There was good news in Maryland last week, where the state legislature voted to repeal a widely loathed tax on computer services. Much less appealing is the way they did it: In place of the tech tax, legislators pushed through a late-night income tax rate surcharge on Marylanders making more than $1 million a year to 6.25% for three years.
Consumers and business groups had fought the tech tax that had many companies considering moving their offices over state lines. Republicans aimed to offset the computer tax repeal by slowing the rate of growth in state spending to 3.7% from the Governor’s planned 5.9%. But Democrats who dominate the legislature jammed through the income tax hike after defeating five attempts to repeal the tech tax without it.
The surcharge continues Maryland’s march up the ladder from a low- to high-tax state. Two years ago Maryland had a low flat tax rate of 4.75% on income of more than $3,000. Last year it made the code more progressive, raising the rate to 5% on single filers earning more than $150,000 and the top rate to 5.5% on those over $500,000. State pols also raised the corporate tax rate to 8.25% from 7%, and the sales tax to 6% from 5%.
As California and New Jersey have shown, a steeply progressive income tax makes state revenue highly dependent on relatively few earners. In good times, those earners do well and the pols spend the excess revenues. But in slowdowns, the state quickly finds itself in deficit, and, true to this form, Maryland’s pols now find themselves on the New Jersey ratchet to ever higher rates.
As state Senate Minority Whip Allan Kittleman pointed out, many of Maryland’s so-called millionaires are actually small businesses that pay taxes through their proprietor’s personal tax returns. With the state’s economy struggling, wise money would avoid cudgeling a sector that has grown to more than 440,000 small businesses statewide. They now have another incentive to move to Delaware.
The only thing that might save Delaware’s economy is that the Democrats in surrounding states understand economics even less than ours do.