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Maryland’s Hidden Tax Increase

Every year, a hidden tax increase affects all Marylanders. Most don’t notice the hand in their pocket and the withdraws from their accounts, but it is there. It is time for it to come to an end.

Everyone knows about inflation – each year, the price of goods go up. Proportionally, you are either making less or are lucky enough to receive a raise that allows you to compete. Why is it then that as inflation hits us the tax burden seizes an even greater portion of our earnings?

In Maryland, the tax code (the brackets, the standard deduction, and the personal exemption) is not indexed. As the relative value of every dollar we make buys is less and less, we are taxed on its previous value. Whether we earn a raise or not, our taxes weaken our standard of living and make it almost impossible to live. That is why both Conservative and Progressive tax groups say that we should index the tax code.

Don’t take my word for it that tax payers are hit by an inflation tax. Instead, look at what the Department of Legislative Services[1] says Maryland would lose in taxes if we were to index the tax bracket this year: $ .5 million in Fiscal 2017 and $4.5 million by 2020. That is just from indexing the bracket. If we were to index all three, Marylanders would save $8.4 million in Fiscal 2017 and $53.8 million in 2020.
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$53.8 million for just one year, and it only increases from there! How does this happen?!

To make it easy, let’s imagine a single man (like myself) who made $33,000 a year, after all exclusions and deductions. This year, e would pay $20 under the first bracket (2% of 1k), $30 under the second (3% of 1k), $40 under the third (4% of 1k), and $1092.5 under the fourth (4.75%of 23k), which totals $1,182.50.

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(Maryland Department of Legislative Services)

The Department of Legislative Services expects inflation to increase annually by 2%. Let’s say I have a job that provides me this modest increase solely to keep up with inflation (my employer thinks I deserve to have the same purchasing power as the previous year).

Next year, I will be making $33,660 and paying an increase of $31.35 per year in taxes. Merely to “keep even” with inflation, I will be losing another $31.35 that year. Skip ahead 3 years, and I will be losing $129.22 that year. Already, that would be quite a few meals that I would have to give up. Think about how much inflation would kick in after 10 years, and this is only one third of the tax code.

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Then there is the issue of Bracket Creep. If, after deductions and exemptions, I make only $3,000 a year, an increase based on inflation would force all of the new income into the next bracket. Instead of paying 4% of the new income, I would be paying 4.75%. Although the $100,000 tax bracket may seem high now, inflation over 20 years at 2% each year could easily push someone over that number.

The progressive Institute on Taxation and Economic Policy think tank makes it clear that this hidden tax harms those who work for a living: “In many states, this means that tax breaks designed to provide low-income tax relief—including exemptions, standard deductions, and most tax credits—are worth a little bit less to taxpayers every year. When all these small impacts are added up, the long-term effect can be a substantial tax hike—and one that falls hardest on low- and middle-income taxpayers.”[2]

The conservative Tax Foundation think tank says the same thing: “A lack of inflation adjustment can also push more of a taxpayer’s income into the highest bracket for which they qualify. This combined with bracket creep can lead to a higher average tax rate. This is problematic because increased incomes haven’t risen in real terms—only nominally. Indexing addresses this by altering each bracket level each year by the level of annual inflation.”[3]

Why is it that the major tax groups on either sides of the aisle agree on this issue but politicians refuse to fix it? It is because politicians in both parties (yes, even some Republicans in Maryland) want to increase tax revenues without people realizing that these revenues are increasing. This is a hidden tax increase that they have been getting away with for decades! Plus, Maryland is already fond of indexing taxes when it charges us more: 2013’s HB 1515, the gas tax increase bill, relied on the inflation index to increase the tax.

In 2014, the federal government and 24 states had already indexed their income tax brackets to some degree or did not charge an income tax. It is time that Maryland joins them. The Governor should push for the indexing of our tax brackets, personal exemption, and standard deduction as one of his top priorities. We need to bring Maryland into the 21st century.

Note: I worked under Delegate Susan Krebs as her legislative aide from 2011 to the beginning of 2015, and I performed the research for her “Tax Payer Protect Act” set of bills. These 3 bills (2015’s HB 147, HB 142, and HB 146), which she proposed for over 10 years, would fix Maryland’s tax code by indexing them.

[1] Department of Legislative Services Fiscal Notes: Income Brackets, Personal Exemptions, and Standard Deduction

[2] Institute on Taxation and Economic Policy. “Indexing Income Taxes for Inflation: Why it Matters.” August 2011. Access July 31, 2017. Source.

[3] Malm, Liz. “A Quick Primer on Personal Income Taxes.” Tax Foundation. June 29, 2015. Access July 31, 2017. Source.

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