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.

Not the budget: Other legislation of note

The 2013 regular session of the legislature concluded on midnight Monday. During the course of the session, the Maryland Budget and Tax Policy Institute took positions on a variety of bills related to Maryland’s finances and their effects on low-income and other vulnerable Marylanders.

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Here is the run-down:

Transportation

The legislature enacted a much-needed transportation bill (House Bill (HB) 1515) that gradually increases taxes on gasoline to replenish the state’s transportation fund, allowing Maryland to improve roads, bridges, transit systems, and bicycle and pedestrian passageways.

MBTPI supported this legislation as a responsible compromise. 

However, there are two concerns we have about the bill. One we discussed in yesterday’s blog. The bill calls for a portion of the sales tax to be diverted from general fund purposes (like education, healthcare, and police) to transportation once Congress allows states to collect taxes on internet and catalog purchases.

The other concern we had is that the gas tax places a disproportionate cost on low-income working families. To address this regressive effect, we supported bills to expand Maryland’s earned income tax credit (HB 845/Senate Bill (SB) 703).  Unfortunately, these bills died in committee.

Homeless Youth

MBTPI supported HB 823/SB 764 to create a task force to find solutions for the growing problem of unaccompanied homeless youth.  The legislature enacted these bills. MBTPI will be following the task force’s work closely. We expect the task force to develop creative and effective initiatives to help these teens and young adults.

Making Welfare to Work Workable

MBTPI supported and the legislature enacted SB 686 to establish an earned income disregard pilot program. Currently, Temporary Cash Assistance (TCA) recipients lose 60 cents in benefits for every dollar they earn when they join the workforce, even though those exiting TCA on average earn less than the federal poverty rate. SB 686 creates a pilot program in a rural county to research the impact of reducing the earned income disregard when recipients initially enter the workforce. The pilot program would ease the transition from TCA to self-sufficiency by disregarding (for the purposes of TCA eligibility) 100 percent of their earned income for the first three months of employment, disregarding 60 percent of their earned income for the following six months, and disregarding 40 percent (the current standard) afterwards. A graduated disregard would help TCA parents succeed when they enter the workforce, encouraging personal responsibility and helping families achieve independence. The pilot program will allow this policy to be tested and evaluated.

Tomorrow we'll look at some of the bills we supported that didn't make it through the legislative process.

The Week Ahead (Sine Die Edition)

Today is Sine Die, the last day of the 2013 legislative session. It's been a busy session, between passing the budget, raising the gas tax, enacting gun control, and repealing the death penalty, among other issues--but with less drama than last year. Look for our in-depth review of the session on our blog later this week.

Last week we blogged about the legislature missing the budget target date, the supplemental budget introduced by Governor O'Malley, national employment trends in March, and the budget conference committee report.

For the week of April 8th to April 14th:

• Monday being the last day of the 2013 session, the legislature is scheduled to rush through its remaining workload, including bills on: speed cameras, medical marijuana, pit bulls, and driving while using a mobile device.
• The Commission on State Debt, which advises the Board of Public Works on the property tax rate, also meets Monday, April 8th at 2pm in the Treasury Building, Annapolis. 
• The Advisory Council for Alternative Response meets on Tuesday, April 9th at 1pm in the Department of Human Resources, 311 West Saratoga Street, Baltimore. 
• The Bureau of Labor Statistics releases metropolitan level employment figures for February on Wednesday, April 10th. 
• The Health Services Cost Review Commission holds their monthly meeting at 1pm on Wednesday, April 10th at 4160 Patterson Avenue, Baltimore. 
• The Census Bureau releases the 2012 edition of their Annual Survey of State Government Tax Collections on Thursday, April 11th.
• The Maryland Health Insurance Plan Board of Directors holds its monthly meeting at 9am on Thursday, April 11th at 201 E. Baltimore Street, Baltimore.

The Week Ahead

Last week we blogged about Senate budget action, hunger in Maryland, and the good and bad news about transportation. Neil Bergsman also appeared in a Washington Times story about the gas tax. MBTPI also submitted Senate testimony in support of a Earned Income Disregard pilot program, and expanding education funding.

For the week of March 25th to March 31th:

• Both houses have passed their versions of the operating budget. Work now moves to conference committee, to iron out differences between the two versions of the bill. The constitutional target for passing the operating budget is next Monday, April 1st (the 83rd day of the session). Work continues on the capital budget.
• The House passed the transportation finance package last week. Action now moves to the Senate (SB 1054). MBTPI supports the Transportation Infrastructure Investment Act of 2013, but only if it is paired with an expansion - by amendment or a separate bill (i.e. SB 703) - of the refundable portion of the state earned income tax credit.

Maryland's transportation challenge - Good news and bad news

House of Delegates acts to fund Transportation projects – but tax credits are needed to ease the effect on low-income working families.

MBTPI from Center on Budget estimates

 THE GOOD NEWS: 

The Maryland House of Delegates, by a 78-56 vote, has approved a sensible financing plan for Maryland’s transportation network.

The plan will provide funding to maintain roads, to make our bridges and highways safe, and to expand mass transit, bicycle and pedestrian transportation options for Marylanders.

The funding – principally from a sales tax on gasoline, will phase in over three years (until now, the state gas tax has not increased in 20 years). Then, it will automatically adjust with inflation, so that our transportation system won’t fall behind again.

The bill also includes modest increases in transit fares – everyone has “skin in the game.”

THE BAD NEWS:

It makes sense to use gas tax and transit fare increases to support transportation needs. The problem is these sources place a disproportionate burden on low-income working families.

There is a solution within the legislature’s reach. They can also pass House Bill 845 or SB 703 to expand the state Earned Income Tax Credit. The credit particularly helps working people with kids who earn less than $50,000. By increasing it, we can offset their added cost of gas and transit costs that come along with these much-needed transportation improvements.

State leaders propose transportation package

Governor O'Malley, Senate President Mike Miller, and House Speaker Michael Busch released their transportation funding package yesterday (HB 1515/SB 1054). Maryland's transportation system has struggled for years with inadequate funding and the gas tax (which isn't indexed to inflation) hasn't been raised since 1992. Critical transportation needs are coming to a head in many states (see Virginia's recent transformation of its funding structure), and our state lawmakers finally have a plan to do something about it.

The proposal would raise $3.4 billion over five years. Here are the details, according to a graphic put out by the Governor:

Click to enlarge

This plan is a strong and sensible move toward more sustainable transportation funding. A healthier transportation system will help Maryland businesses and residents of all incomes live a better life.

However, we would advocate that the General Assembly add one more piece to the leadership's bill. Any expansion of the gas tax, sales tax, or other taxes or fees that disproportionately burden low-income families should also include an increase in the earned income tax credit. In fact, there are already bills before the legislature that would do just that. MBTPI strongly recommends that HB 845/SB 703 be made part of any transportation finance deal based on the plan put forward today.

The Big Bad Wolf of Transportation

In our previous blog posts on the budget situation, we used the story of Little Red Riding Hood to illustrate the budget situation. Because Maryland has managed its finances responsibly through the Great Recession and its aftermath, and because the nation and the state are experiencing an economic recovery (albeit a slow, fitful, and uneven recovery), this year’s budget situation is much less challenging than the previous five or six budgets.

It’s like Little Red Riding Hood delivering her basket of goodies to Grandmother’s house. It ought to be an easy, straightforward task. However, there are Big Bad Wolves in the woods, and if Little Red happens to encounter one of them, the trip will suddenly become dangerous.

On January 16, Governor O’Malley delivered his budget and it was indeed less difficult and complicated than previous budgets. There is a comfortable ending balance, an increase in the State Reserve Fund, no large, highly visible cuts, and no significant tax increases.



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However, we cautioned about three “Big Bad Wolves” lurking in the woods. The first wolf was the federal fiscal cliff.

Today, we meet the second Big Bad Wolf: Transportation Finance.



Maryland has a system for funding transportation that relies on dedicated revenue. The revenue sources include transportation-related revenues like gas taxes and vehicle titling and registration fees, as well as a share of the corporation income tax. The gas tax is the largest of these sources. It has not increased since it was set at 23-1/2 cents per gallon in 1992. William Donald Schaefer was the governor.

Since the tax is a flat number of cents per gallon, the amount or revenue does not adjust for inflation. The price of gas in 1992 was $1.09 per gallon.

Soon, the revenue will be insufficient to cover any new highway or transit projects at all. It will only cover operating costs and routine maintenance.

Increasing the gas tax would be the most straightforward way to finance the state’s transportation needs. However, legislative leaders are wary of supporting a gas tax increase. It is perceived as being wildly unpopular with voters.

So … here is where the Big Bad Wolf of Transportation comes in. One way to increase transportation funds without raising gas taxes would be to use general fund revenue sources to finance transportation. And this could endanger adequate funding for education, healthcare, public safety functions, and the other important services that rely on those sources. Governor O’Malley keeps talking about a sales tax increase to solve the transportation problem. Virginia Governor Robert MacDonald has proposed a transportation finance package in that state that involves both increasing the sales tax and diverting a share of existing sales tax revenues for transportation needs.

• To avoid being attacked by this Big Bad Wolf, Maryland should fund its transportation needs with a gradual, phased-in gas tax increase.
• To reduce the economic effect as well as the "regressive" effect on low-income Maryland workers, the gas tax increase should be accompanied by a small increase in Maryland’s Earned Income Tax Credit.
• Finally, the revenue should be used to a balanced transportation program, including significant transit, pedestrian and bicycle improvements.

The Week Ahead (Thanksgiving Edition)

Registration is now open for our annual Legislative Preview!  On Monday, January 7th Maryland Nonprofits and MBPTI will convene public officials, legislative experts, and advocacy leaders at the Doubletree Annapolis Hotel to bring you important information about the upcoming legislative session. If you want to start off the session informed and prepared, you can’t miss our legislative kick-off. For registration information please go to Maryland Nonprofits event page.

Last week we hosted a guest blog from Henry Bogdan, Managing Director of Public Policy and Public Affairs for Maryland Nonprofits, on the variation in support for the various ballot measures across Maryland. We also posted a great infographic about growing income inequality in Maryland and a summary of last week's Spending Affordability briefing. Neil Bergsman also appeared in the Washington Examiner, in an article on the need for new sources of transportation funding.

Tuesday, November 20th

• General Provisions Article Review Committee reviews drafts of Title 4 "Public Information Act" and Title 7 "Emblems; Designations; Commemorative Days and Months." 5pm in room 241, House Office Building, Annapolis.
• Maryland Commission on Artistic Property meets to discuss the state's art collection. 10:30am at the Washington County Museum of Fine Arts, 401 Museum Drive, Hagerstown.
• Bureau of Labor Statistics releases state employment figures for October. In September, Maryland's unemployment rate fell to 6.9 percent as 11,000 people found work.

Apply the sales tax to gas

[This post has been updated and revised for accuracy]

On Monday, Governor O’Malley unveiled his plan to improve Maryland’s roads, bridges, and transit systems by making the first changes in the state’s gas tax in two decades. .  The Maryland gas tax has been 23.5 cents per gallon since 1992, but its purchasing power has declined dramatically over the last twenty years, to the point where it now approaches that of the 1920s.  With this decline in value, it’s clear why Maryland’s transportation system is in serious financial trouble today.

The governor’s plan addresses this problem by phasing out the sales tax exemption for fuel over three years, while continuing the 23.5 cent per gallon tax.  

Maryland State Fuel Tax
	Current Tax Rate	Proposed Tax Rate	Proposed Tax  per gallon *	Difference per gallon
First year	23.5 cents	23.5 cents plus 2%	29.7 cents	6.2 cents
Second year	23.5 cents	23.5 cents plus 4%	35.8 cents	12.3 cents
Third year	23.5 cents	23.5 cents plus 6%	42 cents	18.5 cents
* Assumes average price of regular gasoline is stable at $3.50 per gallon [which includes 18.4 cents in federal gas tax and 23.5 cents in state gas tax].  AAA makes available data on current state average gas prices.

Good transportation is one of the foundations of a healthy economy, and we need to raise the gas tax to make job-creating investments in better transit, roads, and bridges.  At the same time, applying the sales tax to gas will cost working Marylanders more, and we need to take that into account.  Pairing this change in the gas tax with strategic investments in public transportation, as well as asking wealthier Marylanders to pay their fair share of costs for vital services, are good places to start.

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! 

Building a Better Gas Tax

In 1992, Disney’s Aladdin was the top grossing movie, the Washington Redskins won the Super Bowl (really!) and the average price of gas was just $1.09 per gallon. It was also the last time the state of Maryland increased the tax rate on gasoline, from 18.5 cents to the current rate of 23.5 cents per gallon.

The Institute on Taxation and Economic Policy (ITEP) released a report this morning entitled Building a Better Gas Tax: How to Fix One of State Government’s Least Sustainable Revenue Sources. ITEP found that on average the purchasing power of state gas taxes fell by 20 percent since they were last raised (diesel taxes fell 18 percent). In Maryland, the state gas tax purchases 40 percent less than it used to, while the state diesel tax purchases 41 percent less. This translates into $509 million less spending in 2011 on bridge maintenance, pothole repair, road construction and other investments in the transportation infrastructure of our state.

The authors of the ITEP report offer three policy recommendations for states:

• Increase gas tax rates to at least what they were worth when last raised. In Maryland this would mean raising the gas tax by 15.8 cents.
• Change the law so that gas tax rates grow with transportation construction costs.
• Create or enhance targeted tax credits for low income families to offset the impact of gas tax reform.

Maryland’s gas tax was in the news in November as well, when the Blue Ribbon Commission on Maryland Transportation Funding released its final report. The Commission also recommended raising Maryland’s gas tax 15 cents, spread out over three years. According to the ITEP report, this would translate to an additional cost of $6.46 per month for the average driver. Some of that might even return to drivers in the form of less time spent wasting gas stuck in traffic or reduced repair costs on their vehicles due to better maintained roads. It looks likely that the General Assembly will take up raising the gas tax in the next session.

However, raising a dedicated tax like the gas tax is only part of the solution for a better Maryland. Maryland needs new revenues to support all sorts of programs, from public safety to healthcare. In the last five years, Maryland has cut its budget by 2 billion and 5,500 employees. Now it is time to start raising revenue to support the vital services provided by the state.