Sales Tax Modernization for Maryland

Last week, the Center on Budget and Policy Priorities published a new report, "Four Steps to Moving State Sales Taxes Into the 21st Century," that urges states to modernize their sales taxes in order to broaden their tax bases and increase revenues. 

The Center suggests states adopt four general tactics to achieve this goal:
     1.   Tax more services. 
When the state established a sales tax in 1947, goods made up 60 percent of household receipts. Today, goods weigh far less in the share of total consumption; households spend almost 68 percent of their budgets on services, most of which are not subject to the 6 percent state sales tax. 

Source: Center on Budget and Policy Priorities

According to an earlier report by the Center, if Maryland taxed all household purchases of services other than health care, housing, education, legal, banking, public transit, insurance, and funeral services at the same rates they tax tangible goods, the total revenue yield could amount to more than $2 billion per year. 

In the 2012 session, Delegates Hixson and Gilchrist introduced HB1051, which would have expanded the definition of "taxable service" to include personal services such as motor vehicle maintenance and repairs, parking, barber or beauty services, tanning,saunas, and shoe repair. It would have also taxed several business-to-business services, such as  tax preparation, business brokerage, and personnel supply services. MBTPI generally supported the bill's goal of recalibrating the sales tax system to cover a broader range of services but advised that the bill be amended to exempt from taxation 

services that are principally purchased by businesses. However, this legislation did not make it out of committee, so new action in future sessions would be required to broaden the tax base in this way.

     2.   Tax tangible goods purchased online.

Online purchases make up a significant portion of Maryland consumer spending, and very few of these transactions are taxed. According to a study by the state Comptroller, "In 2010, Maryland lost an estimated $198.4 million in sales and use tax revenue from the sale of tangible goods by remote sellers, which represents about 5.4 percent of gross sales tax collections." 

Federal legislation has been introduced that would enable all states to require online retailers such as Amazon and Ebay to collect sales tax on online purchases. The bill known as the "Marketplace Fairness Act" passed the Senate in May but awaits an uphill battle in the Republican-controlled House. In the meantime, several states have passed their own legislation to reach this end, most notably New York with its so-called "Amazon law." Maryland's legislature has so far yielded to Congress to address the issue at the national level. Maryland's 2013 Transportation Bill dedicates some of the increase in sales tax that would result from a federal rule change to state transportation projects, but if Congress fails to pass new law, the state will raise its gas taxes further to meet its financial needs for these projects.

     3.   Tax digital downloads.

Maryland does not currently tax online downloads. The Comptroller's sales tax study estimated the foregone tax revenue from the sale of digital goods (such as online downloads of software, music, ebooks, and movies) amounts to roughly $5 million per year if these sales were taxed at a rate of 6 percent. The Governor proposed an initiative in the 2012 session that would have created a tax on these downloads, but it was rejected by the legislature. This could be an additional source of state revenue in the future. 

     4.   Eliminate the online hotel tax loophole.

Online travel agencies often do not collect the full value of hotel taxes owed to the state. A loophole allows these websites to apply the tax on the wholesale rate the travel firms pay the hotels rather than the higher retail rate that would be charged to a consumer who booked a room directly with the hotel. This difference amounts to at least $5 million foregone state revenue. No major legislation at the state level has been proposed to amend this practice.

Sales and use taxes are second only to the income tax as Maryland's largest sources of income and accounted for 28 percent of state revenue for fiscal year 2012. While sales taxes--like most consumption taxes-- tend to be regressive in nature, they are a more robust source of revenue for state governments than income taxes, declining less in periods of recession. 

Reforms that could enlarge and strengthen this key source of state dollars and bring sales tax into the 21st Century should be considered. However, the state should be sure to accompany any substantial broadening of the tax base with a robustly progressive income tax system and/or accompanying tax credits to help aid lower-income Marylanders who might be disproportionately affected by increases to their consumption tax burdens.

Week Ahead (Mother's Day Edition)

Yesterday was Mother's Day (hope you didn't need the reminder!), and we're celebrating by highlighting a blog post last week by the Bureau of Labor Statistics about working mothers.

Last week we blogged about U.S. Senate action on the internet sales tax, which has the potential to help Maryland businesses as well as state government. We also blogged about how unpopular Maryland is with CEO Magazine. And, we released our latest animated video, on the need for paid sick leave (watch other videos here).

For the week of May 13th through May 19th:

• On Tuesday, May 14th, the Advisory Council for Alternative Response holds their monthly meeting. From 1pm in room 1044 of the Department of Human Resources, 311 West Saratoga Street, Baltimore.
• The Maryland Commission on Artistic Property also meets on Tuesday, at 1:30pm in room 180 of the House Office Building, Annapolis. The Commission will discuss matters related to the State owned art collection.
• Later on Tuesday, the State Commission on Criminal Sentencing Policy meets at 5:30pm at 2009D Commerce Park Drive, Annapolis. 
• Finally on Tuesday, the Community Services Reimbursement Rate Commission meets from 6-8pm at the Mental Hygiene Administration office at 55 Wade Avenue, Catonsville. 
• On Wednesday, May 15th, the Board of Public Works meets at 10am in the State House, Annapolis.
• On Thursday, May 16th, the Maryland Health Care Commission meets at 1pm in their offices at 4160 Patterson Avenue, Baltimore.
• On Friday, May 17th, the Bureau of Labor Statistics (BLS) releases state-level employment figures for April. The initial BLS estimate for March found that Maryland's unemployment rate held steady at 6.6 percent, though the number of unemployed residents fell. However, the national figures for April included positive revisions to the February and March estimates, which may spill over to Maryland's figures.

US Senate allows states to enforce sales tax online

wpclipart.com

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.

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.

Tax Free Holiday Not a Good Deal

Starting this Sunday, August 12th, through the following Saturday, August 18th, Marylanders will be able to purchase certain clothing items costing less than $100 without paying the state's 6% sales tax (you can find more information about the holiday here). However, it's not as good a deal as it sounds.

The sales tax holiday was established in 2007 as a way to help families with back-to-school expenses and to promote Maryland retailers. At the time, legislators thought that the state was on track for budget surpluses and could afford the lost revenue. The recession derailed that plan, and the state is still struggling to recover. Now, the sales tax holiday is a loss the state can ill afford.

Estimates are that the sales tax holiday costs the state treasury about $10 million in lost revenues. That's enough money to provide 1,000 families with emergency housing assistance, or state college scholarships for 4,000 students. And it comes as the state begins to grapple with how to fix the remaining $400-500 million structural deficit in the FY 2014 budget.

Since 1997, at least 20 states and the District of Columbia have held tax holidays. They mostly involve clothes, computers, school supplies, and appliances. Florida extended tax holidays to hurricane-preparedness items. Yet many experts don't think stores benefit much from sales tax holidays. Research has found that in many cases removing sales taxes for a few days affects the timing of purchases rather than the volume. Business might be up during a sales tax holiday, but it goes down at other times as people shift their purchases to the tax-free days. One Florida study even showed that retailers raised prices (or lowered their normal discounts) during the tax holiday so they took 20 cents out of every dollar customers saved on taxes.   

Tax holidays can be confusing too. In Maryland the purchase of clothing under $100 will be tax free; but if you exchange the item after the tax holiday you have to pay tax on the new item (unless you exchange it). If you get a rain check and redeem it after the tax-free week, you'll have to pay tax. The store can’t break up something that’s normally a set (like selling the parts of a suit separately) to get the prices of the individual components under $100 and sell them tax-free. And the tax holiday doesn't apply to accessories, like belts, scarves and neckties.

More importantly, the sales tax holiday provides little relief to low-income Marylanders who are less able to shift the timing of their purchases to coincide with the sales tax holiday.

A better way to help families struggling to stay afloat would be to reform the tax system in Maryland to ensure the long-term revenue needed for services like education, health care, and job training that help people make their own way, take risks, and be productive. Asking out-of-state web-based retailers  to play by the same rules as those on Maryland's main streets would be an excellent start.

Is the sales tax holiday worth it? It provides a little excitement and free promotion for retailers. It gives government officials something to claim credit for. It may help families a little bit with back-to-school shopping, but few shoppers would get excited about a “giant 6%-off sale,” which would amount to the same thing. It costs us, as citizens, real money from our state treasury during a time when Maryland is cutting public services and can ill afford to make the hole we are trying to dig out of even deeper.

The bottom line is the tax holiday is not a good use of our limited resources. Interestingly, both the progressive Institute on Taxation and Economic Policy and the conservative Tax Foundation agree with me.  While the tax holiday might help consumers and businesses a little bit, a strong economy and safety net will help them more. That takes public investment and those investments take money.  There are more direct, less costly ways to help retailers and working families. We can’t afford to be spending money on gimmicks like tax holidays when we still have high unemployment and foreclosure rates, and losses of revenue needed for education and healthcare.

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.