Lawmakers Begin Weighing Novel Expansion of State Sales Tax

House Majority Leader Eric G. Luedtke (D-Montgomery) speaks to reporters about a proposal to expand the state's sales tax to cover most services, while reducing the overall sales tax rate. Photo by Danielle E. Gaines.

A novel approach to expand Maryland’s sales tax ― with the appealing benefit of generating enough revenue to pay for a 10-year, multi-billion-dollar education reform plan ― is likely to clear a procedural hurdle Friday morning, but faces an uncertain future in the second half of the 90-day General Assembly session.

The proposal, from House Majority Leader Eric G. Luedtke (D-Montgomery), would lower Maryland’s sales tax rate by a penny to 5% ― a figure lower than neighboring states, except for Delaware, which doesn’t charge a sales tax ― but extend the tax to cover most services in the state, which aren’t currently taxed.

The result would be a $2.6 billion revenue boon for the state within five years ― enough to keep ahead of the costs of education reforms proposed by the Blueprint for Maryland’s Future, the chief priority of Democratic lawmakers.

But the bill’s prospects for passage this year are unclear. There’s no cross-filed measure in the Senate, and opposition groups are already lining up. Professional services ― which are stricken from a list of exemptions in current law ― are among the least taxed services throughout the U.S., thanks in part to strong lobbying forces. And to tax things like legal and accounting services in Maryland will likely require extensive amendments to the bill, which has just over half the legislative session to clear the House Rules Committee, receive a hearing and cross to the Senate chamber.

Luedtke, who spent much of Thursday stumping for the legislation with reporters and advocacy groups, said the bill was meant to spark a serious conversation about tax policy in the state, if nothing else.

While sales taxes are, by nature, regressive, extending the sales tax to services would make the state’s overall tax structure more progressive, Luedtke argued.

“Wealthier families consume more services than goods, poorer families consume more goods than services,” he said. “So, for many families at the lower end of the income spectrum, this would actually be a wash.”

Other exemptions from the sales tax in current law would remain: including food and medicine, and educational, health care and social services.

Luedtke pegged increased tax payments at $3 per week ― or $156 a year ―for a family earning the state’s median income of about $84,000.

But Gov. Lawrence J. Hogan Jr. (R) attacked the plan in a news conference Thursday and promised that “it’s not ever going to happen while I’m governor.”

Hogan charged that the tax change would cost $1,708 a year for a family of four, which his administration calculated by dividing the total increased tax equally among all Marylanders.

But Luedtke said his estimates were borne from “actual economic modeling” that shows the annual increase to a household with $50,000 annual income would be $25. The increase wouldn’t hit $1,750 until a family earns $750,000 a year, he said.

“Bottom line, to understand the impact of a change like this requires a bit more than 3rd grade math, which seems to be what the governor’s office is using,” he said.

After the bill was introduced on the House floor Thursday morning, House Minority Whip Kathy Szeliga (R-Baltimore County) said average Marylanders are living on a limited budget and shouldn’t face the additional 5% expense when their car breaks down or they need a haircut.

“It would be Realtors, nail salons, beauty salons, oil changes, auto repairs,” Szeliga said. “…That puts our businesses at a 5% disadvantage against our neighboring states that we’re competing against.”

Szeliga said she was particularly concerned about senior citizens.

Broad-based sales taxes on services are rare across the country. Hawaii and New Mexico are the only states to apply a sales tax to nearly all services, while Delaware and Washington apply a separate gross receipts tax to service transactions, according to the Federation of Tax Administrators. Other states apply sales tax to some, but not all, services.

The bill is cosponsored in the House by heavy hitters: Appropriations Chairwoman Maggie L. McIntosh (D-Baltimore City), Ways and Means Chairwoman Anne R. Kaiser (D-Montgomery), Economic Matters Chairman Dereck E. Davis (D-Prince George’s) and other leaders on their committees.

However, it’s unclear if the politically charged proposal has a champion in the Senate just yet.

Senate President Bill Ferguson (D-Baltimore City) took a wait-and-see approach when asked about the proposal on Thursday morning.

“We’ll see where things go,” he said. “…All of us are looking at ways to fund a world-class education system in Maryland in a  way that is sustainable [and] realistic, without impacting Maryland’s long-term competitiveness, and so the more ideas that are on the table, the better the work product will ultimately be.”

Senate Budget and Taxation Chairman Guy J. Guzzone (D-Howard) said he doesn’t view Luedtke’s bill any differently than any other revenue option under consideration this session.

“Any option that comes before the General Assembly needs to be taken seriously,” he said. “…But we have to go through a public process and we have to see how the citizens respond to this.”

Political scientist Todd Eberly said that while Luedtke’s proposal “is not an altogether bad idea,” as shifting spending patterns toward more services have diminished the value of sales taxes on goods, anything that ultimately raises the amount of taxes paid by the public will face significant pushback.

The challenge for Democrats will be proving the value of the education reform plan to the extent that the public will be willing to pay for it.

Given the tight timeline this legislative session, Eberly, a professor at St. Mary’s College of Maryland, said he wouldn’t be surprised if the bill takes more than one year to pass.

“It’s not uncommon for somewhat controversial things to gestate for a while,” he said.

Kali Schumitz of the liberal-leaning Maryland Center on Economic Policy said the organization ― which has advocated for changes to make the state’s tax policies more progressive as a way to pay for education reform ― was still reviewing Luedtke’s proposal late Thursday.

The center has spent the legislative session largely advocating for changes to state tax laws to close corporate loopholes and eliminate certain business tax breaks. However, “broadening the sales tax base to certain services could be a component of a well-designed package to raise additional revenue for schools,” if steps were also taken to alleviate burdens for lowest-income residents, Schumitz said.

House Speaker Adrienne A. Jones (D-Baltimore County) said earlier this week that the first three years of the education reform plan can be paid for with existing state resources.

As an alternative to passing one sweeping measure, lawmakers could cobble together several smaller revenue bills this year and both chambers are considering bills that would increase the tobacco tax, require combined corporate reporting in the state, and legalize and tax sports betting, among other measures.

Senate President Emeritus Thomas V. Mike Miller Jr. (D-Calvert), who is chief sponsor on another novel measure to tax online digital advertising ― which could generate $250 million a year, according to fiscal analysts ― was skeptical about the sales tax bill’s future on Thursday.

“It’s an idea that might happen at some time. I’m not sure it’s ready for prime time,” he said. “…We’re halfway through the session; to put a bill like this out, that’s sort of just popped on people in the latter part of the session, I don’t think it’s going to happen.”

One benefit to Luedtke’s approach could be its rip-the-bandage approach to creating revenue ― all at once, in one bill without businesses wondering which new, smaller tax measure could be considered year after year.

“There are a number of options on the table. The difference between this and some of the other options is that this is simpler, it’s more straight-forward, it’s frankly easier for a lot of businesses to implement instead of something like combined reporting,” Luedtke said. “But at this point, all options are still on the table.”

Reporter Bruce DePuyt contributed to this report.

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