Investing in Education Will Build a Stronger Maryland Economy

It's back-to-school time again. It's a good time to think about how education contributes to our economy and our quality of life.

The best way for Maryland to grow its economy is by continuing to invest in a well-educated workforce, according to a new paper published by EPI for the Economic Analysis and Research Network (EARN—a network of state local and national economic think tanks, including MBTPI).

In A Well Educated Workforce is Key to State Prosperity, Noah Berger, president of the Massachusetts Budget and Policy Center, and Peter Fisher, research director at the Iowa Policy Project, find a strong link between the educational attainment of state workforces and both productivity and median wages. In Maryland, 41 percent of the workforce have college degrees; the US average is 33 percent. Maryland's average hourly earnings are $19.12, almost $3 above the national average.

Expanding access to high quality education will create more economic opportunity for Marylanders and do more to strengthen our overall economy than anything else state government could do.

 Some ways to increase the educational attainment of Maryland’s population include:

•  increasing funds for preschool programs and quality childcare,
•  restoring full inflation increases in the “Thornton” public school funding formula, an
•  keeping college affordable by holding down tuition growth, and increasing need-based financial aid.

Meanwhile, strategies such as cutting taxes to lure employers and capture private investments from other states are shortsighted, and promote a race to the bottom which undermines states’ ability to invest in and attract an educated workforce. The paper finds no clear relationship between a state’s tax rates and its wages.

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.

The Week Ahead

Last week MBTPI testified on seven bills, including: forming a committee to study evidence-based budgeting (support), an earned income disregard pilot program (support), and the new transportation financing plan (support with amendments). We also blogged about action in the House Appropriations Committee and the benefits of raising the cigarette tax.

Last Friday the House of Delegates passed the operating budget. The Senate Budget and Taxation Committee also sent its version of the operating budget to the  full chamber. The Senate will debate the budget on the floor this week, setting up a conference committee next week. The Senate Budget and Taxation Committee report and supporting documents will be available online at 8pm tonight (look for them on the legislature's website under recent publications).

This morning, the Bureau of Labor Statistics released state level employment figures for January. Maryland's unemployment rate held steady at 6.7 percent, the same rate it has been since November. This is still lower than the national unemployment rate of 7.9 percent.

For the week of March 18th to March 24th:

• The Senate debates the operating budget, starting on Wednesday. The House continues work on the capital budget. Check the budget hearing calendar for more information.
• Maryland Hunger Solutions is holding a Fighting Hunger and Poverty Breakfast. Nearly 1 in 6 households in Maryland reported in 2012 the inability to afford enough food. The breakfast will allow attendees to hear and see the voices of individuals struggling with food insecurity and the challenges of living in or near poverty, and ultimately provide an opportunity for everyone to engage in the critical effort to eliminate hunger and poverty across our state. If you have any questions or to RSVP, please contact Lisa Klingenmaier (lklingenmaier@mdhungersolutions.org ) by tomorrow, March 19th. Thursday, March 21st, from 8-10am in room 170 of the House Office Building.

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.

ALERT: Fox 45 Budget and Tax Town Hall TONIGHT 7pm

Maryland lawmakers recently passed a responsible compromise budget that featured both spending cuts and tax increases, while avoiding $500 million in “doomsday” cuts.

MBTPI’s own Neil Bergsman will be taking part in a town-hall style debate on taxes and the budget, TONIGHT at 7pm.  The other three panelists will be Vincent DeMarco from the Maryland Health Care for All Coalition, Charles Lollar from New Day Maryland, and David Schwartz from Americans for Prosperity. Mark Hyman of Sinclair Media will moderate. Fox 45 (which is owned by Sinclair Media) is hosting and moderating the debate, which will be streamed live on their website (it will NOT be broadcast live). Viewers will have the chance to submit questions online, on Facebook, and via Twitter.

We know that our opponents will flood the Fox 45 forums with questions arguing that Maryland should cut taxes and gut vital programs. With your help we can show support for continued public investment in the programs and services that make Maryland great, such as our schools, parks, hospitals, and universities. 

Please watch the 7pm debate live at www.FoxBaltimore.com.  We also ask that you post comments and submit questions for the panelists on Fox 45’s website, Facebook page Facebook.com/foxbaltimore and by Twitter @FoxBaltimore. You can also follow along as MBTPI tweets comments and reactions to the debate at @MarylandBudget. The hashtag for the forum will be: #Fox45TownHall. 

See you tonight!