Maryland Car Washes Live to See Another Day

As Maryland lawmakers pack up after completing a month-long special session on tax reform, dozens of Maryland lobbying groups are thanking their lucky stars they didn't get dinged.

Typical is the reaction of the Mid-Atlantic Carwash Association, which isn't happy that sales and cigarette tax rate hikes got enacted, but is delighted that the sales tax will still not apply to carwashes:

“All in all, I think we have to feel relieved,” said David DuGoff, president of the MCA. “Even though we will get stung by the increases, we can live with them, especially compared to the devastating effect of a sales tax on carwashing.”

Every industry goes on record arguing that taxing them would be devastating, of course. But one hopes these guys (and MD lawmakers, to say nothing of the public) can see the big picture. The victory of the car washers, and of the health clubs and the various other businesses that still won't have to collect sales tax because Maryland lawmakers chickened out from doing the right thing, comes at the direct expense of... every other individual and business in the state who currently pays sales tax, and who will now pay sales tax at a higher rate.

And every occasion on which the carwashers win their lobbying battle, marginally increases the likelihood that the rest of us will face a higher sales tax rate (or income tax rate) further down the road. Tax breaks are never free-- everyone else has to pay for them.

It's that simple.

Maryland Tax Changes: Glass Half Full

After close to a month of intense debate and lobbying, Maryland lawmakers have agreed upon a plan to increase the state's taxes by over $1 billion a year. After a marathon weekend session, lawmakers came to an agreement at about 2 AM Monday morning-- and Governor Martin O'Malley signed the plan into law before the end of the day.

The full-year effect of the plan's tax provisions won't be felt until fiscal year 2009 (at which point the plan will bring in $1.35 billion a year). And the main non-tax revenue raiser, the much lamented "video lottery terminals," or VLT's, won't bring in their estimated $400 million a year until FY 2012, at which point the package at a whole will be bringing in $1.9 billion a year.

In FY 2009, about 67% of the tax hike is coming from the state sales tax-- most of it by increasing the tax rate from 5 to 6 percent, and a couple hundred million from expanding the tax base to including "computer services."

Here's how the remaining 33% breaks down:
Cigarette tax hike 12%
Car sales tax hike 7%
Corporate tax 10%
Personal income tax 2%

Put another way, 88% of the tax hikes in 2009 are coming from things that hit low-income families hardest (sales and cigarette taxes), and 12% is coming from things that hit upper-income families harder (income and corporate tax).

So it shouldn't be surprising to know that on balance, these tax changes will make Maryland's tax system more regressive. A new report from the Institute on Taxation and Economic Policy, published earlier today, shows the biggest tax hikes, as a share of income, from the agreed-upon tax plan will fall on the very poorest Maryland families.

Today's Washington Post headline on the plan's fairness impact said that experts were "Divided" on the fairness impact of the plan. But the numbers don't lie. The only folks who are defending the legislature plan on tax fairness grounds are those who have a vested interest in seeing it pass-- and who haven't seen the numbers.

But, of course, fairness isn't everything. And it's not even the main goal lawmakers wanted to achieve over the last month. The name of the goal has been adequacy: making sure there's enough tax revenue to fund needed public services.

And, from a short-term adequacy perspective, the legislature has obviously done a good thing here.

But from a longer-term adequacy perspective, the plan doesn't look so good either.

By "longer-term adequacy," I mean sustainability-- the ability of a tax system to bring in enough revenue in the long term. In general, the way to achieve this is through having a broad tax base, eliminating loopholes, and ensuring that your taxes are designed to keep up with economic growth.

The way NOT to achieve this is to ignore the structural flaws, loopholes, etc. in your tax system and just jack up the tax rates.

At every turn, Maryland lawmakers had a choice between raising taxes the smart, sustainable way (by using combined reporting to close a variety of harmful corporate tax loopholes, for example) and doing it the dumb way (hiking the corporate tax rate, for example). And seeminly at every turn, they chose the dumb way.

To stick with the example, Maryland will realize more corporate tax revenues because they hiked the rate. But in the long run, they may not, because they chose not to close the single most threatening corporate tax loophole in the Maryland tax code.

The same song and dance happened with the sales tax, where lawmakers largely squandered an opportunity to redefine the tax base to include more of the services (haircuts, health clubs, etc) that Marylanders are buying these days, and ending up getting most of their money out of a higher tax rate.

On balance, the Maryland legislature has done a good and necessary thing. Their #1 goal was to figure out a way to pay for public investments next year, and they've achieved that.

And while lawmakers failed to fix the leaks in the roof, they can always come back in 2008 to deal with corporate combined reporting, and with an expanded sales tax base.

But it's hard to be thrilled with the legislative outcome here, simply because lawmakers had it in their power to do things in a much smarter way: less rate hikes, more loophole closing.

Wait til next year...

Maryland: Pity the Poor Gym Rats

It's one of those tax policy debates where the battle being fought is basically principle against power. As Maryland lawmakers debate whether or not to expand the state's sales tax base to include personal services such as health clubs and tattoo parlors, lobbyists are emerging from the woodwork to argue that their particular industry is too precious to be taxed. Here's a health club owner explaining why her services shouldn't be taxed, as quoted in today's Baltimore Sun:

"People are trying to save their own lives," Brick said, "and we want to tax them for it?"

Of course, pretty much any producer of goods and services can make a similar case for why their product is socially beneficial, or is a necessity of life, or helps grow the economy, etc. If we exempted all the things we like from the sales tax, we'd be left with... cigarettes and beer. And maybe tax preparation. And you'd have to have a much higher rate on this super-limited base to raise any money at all.

It's tax policy 101: the broader the tax base, the lower the tax rate has to be to bring in the revenue you need. The closer Maryland lawmakers can get to taxing all personal consumption uniformly, the less likely they'll be to have to raise the tax rate down the road.

And, conversely, every time lawmakers cave to the tax-break demands of lobbyist for auto repairs, or tattoo parlors, or dog grooming, the more likely it becomes that the tax rate on the remaining base will be increased.

And there's a basic fairness argument for taxing services, too. In general, if a Maryland consumer spends $20, it shouldn't matter whether it was spent on a pair of scissors or on a haircut. The law shouldn't discriminate.

As quoted by the Sun, an outraged health club member misses this point completely:

"Any time they raise my taxes, I'm not a fan of it...But if the state is going to be a nanny and they are throwing around all these taxes, they should at least be consistent in their message."

But of course, consistency is exactly why lawmakers should tax health clubs.

For more on taxing services, check out this ITEP policy brief.

Florida: Violating the "Right to Travel"

It's never easy to design an effective ballot proposal on tax issues. You've got to explain inherently complicated tax concepts in simple, easy-to-understand language, and you've got to do it in a way that doesn't misrepresent the proposal's actual impact.

In their effort to achieve these goals, the legislative architects of Florida's January 2008 ballot measure on property tax cuts may have forgotten a third important goal: don't violate the US Constitution.

As the Palm Beach Post describes it, the hallowed (since 1999, anyway) principle at issue here is "the right to travel:"

The "right to travel," established by a 1999 Supreme Court decision, gives Americans the right to move from one state to another without being treated less favorably than those who established a home earlier.

The January ballot measure falls afoul of this provision by treating current Florida homeowners much better than, say, someone who currently owns a home in Alabama. Under the legislature's latest plan, a Florida homeowner who is currently getting, say, a $50,000 reduction in his home's value from the "Save our Homes" assessed value cap would be allowed to transfer this tax break to a new (Florida) house when he moves. Someone moving from Alabama would get nothing, and would pay much higher property taxes on the very same home than would the Floridian.

Even if it wasn't unconstitutional, this would be patently unfair. It's hard to defend a tax break that's based not on your ability to pay but on your bona fides as a long-term resident. But now Florida lawmakers have to worry about whether their latest property tax bill violates the highest law in the land.

The fundamental miscalculation lawmakers are making here is that, faced with an unfair tax break that gives too much to some and not enough to others, they've decided the only way to fix it is to give more to everyone. If the US constitutional problem turns out to be legit, "everyone" just expanded to include folks who don't currently live in Florida.

When you're in a hole, the old saying goes, stop digging. Florida lawmakers are in a tax policy hole of their own making, and appear to think they can dig their way out. But a more sensible first step would be to repeal "Save our Homes" and enact property tax breaks targeted to those most in need.

Florida: Keeping an Unfair System Unfair

The South Florida Sun-Sentinel's Michael Mayo gives a dispiriting (but probably quite accurate) assessment of Florida's property tax mess in a Sunday column.

True tax reform, and an overall fair and reasonable tax system in Florida, have about as much likelihood of happening as Fidel Castro getting a ticker-tape parade down Calle Ocho.

Mayo's pessimistic assessment is driven by the revised ballot measure referred to voters by the state legislature last month. Since the passage of a property assessment cap known as "Save Our Homes" almost 15 years ago, Florida law has allowed owner-occupied homeowners a tax break that gives the biggest tax breaks to (a) people whose homes are worth the most and (b) people who have owned the same home for the longest time. Who pays for this tax break? In Mayo's words:

Everyone Else (businesses, landlords, recent and first-time buyers, snowbirds).

From a policy perspective, the obvious solution is to repeal "Save our Homes" and enact targeted property tax breaks that are actually geared toward the homeowners, renters and businesses who need it most.

The second most obvious solution is to take Florida out of the diminishing "no income tax" club, enacting a personal income tax to reduce the upwards pressure on state sales taxes and local property taxes.

Both approaches are sound-- but neither is obviously a political winner in the short run. In the spirit of our federal fiscal policies this decade, Florida lawmakers clearly believe that short-term realities require "no losers"-- that is, tax reform shouldn't make anyone worse off. And that's exactly what Floridians will get to vote on in January-- a "reform" that expands the Save our Homes break rather than paring it back.

This is absurd, of course. When you have a group that's received wildly too-generous tax breaks (long-time homeowners) and groups that have been completely hosed (renters, businesses, first-time homebuyers), true reform needs to gore a few oxen. And Florida lawmakers have steadfastly refused to do so.

What's it gonna take to change this depressing trend? Mayo thinks it'll take "voters going against their self-interest and politicians actually leading." He's only half-right on this score-- while it would clearly require lawmakers to show a little backbone, any shift from regressive property and sales taxes towards a progressive income tax will almost certainly make a majority of Florida's voting age population better off. A better way of phrasing it is that voters would need to see through anti-tax rhetoric and recognize where their self-interest lies-- also no easy trick.