of the benefit from repeal -- comes from a fairly small number of large estates.
Avoiding tax cuts that exclusively benefit higher-income Marylanders is important because families at the bottom of the income scale presently bear the largest tax burden. According to one study, Maryland families with incomes below $35,000 on average pay 11 percent of their incomes in state and local taxes; families with incomes above $410,000 pay 8.3 percent.(1) Cutting taxes for wealthier families - as the inheritance tax reduction would do -- effectively shifts the tax burden toward the poor.
Moreover, families with incomes toward the middle and bottom of the income scale have failed to share in the economic expansion of the last several years. The poorest 20 percent of Marylanders have seen their incomes (adjusted for inflation) stagnate since the late 1980s; the wealthiest 20 percent of Marylanders have seen their incomes rise by about 25 percent.(2) A tax cut solely for higher-income families would contribute further to the trend of rising inequality.
One way to avoid an imbalanced tax cut is to restructure the inheritance tax so that it is levied only on larger estates. The state could thus eliminate the inheritance tax on many, perhaps on a majority, of estates, while significantly moderating the revenue loss.
Another option is to combine a modest reduction in the inheritance tax -- perhaps exempting more middle-income families -- with a broader-based tax cut that benefits a larger number of Marylanders, particularly those with lower incomes. Examples of such a broad-based cut might include expanding the standard deduction, which hasn't been adjusted for inflation in over a decade; allowing those who claim the standard deduction to claim an additional tax credit for charitable contributions; or increasing the state's refundable Earned Income Credit, a tax break for working-poor and near-poor families with children. These options are discussed in the full text of the analysis.
Notes:
1.Institute on Taxation and Economic Policy, Who Pays?, 1996.
2. Maryland Budget & Tax Policy Institute, "Gap Between Rich and Poor in Maryland Is Growing," January 18, 2000.