Details of revenue proposals emerging

We are now getting some details about several of Governor O’Malley’s revenue proposals. 

Sales Tax on Digital Products 

Part of the Budget Reconciliation and Financing Act of 2012 (or BRFA), the governor's proposal would require merchants to collect the state sales tax on purchases of digital products such as music, videos, electronic books, ringtones, and newspapers based on where the purchaser is, regardless of where the merchant is located.  While online purchases of physical goods from out of state merchants are legally subject to tax, they are collected directly from the taxpayer in what amounts to an honor system.  The governor’s proposal would treat digital (i.e. non-physical) goods as equivalent to their physical counterparts and place the burden of collection back on the merchant, but opponents worry about unintended consequences.  In the long run, this is an issue that requires federal action, but Maryland and other states are right to do what they can in the interim.

Flush tax

The flush tax funds the Bay Restoration Fund, which works to reduce pollution from wastewater treatment, and urban and agricultural runoff into the Chesapeake Bay.  Currently, wastewater treatment customers pay $2.50 per month and septic system owners pay $30 per year (the equivalent amount), regardless of how much water they use.  The Task Force on Sustainable Growth and Wastewater Disposal recommended tripling the fee by fiscal year 2015.  The governor’s proposal would double the revenue collected by moving to a consumption based system, charging $0.90 per 1,000 gallons for the first 2,000 gallons per month and $1.25 per 1,000 gallons thereafter.  Septic system users would see their fee double, to $60 per year.  There are some income-based exemptions.  The governor argues that the average fee would double, but some argue that the 2,000 gallon break between the high and low fee is too low.

Motor Fuel Tax and Income Tax

What we don’t have details on yet is the governor’s gas tax proposal.  We do know that it will probably raise the state gas tax between 5 and 15 cents per gallon, spread out over several years.  For the last twenty years, Maryland’s gas tax has been stuck at 23.5 cents per gallon, while fuel efficiency and the cost of infrastructure and maintenance keep rising. Adjusting for inflation, Maryland’s gas tax is now at its lowest level since the early 1980’s. Without an increase, it will soon be at levels not seen since the 1920’s.  The governor has also expressed some interest in indexing the rat e to inflation (it isn’t currently), but it is unclear how likely that is.

It is important to remember that the proposed increases for flush and fuel taxes would be dedicated to their specific purposes. They do not help with the state’s billion-dollar general fund revenue shortfall.  Keep an eye out for our report next week on the proposed changes to income tax deductions and exemptions.

At start of session, Governor signals a balanced approach to balancing the budget

Governor O’Malley signaled his intention to adopt a balanced approach to balancing the budget this morning at the annual Annapolis Summit hosted by the Marc Steiner Show and the Baltimore Business Journal.  In addition to supporting raising the gas tax and flush tax, he indicated his support for raising the sales tax by one percentage point as his preferred solution to the structural deficit in the state’s operating budget. His comments are a good indication of what his budget will include, but we still have to wait until next Wednesday for the complete package.

After years of job-killing cuts, the Governor’s sales tax proposal is a good way to begin a conversation about rebalancing the budget.  The legislature can improve on it. A sales tax increase will have a disproportionately negative effect on lower income families. This is because low-income and working families need to spend a larger share of their incomes on taxable goods compared with more affluent households. Increases in gas taxes and the “flush tax” to help Bay water quality will also hit low-income and working families the hardest. These increases should be paired with increased refundable tax credits for low and moderate income earners.

Unfortunately, increasing the sales tax will not be sufficient to protect the vital services that Marylanders depend on and that this state needs to prosper into the future.  The legislature and the governor need to also look at developing other new revenues sources, including closing loopholes for multi-state corporations, reinstating the millionaire’s tax, and modernizing the sales tax to include services.

Happy session!