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The Sales Tax Increase

For all of his woofing about fairness in taxation, Governor O’Malley will be leading with a proposal to increase the amount of the state sales tax, next to the gasoline tax the most regressive tax available, as well as the number of transactions subject to sales tax.

Gov. Martin O’Malley said yesterday that he expects the state will increase the sales tax and expand it to cover services as part of a solution to Maryland’s $1.5 billion budget shortfall.

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O’Malley has been talking for months about the need to modernize Maryland’s tax code to make it “inclusive and fair.” He has yet to offer a specific proposal, but he said yesterday that based on discussions with legislative leaders, an expansion and increase in the sales tax will likely be a part of the final compromise. Maryland’s sales tax, designed when the state’s economy was dominated by manufacturing, does not tax most services, such as shoe repair, haircuts and advertising.

How this all pans out in the end is unclear. Each and every addtional area that could be taxed has advocates to make the case that it should continue to have an exemption to the sales tax.

“The burden of the expansion will be borne by small-business owners,” said Ellen Valentino, Maryland state director of the National Federation of Independent Business. “For example, if you’re taxing accounting services, if you’re taxing advertising services, taxing attorneys’ fees, these are all services that are generally necessary for small-business owners to operate.”

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Underscoring the point, John Grant, the owner of Secret Sound Studio, where O’Malley’s Celtic rock band has recorded CDs, called the governor while he was on the air to say that taxing services would be a disaster for his business.

“As a small-business owner, that’s the kind of thing that really squeezes us middle-class taxpayers,” Grant said.

O’Malley assured him that recording studios weren’t a part of the bill that was considered last year.

At this point I really have to ask, if we aren’t going to add sales from recording studios to the taxation menu what in the hell are we going to add?

But a lot remains to be played out.

The political difficulty of sales tax expansion was on display this spring when the House Ways and Means Committee held a hearing on the issue. Although the committee chairman, Montgomery County Democratic Del. Sheila E. Hixson, said she had no intention of letting the bill reach the House floor, hundreds of real estate agents who feared they, too, would be subject to the sales tax descended on Annapolis that day.






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