Thoughts on Taxes, Slots and the Special Session

Taxation Goals. There are a number of goals for the tax code beyond simply funding the budget. While Republicans bow at the idol of tax cuts as it is the idea which unifies their party, Democrats often focus on doing good with the tax code. That tends to take two forms: tax credits for engaging in preferred activities (e.g. education) and a more progressive tax code.

However, a third goal ought to be just as important: a healthy economy. President Bill Clinton's economic management did more good for ordinary people that a welter of government programs. Tight labor markets dramatically reduced unemployment, especially among the hard to employ, and increased salaries. President Clinton was also able to reward work through an expanded EITC and pay for all of this through progressive taxation even as he reduced the deficit.

However, progressive taxation is much easier at the national level because it applies the same across states. However, states compete for business and for affluent residents through their tax rates among other factors. As a result, letting the Bush tax cuts expire is a much easier call. Some may pooh-pooh the desirability of wealthy residents and companies but the people who pay far more in taxes than they consume in services are desirable on any balance sheet, including Maryland's.

Progressive Taxation. Happily for liberals, Maryland's taxes are already more progressive than many other states simply because we have an income tax. Moreover, deductions and the state EITC make the income tax more progressive than appears from the low income level at which the highest marginal rate kicks in.

Some have attacked the governor's proposal as insufficiently progressive or even regressive (see Adam Pagnucco's thoughtful series of posts on this blog for an example). However, these analyses tend not to realize that the regressive portions tend to be mildly regressive while the progressive portion (the income tax) is wholly progressive as the increases fall entirely on relatively affluent taxpayers. As a result, I suspect that the entire package is progressive and perhaps even strongly so.

Montgomery County. From the perspective of Montgomery, the package has some clear downsides. First, MoCo will pay for 80% of the income tax increase. From strictly a county perspective, it makes more sense to keep that money here for our own needs as only a fraction of that money will come back here.

Second, raising income taxes as high as proposed by Gov. O'Malley will place MoCo at a competitive disadvantage with the Virginia and even the District--hardly a famous tax haven. Montgomery legislators are thus naturally torn between their instinct to favor progressive taxation and their instinct to protect the County's treasury and economy.

It's hard to vote for a major tax increase without bringing something big home to the County. Still, Montgomery would hardly want to see the state budget sliced. We like, for example, that the State pays a lot for teacher retirement--a comparatively hefty expense here in Montgomery. I also suspect that MoCo residents wouldn't be heartened to see the budget of the University of Maryland chopped either.

Ike Leggett jumped in with a proposal for a tax plan that makes the tax code more progressive yet allows the County to remain more competitive with neighboring jurisdictions. However, the lack of coordination with state legislators in his own County's delegation clearly won him no friends in Annapolis. Liberals have also attacked him for not moving to favor more heavily progressive taxation (while others think he hasn't done enough to fight it).

The Future of Taxes and Slots in the Special Session. In any case, the Gov's income tax proposal looks in little danger of being adopted. Legislators from Baltimore County don't like it. Montgomery is split. Republicans certainly won't vote for it. Surprisingly, the sales tax looks more likely to pass the legislature even though polls show it to be the least favored tax among citizens.

Slots is looking up for several reasons. Speaker Michael Busch, the most trenchant opponent of slots, is negotiating seriously for the best bill he can get rather than to stop slots. The lack of funds is also a strong push to legislators who are loathe to raise taxes regardless of the type, especially since the polls indicate the voters favor slots.

Finally, the emergence of Peter Franchot as the major slots opponent may even help slots pass. Rightly or wrongly, few of his former colleagues in the General Assembly seem to have a good word for the Comptroller. The media portrays him as someone who is more serious about his press coverage than the issues. His strong media presence reinforces that theme. Consequently, his words just don't carry as much weight even if he is right on this one.

Of course, you'd be foolish to bet on the outcome of the special session. It'd be like playing the ponies--or should I say a slot machine.