Tax Day: What Do We Pay For, and Who Pays?

Tax Day is a good day to remind ourselves that taxes allow our state to make investments that benefit our economy and all Maryland’s residents, and that we must continue to work to make our tax code fairer.

What Do Our Taxes Pay For?

Taxes pay for important public services such as schools and health care that also help the state’s economy thrive. Residents and businesses alike depend on roads, bridges, and safe communities. Taxes make these investments possible.

Residents’ federal taxes mainly pay for national defense and major public programs such as Social Security, Medicare, Medicaid, and the Children’s Health Insurance Program. The largest items in the state budget include education, health care, transportation, and public safety.

Who Pays?

While the investments that taxes pay for play a large role in the lives of Maryland residents, the tax code itself plays an equally important role in determining who pays for these investments, and how much.

There are elements to the tax code that are beneficial for working Marylanders but others that favor the rich and well-connected. Like virtually every other state in the country, Maryland residents with moderate and low incomes pay a larger share of their incomes in taxes than do wealthy residents.

Source: Institute for Taxation and Economic Policy

Note: Data includes sources of family income for non-elderly taxpayers

In this regard, the tax code perpetuates and exacerbates inequality, which is particularly troubling as earnings for the wealthy in Maryland have increased while they have stagnated or declined for working Marylanders.

Unfortunately, the General Assembly has compounded this problem by raising the income exemption for the estate tax, allowing millionaires to withhold a higher level of income from estate tax filings. And although state lawmakers were unwilling to index the minimum wage to inflation during the 2014 legislative session, they passed legislation that has the withholding level for the millionaire estate tax eventually rise with inflation.

Thankfully, there are elements of the tax code in Maryland that benefit working families. Maryland has its own Earned Income Tax Credit (EITC) for people who work at low-wage jobs which complements the federal EITC and helps reduce inequality and lift residents out of poverty. This year, the General Assembly approved an expansion of the state EITC which will help the state’s workers keep even more of their money and further reduce poverty and inequality. This was an important victory for working Marylanders.

Maryland also employs a graduated rate income tax structure that rises with earnings, helping ensure that the wealthy pay their fair share. Maryland increased tax rates for high earners in 2012. Research shows that high-income residents do not leave a state in response to taxes (instead moving for family, job, and weather reasons. Indeed, Maryland remains the wealthiest state in terms of household income and the state with the most millionaires per capita.

Like the wealthy, large corporations operating in Maryland are not paying their fair share in taxes. Lawmakers failed to close a loophole that allows companies to avoid state taxes, and Maryland can do more to make sure its tax incentives are targeted toward moderate and low income residents that need them most.

As another Tax Day comes and goes, residents and lawmakers should be mindful that while taxes are necessary to pay for investments in Maryland’s residents and economy, there remains a need to improve the tax code so that it is fairer and promotes broad prosperity.