O’Malley’s gas tax proposal should be paired with EITC changes

Governor O’Malley released the final details of his gas tax proposal yesterday.  We already knew that he was going to propose phasing out the sales tax exemption on gas over three years.  Now we know what’s in the fine print.

The governor introduced a “braking mechanism” to ease the effects of implementation on consumers.  This braking mechanism would hit the pause button on implementation if, during the prior year, the price of gasoline rose by more than 15 percent.  So in year one of implementation consumers would pay a 2 percent sales tax on the retail price of gasoline (less the 18.4 cent per gallon federal and 23.5 cent per gallon state gas taxes).  If during that first year the price of gasoline rose more than 15 percent, the sales tax on gas would remain at 2 percent during year two instead of rising to 4 percent.  Only after a year in which the price of gas rose less than 15 percent would the sales tax on gas rise to 4 percent.  This braking mechanism would remain in place until the sales tax on gasoline rises to 6 percent, where it will remain. 

How likely is it that Maryland will need to use this braking mechanism?  I did some digging, and according to data from the federal Energy Information Administration, it would have engaged in six out of the last eleven years.  So it seems likely that implementing Governor O’Malley’s proposal will take longer than the minimum three years.

Source:  MBTPI analysis of Energy Information Administration data

The second new detail of the governor’s proposal is an increase in the amount transportation funding given by the state to county governments.  Under his proposal, local governments would eventually get one fifth of the money raised by the gasoline sales tax. This doubles the current level of 10 percent, but it’s still less than the historic local share. Prior to the 2007 recession, the local share of transportation revenues was 30 percent.

Governor O’Malley also proposed several mechanisms to restore faith in the transportation trust fund, though his proposal does not go as far as some legislators want.  First, any transfer of money from the transportation trust fund to non-transportation purposes would require a stand-alone bill in the General Assembly, passed by three fifths of all assigned committees in each house.  Transfers could also be made if the governor declared a state of emergency.  In either case, an automatic repayment plan must be included.

While MBTPI is focusing on revenue measures that provide general fund support, raising funds for transportation needs is also important.  We believe that this and other necessary tax increases should be paired with an increase in the state refundable earned income tax credit (EITC) to minimize the harm done to those Marylanders least able to pay.

MBTPI Director Neil Bergsman testified yesterday before the House Ways and Means Committee in support of HB 331.  This bill would increase the refundable portion of the state EITC to 30 percent of the federal EITC, from its current level of 25 percent.  EITC is one of the most powerful anti-poverty tools Maryland has in its toolbox.  Lawmakers should use it, as they did in 2007, as part of a package of tax reforms that raise needed revenues while enhancing the progressive nature of our tax code.