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Education Working & the Economy

As Businesses Oppose Tax Bill, Sponsor Willing to Deal

House Majority Leader Eric G. Luedtke (D-Montgomery) and Del. Lorig Charkoudian (D-Montgomery) testify in favor of their bills that would expand the state’s sales tax to services. Photo by Danielle E. Gaines.

A multi-billion-dollar expansion of Maryland’s sales tax to most services drew hours of impassioned opposition during a Monday afternoon hearing before a House committee tasked with finding ways to raise enough revenue to fund an ambitious and expensive education reform plan.

Lawyers, architects, real estate agents and car wash owners appeared by the dozens before the House Ways and Means Committee to oppose a measure from Majority Leader Eric G. Luedtke (D-Montgomery County) that would expand the states sales tax to most services.

Levying the tax on services would generate $3.7 billion in new tax revenue by fiscal 2025, while a 1% decrease in the overall rate would lower the state’s current sales tax revenue on goods by about $796 million. Taken together, the proposal would generate about $2.9 billion in additional state tax revenue by 2025.

Faced with hours of testimony about adverse economic impacts and difficulties in implementing the proposal, Luedtke said he was open to amendments on the bill, including to exempt more transactions from the expanded service tax or to further decrease the sales tax rate.

Health care, education and nonprofit social services are not included in the proposed expansion.

Businesses that would be subject to the tax testified that the expansion could be crushing to the economy, and even unworkable when it comes to multi-state businesses or complex transactions like home sales and legal services agreements.

Maryland Realtors argued that the tax expansion would complicate home sales, increase the cost of mortgages and push homeownership out of reach for some Marylanders at a time when ownership rates are already falling.

The bill also created interesting alliances, such as the joint testimony from the Maryland Association for Justice, Maryland Defense Counsel and Maryland State Bar Association. Together, the groups listed a litany of concerns about establishing such a “misery tax,” including how to discern who should pay in complex legal settlements, how contingency fees would be handled, and a warning that increased taxes could dissuade low-income Marylanders from seeking legal representation.

Kelly Hughes Iverson, on behalf of the Bar Association of Baltimore City, said the bill would “hurt many of the very people it is intended to help.”

“We cannot forget in our well-intended efforts to address inequitable education funding that many of those who suffer from inadequate access to education also suffer from inadequate access to justice,” she said.

Small business effects

Del. Wayne A. Hartman (R-Lower Shore) said he was concerned about the effect on small businesses, particularly those who would have to hire ― and pay a tax on services to ― accountants or other professionals to help them implement the services tax.

Luedtke conceded that many economists ― including one he invited to testify in favor of the bill ― agree that business-to-business services should be exempted and that he’s “absolutely open to that conversation.”

However, as a state, Luedtke said, Maryland is already “picking winners and losers in our economy” by giving services-based businesses a tax advantage over goods-based businesses.

“From a fundamental economics perspective, that’s bad policymaking,” Luedtke said.

Del. Jason C. Buckel (R-Allegany) said he thought Luedtke’s arguments about treating different types of businesses fairly was interesting, and “I’m kind of OK with that concept that we should treat everybody the same way.”

But, Buckel said, Luedtke’s bill was introduced as a revenue generator. He suggested that the bill could be made revenue-neutral by expanding the tax base to services, but lowering the rate even further ― to something around 3% instead of the proposed 5%.

“Would you be OK with that?” Buckel asked.

“If we find other sources of revenue for the Blueprint, I’m perfectly happy to have a conversation about dropping the rate lower,” Luedtke responded.

Unintended consequences

Business representatives listed a series of the bill’s potential unintended consequences if consumption of services decreases.

Representatives from the Mid-Atlantic Car Wash Association said more pollution could wind up flowing into the Chesapeake Bay from driveway washes if residents are driven away from their sophisticated car-washing operations, which recycle water and capture chemicals.

Andrea Brubaker of the Maryland State Pest Control Association noted that rodents and cockroaches can transmit dozens of diseases and bacteria, and that increasing taxes could lead to unsanitary conditions if restaurants or other retailers avoid pest control services.

“We believe that increasing the costs of eradicating dangerous and deadly pests will only negatively impact food safety and public health in Maryland,” she said.

Representatives of AAA Mid-Atlantic said the expanded tax could cause Marylanders to forego vehicle repairs, making the roads less safe.

James Doyle of the Maryland State Funeral Directors Association reminded the committee that “death is not a luxury item.”

“Death is not a discretionary item,” he said. “But what it is is a hardship to the families that are going through it. It’s a serious financial hardship in addition to everything else.”

There are other practical issues with implementing the tax,  including whether it should be assessed on prepaid funeral arrangements that may have been set years ago.

Governor opposes measure

The hearing became heated at times, as lawmakers pressed those who testified against the bill to offer different solutions for funding education reform.

Luedtke pressed a panel from Republican Gov. Lawrence J. Hogan Jr.’s administration in particular.

Maryland Commerce Secretary Kelly M. Schulz testified against a proposal to expand the state’s sales tax to apply to services. Photo by Danielle E. Gaines.

Hogan’s deputy legislative officer Mathew Palmer said the cost of the sales tax expansion would be passed on to everyday Marylanders.

“Ultimately when businesses have to pay that tax, it gets passed on,” Palmer said. “…In some way, all of that money, all of that $3 billion will get to consumers. They will feel it.”

Commerce Secretary Kelly M. Schulz said the proposal would be dangerous not only to the existing business community, but would also hurt efforts to attract new businesses for the state.

Luedtke’s bill is “a big flashing neon sign that they should look elsewhere,” Schulz said.

Luedtke asked the panel what revenue proposals the governor would be willing to support to fund education reforms.

“I don’t believe this bill hearing today is about education,” Palmer responded at one point, after noting that the bill did not dedicate increased sales tax revenues to education. “If you think it is, then we have a difference of opinion on what exactly this bill does.”

Palmer later noted that a bill passed last year to tax online marketplace facilitators is expected to generate $1 billion in revenue above initial estimates within six years.

“There are plenty of ways to fund [education reform],” Palmer said. “However, this bill is not one of them.”

Luedtke said he rejected the notion the notion that the state can’t afford to increase education funding.

“We can figure out how to do it in the wealthiest state, in the wealthiest country in the history of the world,” Luedtke said. “If we can’t figure out how to provide a decent education for every kid in this state, nobody can.”

Del. April Rose (R-Carroll) responded: “We have very diverse areas in the state. While we may be a wealthy state, not every area is wealthy.”

Few states tax services in the expansive way proposed in Luedtke’s bill: Hawaii, New Mexico and South Dakota.

The committee also considered a bill on Monday from Montgomery County Dels. Lorig Charkoudian (D) and Julie Palakovich Carr (D) that would expand the sales tax in a narrower fashion, by taxing 13 specific services, including fur cleaning and storage, country club memberships, tattooing and piercing, art storage, interior design, dog walking, travel services and lobbying.

Taxing the additional services would generate about $72.1 million in additional tax revenue by 2025, according to a nonpartisan fiscal analysis.

Charkoudian said she sought to include services in her bill that are generally used by families with more resources, but was open to changing the particular additions based on suggestions from colleagues.

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As Businesses Oppose Tax Bill, Sponsor Willing to Deal