Budget Proposals
Governor O’Malley’s budget includes a proposal to increase Maryland’s personal income tax for “higher” income taxpayers by cutting back on the personal exemptions and itemized deductions. (See attached charts for examples of the impact on various income level taxpayers.) The proposed changes are effective for the 2012 calendar year. They are expected to raise approximately $180 million for the State and another roughly $110 million for local governments for FY 2013. (Note: thus far there appears to be a “cool” reception to these income tax increase proposals.)
The proposed increases were included in an omnibus bill called BRFA (Budget Reconciliation and Financing Act) that goes along with the actual budget. This bill not only contains $250 million in State tax increases, but another $502 million in other revenues, transfers, reductions in mandated spending, cost shifts to local governments, and fund swaps. All of these things require changes to the law and that’s the purpose of BRFA.
If the budget were to pass as introduced (not likely), the $1.1 billion general fund structural deficit would be reduced to about $400 million for the following budget year.
One lighting rod proposal in the Governor’s FY 2013 budget is a cost shifting measure of $239 million wherein county governments will have to pick up 50% of the cost of teachers pensions. (Note: this proposal is likely to be strongly opposed by county governments.)
Finally, the Governor’s budget proposal (BRFA) includes another tax increase: the imposition of the 6% sales tax on digital downloads. While the estimate in the budget is for just $5 million more per year, some believe it could be more like $50 million as the language is very broad and appears to include the downloading of software in addition to music and eBooks.
Analysis of Budget Proposals: if the General Assembly decides to not move forward with the personal income tax increases proposed by the Governor, they will have to make up the loss of $180 million to the State and county governments will be short the $110 million in piggyback income tax increases. Further, if the General Assembly decides to not transfer 50% of the costs of teachers’ pensions to county governments, the State will be short another $239 million for a total shortfall of $419 million which brings the projected structural deficit back up to $819 million.
Attachments
- Income Tax – Itemized Deduction Changes Impact on Example Taxpayers
- Income Tax – Personal Exemption Changes Impact on Example Taxpayers
Corporate Tax Increase Bills Introduced to Date
The bill volume to date is very light; however, we do have two old favorites that have been reintroduced in the Senate: SB 248 Alternative Minimum Assessment and SB 269 Combined Reporting. No hearings are scheduled to date.
Windmill Legislation Introduced
Governor O’Malley has introduced a somewhat different version of last year’s bill to provide funding for the development of a windmill farm off of the coast of Ocean City. SB 237 appears to take a different approach to charging ratepayers by going to the Renewable Portfolio Standard in existing law and making offshore wind power a Tier 1 source. This means electricity suppliers/customers must have at least 2.5% of their electricity from offshore wind power or pay a penalty of 40 cents per kWh of shortfall; however, manufacturers would only pay a penalty of 0.4 cents (existing law for other Tier 1 sources). Plus, there is no penalty for electricity purchased beyond 75,000,000 kWh per year for a single customer.
Bay Restoration Fee (Flush Tax) Increase
SB 240 is the Governor’s bill increasing the BRF (Bay Restoration Fee or flush tax). It is effective July 1, 2012. The bill changes the method of calculation of the fee. According to the Administration the change will result in a doubling of the existing fee.
Analysis of the Bay Restoration Fee Increase: MAM fought hard in opposition to the “Impervious Surface Fee” legislation of prior years. It is believed that the increase in the BRF (flush tax) will forestall pursuit of the impervious surface fee legislation. If that turns out to be the case, I recommend no position on the BRF increase.
Coming Attractions
The legislation to increase the cap on the R&D tax credit program has been drafted and is awaiting introduction in both the House and the Senate. As drafted, the bill will increase the existing $3 million cap to $9 million for the basic 3% credit for ongoing R&D expenditures and it will also increase the existing $3 million cap to $9 million for the 10% credit for new or expanded R&D spending. Both credits are significantly over-subscribed resulting in prorating. The increases, should they pass as introduced, would greatly reduce the extent of the prorating and thereby provide MAM members with an increase in the amount of credits to be claimed.
The bills will also add a new provision allowing “small businesses” to claim the credit even if they do not have a tax liability in that year. This is called a “refundable” credit and it was added to gain support for the legislation. Stay tuned for further developments!
If you have any questions or comments on the issues covered in this Update or on any other matter, please do not hesitate to contact me. Thanks again for your support.
