The Chamber v. The People

The Gazette reports that the Montgomery Chamber of Commerce has taken a position on the governor's tax proposal:

The chamber specifically opposes raising state income taxes on high-income payers, a ‘‘mandatory unitary tax” on corporate profits and expanding the sales tax to include more business services.

Everything else in O’Malley’s package, including raising the sales tax by 20 percent and legalizing slot machines at racetracks, should be considered by the legislature, said Lisa Fadden, the chamber’s vice president for public affairs.

Today, the Washington Post released a poll showing the opinion of Marylanders on various tax proposals floated by the O'Malley administration (click here to see the graph). According to the Post poll, 69% favor increasing the cigarette tax, 68% favor slots, 66% favor upping the corporate income tax, 62% favor raising the top income tax rates, and 57% favor extending the sales tax some additional services.

However, only 29% like the idea of increasing the state sales tax from 5 to 6%--the Montgomery Chamber's of Commerce preferred option. The Chamber has its reasons. Montgomery Chamber President and CEO Gigi Godwin told the Gazette that ". . . onerous new taxes on business will harm Maryland’s ability to compete globally”. Godwin has a point though she should focus more on interstate than international competition.

As I discussed previously, higher income tax rates could encourage very affluent taxpayers to plump for Virginia or DC over Maryland if our tax rates are significantly higher than these jurisdictions. According to a previous article in the Washington Post, the proposed top tax rate for higher earners of 10% in Maryland would exceed the top rate of 5.75% in Virginia and 8.5% in the District of Columbia.

McLean could start looking a lot more attractive than Potomac to someone who earns $5 million per year; they would pay $191,250 less in state income tax in Virginia than in Maryland on income over $500,000. My guess is that impact would be felt slowly as the increase would be more likely to influence where people new to the region settle than cause current Maryland residents to pick up and leave. However, the impact on revenues would grow stronger over time.

Income taxes could impact business indirectly. As Joel Garreau explained well in Edge City, when businesses move, they always move closer to the home of the CEO. If more CEOs live in Virginia, more business could go there as well. Of course, higher corporate tax rates would provide a nice business reason for the move.

The impact on affluent taxpayers has made increasing income tax rates somewhat less popular in Montgomery than elsewhere in Maryland. Even if you don't earn more than $150,000 and would not pay higher rates, it isn't hard to figure out than the vast majority (over 80%) of the money would be paid by people in Montgomery and most of it would not be coming back here. According to the Post, only 54 percent of people surveyed in Montgomery favored increasing income tax rates compared to 62% statewide.

Still, a majority of people in Montgomery appear to favor the increase, and my guess is that support is a lot higher in among the people who vote in the crucial Democratic primary. Legislators from solid Democratic districts (e.g. Districts 16, 17, 18, 19, and 20) would probably be safe voting for the increase even though several represent the most affluent voters in the state. Legislators from more marginal Montgomery districts (e.g. Districts 14, 15, and 39) may feel more intensely cross-pressured between their primary and general electorates.

Moreover, Maryland's wealth rests primarily not on a relatively flat state income tax level but the quality of education and infrastructure. We have never been regarded as a low tax state. However, the quality of services is far higher than many other places. In Montgomery, the quality of the school system is an obsession in which we can pride--I remember when I went to college and was floored to learn that people elsewhere actually vote down money for schools. An educated workforce is critical to the State's future continued success. What would the Chamber cut out of the budget?

The one place where the Chamber and the people appear to have a meeting of the minds is on slots, though support for the proposal in Montgomery and Prince George's is heavily conditioned on none of the machines being located here:

Almost two-thirds in Montgomery and 56 percent in Prince George's favor allowing slots as part of the effort to trim the budget gap. But that support would dip sharply if slots were allowed in their counties. Only about four in 10 Montgomery and Prince George's residents would support them in that case.

Although a vote for slots is widely viewed as a tough vote for Montgomery legislators, it may not play so badly with the people. Legislators in Montgomery may find it easier to vote for slots than other tax increases. Of course, it would be very interesting to have a survey of Democrats and Democratic activists and primary voters. My guess is that they are less supportive than the electorate as a whole.