On January 22, Maryland Delegate Palakovich Carr launched H.B. 470, a invoice that will considerably alter the native revenue taxA tax is a compulsory cost or cost collected by native, state, and nationwide governments from people or companies to cowl the prices of common authorities companies, items, and actions.
system within the state. If adopted, the laws would increase the utmost prime native revenue tax charge from 3.2 % to three.7 % starting in 2026 and permit counties to impose this charge on taxable revenueTaxable revenue is the quantity of revenue topic to tax, after deductions and exemptions. For each people and companies, taxable revenue differs from—and is lower than—gross revenue.
of $250,000 or above for single filers ($300,000 or above for married people submitting joint returns). Till fairly lately, all native revenue taxes in Maryland had been levied at a single charge.
What’s within the Invoice?
The preliminary model of the invoice is sort of concise, a mere three pages. Regardless of its brevity, it comprises a number of main provisions that might impression Maryland’s native revenue tax system and the composition of native revenues.
The important thing provision permits counties to boost their revenue tax charges as much as 3.7 % (starting in 2026) whereas maintaining the bottom allowable charge fixed at 2.25 %. At present, the best statutory tax charge stands at 3.2 %.
It’s price noting that the brand new highest charge of three.7 % is relevant solely to taxable revenue exceeding $250,000 for single filers and above $300,000 for married people submitting collectively. This basically signifies that if county governments want to implement a charge above 3.2 %, then they need to construction their tax codes progressively, whereby larger charges apply to larger ranges of revenue.
The invoice additionally permits counties to create as much as six revenue tax brackets. Whereas counties have been permitted to impose charges on a bracket foundation since 2022, solely two counties—Anne Arundel County and Frederick County—have began experimenting with graduated-rate tax schedules, with neither exceeding 4 brackets.
Native Revenue Taxes in Maryland: Lengthy-Time period Developments and Current Developments
Maryland is one among 16 states the place native revenue taxes are approved and one among six states the place they represent a big supply of native tax revenues. Notably, native revenue taxes in Maryland represent about 35 % of native tax collections and greater than 17 % of native income, giving Maryland’s localities the best dependence on revenue taxes within the nation. Consequently, the proposed native revenue tax reform is more likely to have a big impression on the composition of native revenues and intergovernmental fiscal relations inside the state.
Native revenue tax charges in Maryland have mildly elevated since 2006, however the tempo has accelerated in recent times—a pattern noticed in Indiana and several other different states. The typical native revenue tax charge rose from 2.82 % in 2006 to 2.90 % in 2018 and additional to three.03 % in 2024. Importantly, solely three counties imposed the best statutory revenue tax charge of three.2 % in 2006, whereas this quantity elevated to 13 counties in 2024.
Over this era, 16 counties raised their prime charge, six counties witnessed no modifications, and two counties (Carroll County and Cecil County) decreased their prime charge. The most important enhance was in Worcester County (from 1.25 to 2.25 %), adopted by Anne Arundel County, Dorchester County, and Caroline County (in every of those three counties, the speed went up from between 2.5 and a couple of.6 % to three.2 %). The prevailing pattern signifies that when the state permits counties to extend their charges as much as a specified cap, most counties finally attain this cover, and the authority to impose a progressive charge construction makes it simpler for native officers to impose larger charges. Ought to H.B. 470 go, it’s cheap to count on that the majority counties will make their revenue tax code progressive and lift the highest charge to three.7 %.
Is the Proposal Sound?
Whereas the proposed invoice seeks to reinforce native tax autonomy and help the availability of native public companies, it violates a number of key ideas of sound tax coverage. Some problematic components of the invoice embrace its complexity, lack of neutrality, and disrespect for the extremely aggressive tax panorama. The proposal would additionally confer the best income profit on the jurisdictions which might be already probably the most well-off.
The proposed invoice makes the tax code extra complicated and fewer impartial. Basically, the one technique to increase the native tax charge above the three.2 % threshold is by adopting a progressive county tax code. Progressivity is achievable on the federal and state ranges (primarily by means of federal tax progressivity and revenue switch packages at each ranges), however native governments should not well-positioned to reinforce progressivity even additional. The first impediment is the convenience with which excessive earners can relocate inside or between states. Educational analysis and our evaluation of Indiana counties recommend that prosperous taxpayers usually tend to transfer to low-tax localities. The modified tax code, due to this fact, isn’t impartial—it will immediately have an effect on particular person and enterprise selections.
In a extremely aggressive state revenue tax atmosphere, permitting localities to boost the mixed prime state and native tax charge to 9.45 % (5.75 state + 3.7 % native) would make Maryland even much less aggressive than all its neighbors besides D.C. This consists of Virginia (with the best revenue tax charge of 5.75 %), West Virginia (5.12 %), Pennsylvania (6.83 % [3.07 percent state + up to 3.75 percent local in Philadelphia]), and Delaware (7.85 % [6.6 percent state + up to 1.25 percent local]). If Maryland policymakers are curious about retaining current taxpayers and attracting new ones (in 2021, the state misplaced greater than 23,000 particular person taxpayers and virtually $2 billion in AGI), then they should prioritize extra structurally sound revenue tax insurance policies.
Lastly, whereas no native tax authority will end in equal geographic distributions, a lot of the income profit from new tax authority over excessive earners can be centralized in a handful of jurisdictions. The distinction in per capita revenue between the richest county and the poorest county in Maryland is 2.4 occasions ($93,395 in Montgomery County vs $38,480 in Somerset County, in response to the most up-to-date BEA knowledge). Consequently, the composition of taxpayers varies fairly considerably throughout Maryland counties. Per county-level IRS knowledge for 2020, Montgomery County had 74,580 taxpayers with AGI exceeding $200,000 (virtually 14 % of all tax returns), whereas Somerset County had solely 130 such taxpayers (about 1 % of all returns). In fact, the flip facet of that is {that a} county with many excessive earners that chooses to go all-in on larger taxes may see its taxpayer depend start to erode.
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