Wednesday, December 19, 2007

Analysis of Progressivity of Special Session

The Maryland Budget and Tax Policy Institute (.pdf) views the results of the special session as regressive but says that Maryland still does better than other states.

Some of the key conclusions are:

Most of the revenue in the special session’s package comes from increasing the sales tax. This affects all consumers alike if their buying patterns are the same. But they aren’t. Lower-income taxpayers expend more of their income on purchases than higher income taxpayers do (they save less). And they spend more of their income on goods, which are generally subject to the sales tax, compared with services, which are generally not taxed. The Department of Legislative Services estimates that a poverty-level taxpayer pays almost twice the share of her income in sales tax as a household making $100,000. . . .

The Institute on Taxation and Economic Policy estimates that the overall effect of the tax package is regressive.5 The poorest 1/5 of taxpayers will pay nearly 0.8% more of their income in taxes. The middle 1/5 will pay half that percentage: just over 0.4%. The wealthiest 1/5 will pay between 0.3% and 0.5% of their incomes in increased taxes. This overall regressive distribution occurs because the regressive nature of the sales tax rate increase overwhelms the progressive features of the income tax changes. . . .

Maryland’s tax system does more than most states to spare citizens living in poverty. The very poor are protected from paying state income tax. For example, for a two-parent family of four, no tax is due in incomes below $31,000. Only six states have higher tax thresholds. For working families, Maryland provides a refundable earned income tax credit (EITC). As a result, a family of four with wage earnings and the poverty level of income would actually receive a $423tax refund to supplement their earnings.

Maryland relies more on income tax revenue than most states: 42% versus the national average of 35%. The flip side of this fact is that Maryland relies less on the general sales tax: 23% versus the national average of 32%. Since the sales tax is less responsive to incomes, it hits lower-income families harder. Maryland’s revenue system draws less from this regressive tax than most other states.