Will MD's Tax Rates Exceed DC's?

While Gov. Martin O'Malley's tax plan would raise taxes on all who earn more than $150,000, it would stick it the hardest to taxpayers earning more than $500,000:

But under new rates proposed by O'Malley, Montgomery residents earning more than $500,000 would pay a combined rate of almost 10 percent -- 6.5 percent in state taxes and the existing 3.2 percent county levy. That surpasses Virginia's top rate of 5.75 percent and the District's 8.5 percent. Maryland's current top income tax rate is 4.75 percent.

Moreover, more than 80 percent of the $163 million expected to be generated by the governor's income tax plan would come from Montgomery taxpayers, according to an analysis by the Comptroller's Office. The state would collect less in income taxes from many other jurisdictions, including Prince George's.

Montgomery County Executive Isiah Leggett (D) and Senate delegation leader Rona E. Kramer (D) have said they fear that such a burden and the sticker shock from the combined rate could hurt the county's ability to compete with its neighbors in Northern Virginia and the District. Although a family on, say, River Road is unlikely to pack up and leave Potomac for McLean, opponents of the tax plan say that newcomers to the area might choose not to live in Montgomery.

Obviously, the vast majority of Montgomery residents won't pay higher taxes as a result of these increases. However, legislators rightly worry than this could discourage people from settling in the Montgomery. Tax rates can influence where affluent taxpayers, the kind who pay the most in taxes, choose to live. This is why it makes sense to make federal tax rates more progressive than state tax rates--most people don't want to leave the country while state borders, especially in Maryland, are easy to jump. Del. Sheila Hixon, Chair of the House Ways and Means Committee, has nevertheless agreed to sponsor the legislation:

Among the Montgomery lawmakers who back O'Malley's tax plan is Del. Sheila E. Hixson (D), chairwoman of the House Ways and Means Committee, who has introduced legislation in past years to raise the tax rate for high-end earners.

Hixson acknowledged the awkward situation for lawmakers in trying to represent their constituents and support the Democratic governor. She said that the governor's plan might have to be tweaked to make it more palatable and suggested that the higher rates could be limited to a two- or three-year period.

"It's going to be a problem politically and every other way," she said.

But she said that if the $163 million is not raised at the state level, it will have to be raised locally to continue to offer services residents expect. "We value services," Hixson said, "and we've always been willing to pay for them in the past."

Of course, there is a big hole in Del. Hixon's logic. If we raised the money locally, it would all stay in Montgomery and rates here would not have to rise nearly as much to maintain services. Indeed, Hixon's argument is actually a reason to oppose the tax package. I think Montgomery residents have often been willing to pay higher tax rates than Virginia because of the quality of services received. However, when taxes shoot past those of the District, many may be ready to cry uncle.

I have no problem with the idea that the rich in Maryland should pay more. In the short-term the economic impact would be low. The long-term economic impact may be harder to swallow as the cumulative decisions of very high-income taxpayers bite.