US Senate allows states to enforce sales tax online

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These days online purchases are commonplace, yet Maryland's budget and tax system are still playing catch-up. The problem is that online retailers who do not have a physical presence in Maryland (such as a store or warehouse) are not required to collect sales tax. This puts the burden of payment on customers (who rarely pay), disadvantages local businesses, and forces Maryland to under-invest in education, healthcare, and public safety.

On Monday, the U.S. Senate took a step forward and passed legislation empowering states-including Maryland-to collect sales taxes from online purchases. This includes books, clothes, recreation equipment, and all the other stuff we pay Maryland sales tax for when we buy it in a physical store. Technically the bill does not create a new tax; rather it allows states to enforce collection of a tax which is now legally due, but rarely collected. 

Maryland and Virginia both counted on this authority in their recent transportation revenue packages. In Maryland’s case, the transportation bill provides that if Congress acts to allow states to collect Internet sales tax, then two things happen:

• 4 percent of all sales tax revenues would be allocated for transportation purposes (currently all sales tax revenues go into the general fund to pay for investments such as education, healthcare and public safety).
• The new sales tax on gasoline (which is in addition to the existing 23-1/2 cent gas tax) will be capped at 3 percent. If Congress fails to act it will rise to 5 percent. This sales tax on gasoline all goes for transportation purposes. Either way, this change would be phased in gradually over four years.

However, the federal legislation now has to pass the more conservative U.S. House of Representatives, which will be a tougher test than the Senate was.  A majority of U.S. representatives would need to vote for something that looks like a tax increase, where they get the blame, but state officials get to take credit for allocating the proceeds. Until now, this measure – meritorious as it is – has not made much progress in Congress.

Yet the ability to tax internet sales is unequivocally the correct economic and financial policy. Internet commerce is no longer a fragile new enterprise. It is a major player in the retail industry. It no longer needs the advantage of a de-facto sales tax exemption to grow and thrive (if it ever did).

And it is not fair to physical retail stores, or to internet sellers with physical locations in Maryland (from Target to your local florist). Under the current arrangement, they have to collect sales tax, but compete with out-of-state internet sellers who don’t.

So, however difficult the politics are, Congress should pass this bill.

Maryland’s allocation of these receipts for transportation, however, might endanger funding for general fund needs in the future. That means local schools, higher education institutions from our county community colleges to the University of Maryland, health programs, and police departments.

When and if Maryland starts collecting tax on all Internet sales,  legislators will need to keep a close eye on the receipts, to make sure that education, healthcare, and other functions funded from general revenues get their fair share.

Hunger solutions in Annapolis and Washington

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On Thursday, March 21, Maryland Hunger Solutions hosted a legislative breakfast to discuss food policy in Maryland. In addition to eating breakfast, there are other things we should do to fight hunger.

In spite of Maryland's overall wealth, hunger, homelessness and poverty remain problems here. One in 10 people are poor. Based on official USDA statistics, one in 8 Maryland households cannot afford adequate food at some point during the year (up from one in 12 just a few years ago). 50,000 Marylanders are homeless at some point each year.

In our budgeting and public policy, Maryland’s leaders have done a lot to improve these things. They have respected the social safety net while implementing a balanced approach to balancing the budget. They expanded Medicaid and moved forward to implement the Affordable Care Act and state health exchange. They are moving forward on a five-year program to provide in-class breakfasts at all eligible schools.

The situation in most other states around the country is actually much worse – both in terms of the rates of hunger, poverty and homelessness, and the commitment of the political leadership. Still, in the wealthiest state in America, we can and should do better.

On the federal level, things have gone haywire. The forces of greed and fear are telling us that people should not feel “entitled” to food, shelter, and medical care. These things ought to be efficiently allocated by market forces on the basis of ability to pay. The savings should be used to reduce taxes on investment earnings and corporate profits, according to some.

Our national leaders DO need to reform the nation’s finances to bring down the long-term budget deficit. We should support a “Grand Bargain” to accomplish these goals. But not everything should be on the table. Cuts to “Domestic Discretionary Expenditures” that affect Food Stamps, WIC, school meals, and other vital safety net food programs must not be negotiable. Cutting food for the hungry should not be part of a partisan political deal.

Our jobs as advocates include:

1. Thank Governor O’Malley and our legislators for preserving and enhancing key food and health efforts here in Maryland.
2. Advocate for structural solutions to hunger and poverty to prevent problems in the future. Things like minimum wage and paid sick day policies really are hunger solutions. Ultimately, so are funding for public schools and promoting access to higher education and job skill training.
3. Tell our representatives in Congress to protect food, housing and healthcare for low-income Americans as they come to a sane agreement to reduce future deficits.

The Sequesters are Coming

Maryland should keep its budget intact, and use rainy day reserves for temporary shortfalls.

Tomorrow is D-Day for sequestration unless Congress acts to prevent it in the coming hours.

Sequestration—that scary moment when automatic, across-the-board federal budget cuts begin. Every state will be affected, but Maryland may be worse off than many.  

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While the effect of these cuts on Maryland will be very substantial, they will not all be immediate. Maryland’s state and local budgets will be affected in three ways:

1.  There will be a loss of direct federal funding for state and local programs. Some of the larger programs, like Supplemental Nutrition Assistance (“Food Stamps”) and Medicaid are excluded from the cuts. But lots of other programs in education, health care, job training, public safety, and many other areas will be cut. According to White House estimates, Maryland schools will lose over $24 million in federal funds. 800 kids in Maryland will lose Head Start program seats. Funding for child vaccinations will drop by $140,000, reaching 2,050 fewer children. Senior meal programs would lose $877,000. The Department of Legislative Services estimated the total at $117 million for the state over two fiscal years, with additional cuts hitting local governments.
2. Cuts to federal jobs and purchases will suck income out of the state’s economy. The White House estimates that civilians working for the Defense Department in Maryland will lose $354 million as they are furloughed one day per week. Other cuts to military operations will exceed $100 million. Cuts would hit other federal agencies located in Maryland: the National Institutes of Health, Social Security Administration, the National Institute of Standards and Technology, National Archives, Census Bureau, and many others. Employees of these agencies—and of Maryland businesses that sell supplies and services to them—could  all lose income.
3. These impacts will affect the state’s overall economy. As federal employees, vendors, and contractors lose income, they will have less money to spend on groceries, entertainment, furniture, and everything else. The cuts will have a “de-multiplier” effect on Maryland’s economy, reducing job and income growth in all sectors. That will cut Maryland’s yield from income and sales taxes, which combined make up the largest source of state revenue.

The net effect could be the loss of hundreds of millions of dollars, just when Maryland’s budget is finally approaching stability.

What should the state do? To repeat a popular phrase, “Keep Calm and Carry On.”

Our national leaders have fallen into a bad habit of brinkmanship. Since each side feels its leverage increases as a crisis gets closer, they wait until a deadline (or past a deadline) before they negotiate seriously. These cuts are serious and should not be acceptable. But their effect won’t be fully apparent right away. With some pressure from ordinary people and businesses, it is likely that Congress can eventually reach some sort of deal, and before the next scheduled crisis on March 27, when the current federal appropriations run out.There will be yet another scheduled crisis set for May 18, when the federal debt limit expires again.  All of these events will occur before the new state fiscal year begins July 1st. We can hope that the national financial and economic pictures are clearer by then.

Maryland has ways to address shortfalls. The Governor's proposed budget prudently leaves cash balances of more than $1.1 billion in Rainy Day Fund and general fund reserves. Part of these can be used to address federal impacts. 

The Governor and the Board of Public works have the ability to reduce appropriations when the legislature is not in session. 

Finally, the next session of the legislature will meet when the state is half-way through this budget. Since Annapolis has shown the ability to take responsible actions on financial matters, any adjustments that require changes in law can be made then.

However, Maryland should not respond to federal budget cuts with state budget cuts. Eliminating more services, more jobs, and more economic activity would make a bad situation worse.

What is critical now is for Maryland’s government, business, and nonprofit leaders and regular citizens to help convince Congress to solve the nation’s financial problems in a calm way and without wrecking the economy or harming vulnerable families.

PLEASE ACT NOW - THE FISCAL CLIFF IS DANGEROUS!

This is a repost of a blog by Henry Bogdan, Managing Director of Public Policy and Public Affairs for Maryland Nonprofits and our own Neil Bergsman. At the end there is more information about our fiscal cliff conference call next Thursday.

The "fiscal" or as we're calling it, the "human cliff" poses a real threat for our nonprofits and our clients. It is not just a matter of protecting the deduction for charitable contributions.

The “fiscal cliff” refers to a series of tax increases and budget cuts that take effect around the first of the year, unless Congress acts to avoid them. Maryland Nonprofits is asking you to contact your member of Congress and urge them to REACH A RESPONSIBLE COMPROMISE AGREEMENT:

• INCLUDING A BALANCED PACKAGE OF TAX RATE INCREASES ON HIGH EARNERS AND MODERATE SPENDING REDUCTIONS
• AVOIDING CUTS TO PROGRAMS THAT WOULD THREATEN THE MOST VULNERABLE AMERICANS
• PRESERVING AN EFFECTIVE INCENTIVE FOR CHARITABLE CONTRIBUTIONS
  

The fiscal cliff will trigger automatic federal budget cuts of $109 billion each year, half to defense and half to “discretionary domestic spending.” Across the board this would be an 8.2% cut to hundreds of programs that relate to nonprofits’ missions in the discretionary domestic category: from nutrition, to substance abuse treatment, to job training, and the arts.  That automatic budget-cutting process is called “sequestration.” The sequestration cuts are estimated to mean a loss of over $117 million in Maryland’s state budget alone for the next year.  
At about the same time, tax reductions for people at all income levels adopted over the last 11 years would expire all at once with major impacts on the economy. Together with sequestration these are referred to as the “fiscal cliff”.
If nothing is agreed upon in Washington, there is a strong chance of renewed recession in addition to major spending cuts.  The State Department of Legislative Services recently estimated a potential combined negative impact on Maryland’s fiscal 2014 personal income and sales tax revenues (which make up about 80% of the state’s general funds) ranging from $337 to $635 million.  Together with the sequestration cuts listed above, this could reach over 5% of the state’s total general fund budget.
Much more likely is a gradual or phased package of negotiated tax changes combined with new revenue and significant new cuts in future spending.  For domestic programs, this will be in addition to cuts over the next ten years already adopted in the Budget Control Act of 2011. Failure to raise major new federal revenue, as the President is proposing by eliminating most of the Bush-era tax cuts for the wealthiest 2% of taxpayers, will magnify the size of additional spending cuts required. Domestic program funding through the states, Medicaid, Head Start, Title 1 Education, Women and Children’s Health, for example, are all at risk. Further, any cuts absorbed by states will likely mean reductions in additional areas as they try to re-adjust priorities at their level.   
WHAT CAN YOU DO?
 
Cuts are coming – even without the “cliff” the Budget Control Act has already put reduced spending caps on discretionary domestic spending, and rapidly growing costs of veterans’ benefits will compete with everything else in that category.  Nonprofits must be advocates for raising federal revenue – as much and as fairly as possible. 

1. Support the President’s tax proposal – it is the best chance to protect the most services for people and communities we serve!
2. Oppose ‘flat dollar caps’ on tax deductions – these are being proposed as an alternative to the President’s plan for tax rate actions and a modest limit on the percentage value of deductions for top earners.  Caps won’t raise as much revenue, so many more cuts must occur, and will have major negative consequences for charitable giving and many state tax systems that benefit from federal deductibility.  More information... 
   

HOW CAN YOU DO THIS?

1. Craft a message (you can use this sample format and vary the details for your audience) that: 
1. describes the people (children, families, communities, etc.) that your nonprofit serves or advocates for, and the importance of their needs; 
2. summarizes how cuts in the government-supported services they use and need will impact them and the community; and 
3. supports the President’s tax and revenue plan to help protect those services. 
2. Communicate this message (by phone, letter, email, meetings) to your member(s) of Congress (use http://mdelect.net/ to find your representatives and their contact information). 
3. Communicate to the public through social media, letters to editor, other local media, etc., to raise the profile of the issue. Communicate the same message to your state legislators and state officials (and local officials if they are involved in the services or funding). They will decide whether or how to make up for federal cuts, and how to cut or re-allocate their own resources. 
4. Reach out through your networks, coalitions, or state associations of providers or advocates, to reach more of the state’s delegation in congress (and more of the media and the public). 
5. Keep up with developments and keep your message current and fresh – follow the Maryland Budget and Tax Policy Institute’s updates at www.marylandpolicy.org 
6. Involve your board, staff, volunteers, supporters and clients in the steps above. 
7. AND Join us for a “fiscal cliff” information conference call at noon on Thursday, Dec. 13 at 1-866-740-1260, passcode 7636737.

Marketplace Fairness Act

Marylanders will avoid paying sales tax on roughly $3 billion in online purchases this year.  That works out to $184.1 million in lost state sales tax revenue, according to projections by the University of Tennessee (see Table 5, page 11).  U.S. Senator Ben Cardin wants to do something about that, which is why he cosponsored the Marketplace Fairness Act last fall.

I've written about the need for an internet sales tax previously (Cyber Monday highlights need for internet sales tax). Now apparently Memorial Day online sales are becoming a thing as well.  As time goes on the percentage of purchases which are made online will continue to grow.  Unfortunately, given the status quo that means that the amount of sales tax Maryland can expect to collect will likely decline.

The state's bank account isn't the only victim here.  Not charging sales tax on online purchases hurts local retailers who can't compete on price because they have to collect the tax. Consequently local businesses and the state can't afford to hire more employees, which in turn means that retailers lose further sales.

While there are actions Maryland can take to collect on some of these purchases (the governor has a few ideas), this is one policy area that can only be resolved at the federal level.  The Marketplace Fairness Act is a good start, but I fear it will languish in Congress.