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Federal Tax Cuts Provide Windfall To Maryland State Taxes


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News From The Statehouse

The Severna Park Voice, Feb 12, 2018

Noting the near-universal American pastime of complaining about taxes, I have been surprised at the level of ingratitude that has accompanied the federal tax cuts in December. Maryland politicians have repeatedly spoken of the need to protect the state from the “impact of the cuts,” as if Marylanders keeping more of their own money was a sickness in need of a cure.

I understand that with the complexity of the tax code, many of us are confused what the personal impact will be until we sit down with the new forms and a calculator, but I assure you, for most everyone, it will be a pleasant surprise. In the last week of January, we finally started getting some hard numbers from the Office of the Comptroller, which serves as Maryland’s tax collector.

According to the comptroller, the federal Tax Cut and Jobs Act of 2017 (TCJA) will reduce the taxes of approximately 2 million Maryland taxpayers (71 percent) while 376,000 taxpayers (13 percent) will see some increase, with a net savings to Marylanders of almost $3 billion! So, why all the complaining?

Part of the complaint is an indignation by many state leaders that Maryland is being singled out and punished under the new tax code along with other high-tax states like California, New York and New Jersey. That is true in part. The new law caps the deduction on state and local taxes to $10,000, so if you pay more, you will not get the benefit of reducing your federal taxes as you have in the past; however, that is true no matter where you live.

It just so happens that because state and local taxes are much higher in Maryland, California, New York and New Jersey, many more taxpayers in those states will be affected by the cap. Still, even with the cap, increases in other deductions, including the personal exemption and a reduction in the overall tax rates, will still leave most Marylanders with a great savings.

Moreover, the problem for those high tax states is that the new law highlights and exposes more of their citizens to the full impact of state tax policy. Whereas before, the federal government picked up part of the tab by covering about a third of those costs through deductions, the impact above $10,000 will now be completely on the state taxpayer. This change puts more pressure on Annapolis to reduce taxes, which is a good thing but is not something that comes naturally to the General Assembly.

In response, the state Democrat leadership is lashing out. They are considering changes to the state tax code to allow Marylanders to claim a part of their taxes as a “charitable contribution” in an effort to avoid the federal cap on deducting state and local taxes. Such a strategy would likely be dismissed by the IRS as a tax gimmick and is unlikely to work. Others are urging the state to sue the federal government based on fairness. Stay tuned.

Maryland has another problem. For convenience, the state tax calculation is based on the federal calculation. The federal adjustable gross income, line 37 on your federal form 1040, is the starting place for most of your Maryland tax calculations.

With the reductions under the TCJA, the changes in the federal calculation will automatically increase Maryland taxes that are collected under existing state law by about $500 million. The governor has stated that he wants to make a technical change to the code so that Maryland taxes do not automatically increase. The fix would simply decouple the federal and state tax forms, allowing individuals to make the choice to take additional deductions on their state form. I fully support the change, am a co-sponsor of the bill, and it is the right thing to do; however, knowing the General Assembly, don’t be surprised if they “accidently” run out of time on the fix and keep the money.

Read the full article here

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