The Maryland Comptroller’s Office released Thursday an eagerly awaited report on fallout from last month’s federal tax cut, an intricate best-guess effort to help guide policymakers looking to minimize any adverse effect on state taxpayers.
The state’s Bureau of Revenue Estimates found that while 71 percent of Marylanders will pay less federal tax for 2018 – an average savings of $1,741 a taxpayer – many residents would end up paying significantly more state tax than they currently do, were the General Assembly not to act to change the tax laws.
The bureau estimated that the federal tax cut would amount to roughly $2.8 billion for Maryland residents in the current tax year, 2018. At the same time, state officials found, 13 percent of residents will pay more federal tax, and 16 percent will see no change.
The problem facing Maryland policymakers lies in that state and local tax laws work in concert with the federal tax code, and there now is a need to decouple from the federal law. But the intricacies of the new federal tax changes and the ramifications for the state tax laws are complicated, multilayered and mind-numbing — even for the professionals.
“This is complicated for tax wonks,” said Andrew M. Schaufele, director of the Bureau of Revenue Estimates, who briefed state officials and press on the findings.
Schaufele reports to state Comptroller Peter V.R. Franchot, a Montgomery County Democrat, who introduced him Thursday.
Franchot described the report – put together in just 30 days – as a “nonpartisan, fact-based, comprehensive analysis of how the federal tax legislation will affect our state,” the first of its type in the nation.
“I look forward to working closely … with the governor and the legislative leaders over the next several months as they craft and consider legislation in response to this new federal tax law,” Franchot said.
One of the problems generally seen as needing to be addressed by state legislation this year is correcting the ambiguity of whether the Maryland’s exemptions would still be allowed even though the federal exemptions are eliminated by being set at zero.
The major changes in the federal tax code affecting taxpayers include the suspension of personal exemptions and a $10,000 cap on the deduction for state and local taxes, or SALT, which could affect more than a half-million Maryland filers whose deduction exceeds that limit.
The revenue estimates bureau found that the effects of those two changes would be offset by the federal Child Tax Credit, which doubled from $1,000 to $2,000, and the increase in the federal standard deduction, which jumps to $24,000 from $12,700 for married individuals filing jointly.
By contrast, the state’s standard deduction for married individuals is currently capped at $4,000.
The attractiveness of the significantly increased federal standard deduction is expected to reduce the number of Maryland taxpayers who itemize deductions – including charitable contributions – by roughly 700,000, the report found.
As a result, Schaufele said, charitable contributions are expected to drop overall. Of the 700,000 Maryland taxpayers expected to switch to the federal standard deduction, 574,000 in the past have claimed charitable contributions totaling $1.5 billion in the past.
In order to most accurately assess the impact on the state, Schaufele’s staff used data from 2.5 million Marylanders’ actual tax filings, both state and federal for 2014. In the report, the bureau presented a series of scenarios for taxpayers filing returns and the estimated revenue that would be realized by the state. Those estimates ran as high as $438 million for next year, he said.
Meanwhile Thursday, Gov. Lawrence J. Hogan (R) held a press conference to announce that he was submitting the Protect Maryland Taxpayers Act of 2018 for introduction in the General Assembly, to resolve problems outlined in the comptroller’s office report released earlier.
Hogan re-emphasized comments he made last month, upon Congress’ passage of the tax bill. He said his administration was committed to ensuring that “Marylanders will not pay one cent more in state taxes as a result of the actions at the federal level.”
Two weeks ago, Democratic legislative leaders introduced a package of their own bills dealing with the chaos brought on by passage of the federal tax bill, saying they could not afford to wait any longer for Hogan or the administration to act.
At the same time Thursday, Hogan took the opportunity to paint a dire picture of the Maryland Health Connection, the state’s insurance marketplace created to satisfy requirements of the Affordable Care Act, known as Obamacare. As part of the federal tax bill, a key provision of the ACA, the so-called “individual mandate,” was repealed, sending Maryland’s already troubled program into deeper water.
“As a result of the actions and inaction in Washington, the Affordable Care Act will force insurance rates in Maryland to increase by 50 percent or more,” Hogan said. “Let me be very clear: The stakes here are tremendous. If nothing is done, rates will
increase by at least 50 percent in the individual market.”
“It’s possible that the market could entirely collapse, thousands could lose their health care coverage and Maryland’s Medicaid waiver … we could lose that, which means $2 billion annually to the state,” Hogan said.
Only two insurance carriers now offer health coverage under the ACA program – CareFirst and Kaiser Permanente.
In recent days, legislative leaders have echoed in the same severe tones what Hogan said Thursday about a health insurance crisis in Maryland.
Hogan put together a team of officials – all of whom are former Maryland legislators, from both parties and both houses – to meet with members of the General Assembly and hammer out some sort of agreement on changing the state’s tax laws and the insurance crisis.
The governor’s emissaries to the legislature are David R. Brinkley, budget secretary; Kelly M. Schulz, secretary of labor, licensing and regulation; Robert R. Neall, health secretary; Christopher B. Shank, chief legislative officer; and Keiffer J. Mitchell Jr., special adviser to Hogan who works in Shank’s office.