How Many Millionaires Have Left Maryland Because of the Millionaire Tax?

In the wake of last year’s imposition of the so-called “millionaire tax,” tax return data has set the press and the Maryland Republican Party howling. The Sun, the Post and the conservative-financed Marylandreporter.com all noted that the number of Maryland millionaires dropped by 30% since the tax was imposed. GOP House Minority Leader Tony O’Donnell told the Post, “People are going to protect their interests. People are going to move.” The Sun stated that the Comptroller’s office had “no explanation” for the drop and said, “Maryland was depending on taxing millionaires, but they’re disappearing.” The Wall Street Journal cried, “Maryland’s fleeced taxpayers fight back,” and called the tax “soak-the-rich economics.”

But how many people actually moved out because of the tax?

The tax data shows that the number was, at most, about two percent of the state’s millionaires.

To understand the impact of the millionaire tax, we need to know three pieces of information. First, we need to know the total number of people in the state reporting one million dollars or more of taxable income in several successive years. Second, we need to know the percentage of those people who filed Maryland tax returns in the following years. And third, we need to know the percentage of those people who reported maintaining their million-dollar incomes in the following years. All of that data was available in a letter from the Comptroller’s office. But no media sources bothered to analyze it. That changes today.

Below is a chart showing tax statistics on Maryland millionaires since calendar year 2000. The number of millionaires fell from 3,802 in 2000 to 2,780 in 2002, rose to 7,067 in 2007, and then fell to 4,910 in 2008 – the first year of the millionaire tax. The 30.5% drop from 2007 to 2008 was widely reported in the media, but no one reported that the 2008 count (4,910) was 76.6% higher than in 2002 (2,780).


The percent of Maryland millionaires filing Maryland income tax returns in the following tax year has consistently been over 90%. After all, millionaires hit the jackpot, move out and die in all years, both good and bad. The reason why the 2008 total was so much lower than 2007 was because just 49.5% of 2007 millionaires reported earning more than one million dollars in 2008, the lowest percentage since the dotcom bust hit top-level incomes in 2000. The economy is BY FAR the primary reason why the number of millionaires dropped.

Still, the percentage of 2007 millionaires who filed Maryland tax returns in 2008 (92.3%) was slightly lower than the average of the preceding seven years (94.3%). Suppose that the percentage of 2007 millionaires who filed Maryland returns the following year equaled the long-run average of 94.3%. If that was the case, 6,667 of the 7,067 millionaires in 2007 would have filed 2008 returns. Instead, 6,525 filed 2008 returns, a drop of 142 millionaires - or 2% of the 2007 millionaire count - from the expected historical pattern. So the data shows that just 2% of Maryland millionaires may have left the state because of the tax or other reasons (like deaths). The exact explanation for their departure is a matter for speculation in the absence of other data.

Now that is not the final word on the subject. The millionaire “tax” is actually a three-year surcharge that took effect in calendar year 2008. It could be that many of the state’s super-wealthy are waiting out the surcharge until it expires, especially if the recession causes their incomes to temporarily drop below the million-dollar threshold. If the surcharge is made permanent, a possibility contemplated by some in the General Assembly, then more of these people could very well leave. Also, this data can never answer the question of how many millionaires decide not to move into Maryland because of its tax structure in the future. That is an important factor in the state’s ability to attract entrepreneurs and international headquarters. Just because that phenomenon cannot be measured does not mean that it does not exist.

But at this point, there is simply no evidence that any mass exodus of millionaires has occurred.

We reprint the letter from the Comptroller containing the tax data below.

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Millionaires Offered Discount to Move to Virginia

Dear readers, I promise that this is not one of my much-ridiculed spoof posts. Everything that you are about to read is 100% true.

MPW friend and occasional spoof victim Dana Beyer forwarded us an online ad posted by a Virginia real estate agent enticing MoCo millionaires to move. The ad says:

April 09, 2008

Virginia Welcomes Migration of Maryland Millionaires

New Millionaire Tax in Maryland May Cause some to Migrate to Virginia

It's mid-April. Are taxes on your mind?

If you're wealthy and live in Maryland, say hello to the first in the nation, Millionaire's Tax. Signed into law yesterday by Governor Martin O'Malley, the legislation created a new tax bracket for those who earn over $1 million per year. Approximately 6,000 Maryland households fall into this new tax bracket and are subject to a 6.25% tax rate.

According to The Baltimore Sun newspaper, more than 40 percent of these wealthy households are in Montgomery County. While Montgomery County is a great place to live and Maryland is a great state, many of those being hit with this new tax may decide to vote with their feet.

Let me be the first to WELCOME YOU TO VIRGINIA.

As you know, Virginia is just across the Potomac River from Maryland. Northern Virginia offers wonderful amenities, parks, schools, history, culture, and an easy commute to D.C. Homes in the upper brackets are plentiful throughout the area, especially in popular communities like McLean, Great Falls, Arlington, Alexandria, Fairfax Station, and more. Another bonus of moving to Virginia -- how about in-state tuition at some of the best public colleges and universities in the country, including University of Virginia, James Madison University, and George Mason University.

Virginia has consistently ranked as the Best State for Business by Forbes Magazine year after year.

Best of all -- Virginia does not have a Millionaire's Tax. (Virginia's highest income tax bracket is 5.75%).

Maybe it's time to contact your Maryland Realtor (I can offer some great suggestions) about selling your Maryland home and moving to Virginia.

I'd be happy to help you find a Northern Virginia home and welcome you to our side of the river.

So I emailed this agent the following inquiry:

Brian, I am disturbed about Maryland's new millionaire tax and am considering moving to Virginia. I have a few friends who are thinking along the same lines. If we all decided to move together, could we work out a discount? - Adam Pagnucco, Silver Spring, Maryland.

The agent replied:

Thanks for your e-mail. I certainly understand being disturbed by the Millionaire Tax in Maryland. We can certainly talk about a discount if you and several others decided to work with me to purchase homes in Virginia.

So what are you waiting for, country club members? I actually got a discount for you to move out. Does this mean we get to build the Purple Line now?

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MoCo State Legislators on the Millionaire Tax

Preserved for eternity, here are the published comments and the votes by state legislators from Montgomery County (as well as remarks by the County Executive and County Council President) on whether a surcharge for millionaires should replace the computer services tax. Whether you agree with David Lublin or with me, the millionaire tax emerged as a major philosophical dividing line in the county delegation.

Delegate Charles Barkley (D-39), who voted against the millionaire tax, from the Post:

"You can only hit a cash cow so many times before they say, 'We're going to take our milk somewhere else,'" said Del. Charles E. Barkley (D-Montgomery).

Delegate Kumar Barve, the House Majority Leader (D-17), who voted for the millionaire tax, from the Post:

House Majority Leader Kumar P. Barve (D-Montgomery) defended the repeal bill, modeled on an O'Malley plan, as "a balanced compromise" that would eliminate the computer services tax before it is scheduled to take effect July 1.

"You will be preserving the place of Maryland in the high-tech sweepstakes," Barve said. "I urge you to kill this thing, right here, right now."

Delegate Brian Feldman (D-15), who voted against the millionaire tax, from the Sun:

"A majority of the Montgomery County delegation have a lot of concerns," said Feldman, who said he hopes lawmakers will consider making deeper cuts in O'Malley's spending programs before raising taxes.

"Maybe this isn't the time for new initiatives," he said.

Senator Jennie Forehand (D-17), who voted for the millionaire tax, from the Gazette:

But repealing the tax is a no-brainer to prevent computer firms from leaving the state, said Sen. Jennie M. Forehand (D-Dist. 17) of Rockville.

"Some of the things we passed in November has a negative impact in the counties and put them in a negative situation," she said. "Unlike the millionaires who are well-grounded and are making their money in the state, they won’t leave. But tech companies who would have been affected by this tax could easily have uprooted their businesses and moved."

Delegate Bill Frick (D-16), who voted against the millionaire tax, from Maryland Moment:

Del. C. William Frick (D-Montgomery), a member of the Ways and Means Committee, said he is "disinclined to change the income tax brackets."

"We worked hard on them and reached what we think is an appropriate compromise in the special session," Frick said.

Senator Brian Frosh (D-16), who voted for the millionaire tax, from the Post:

Sen. Brian E. Frosh (D-Montgomery) said he thinks lawmakers should step back and consider whether raising the tax rate is good public policy, irrespective of the consequences for his county.

"I understand that people say it would hit Montgomery County harder than some other jurisdictions, but we don't get taxed by jurisdiction," Frosh said. "I don't perceive it as a geographic issue."

Delegate Hank Heller (D-19), who voted for the millionaire tax, from the Gazette:

"I don’t think we have to apologize" for fighting higher taxes, said Del. Henry B. Heller (D-Dist. 19) of Leisure World. "Montgomery County, instead of [being] a major decision-maker ... will end up either being the obstructionists or having to go along with it."

The so-called "millionaires tax" will cause Montgomery residents to move across the Potomac River to Northern Virginia, weakening the economy, Heller said.

Delegate Tom Hucker (D-20), who voted for the millionaire tax, from the Post:

"I have to represent all my constituents, not just the millionaires," said Del. Tom Hucker (D-Montgomery). "I think those folks can afford to pay more state income taxes, especially in the wake of enormous federal income tax cuts that they have benefited from for the last six years."

Senator Nancy King (D-39), who voted for the millionaire tax, from the Sun:

…Montgomery County Democratic Sen. Nancy J. King, said she would reluctantly opt for an income tax increase, "If I had to."

Montgomery County Council President Mike Knapp from the Gazette:

The tech tax repeal will burden Montgomery County residents unfairly, said County Council President Michael J. Knapp (D-Dist. 2) of Germantown.

Of the state’s 6,150 millionaires, 41 percent live in Montgomery County; Baltimore County has the next highest number.

"Montgomery County is solving a statewide problem — again," Knapp told reporters in Rockville on Monday.

Senator Rona Kramer (D-14), who voted against the millionaire tax, from Maryland Moment:

Sen. Rona E. Kramer (D-Montgomery), who chairs the county's Senate delegation, said she wants the computer services tax repealed, but would prefer cuts in transportation spending than changes in the income tax structure.

"Montgomery County already does the yeoman's share of supporting the state budget," she said. "It's absolutely inappropriate for one jurisdiction, Montgomery County, to pick up the tab for 50 percent of one tax."

And from the Sun:

"I would not support it," Sen. Rona Kramer, a Montgomery County Democrat on the budget committee, said yesterday.

O'Malley's proposal is a political mistake, she said.

"He's coming to the one jurisdiction where he's still popular and saying: 'We're going to make you compromise again,'" Kramer said. "It's going to make him look terrible."

Montgomery County Executive Ike Leggett from the Post:

Leggett said he favors a repeal, partly because the planned tax significantly affects the thriving technology industry in the Washington suburbs. Leggett said, however, that he opposes raising the top personal income tax rate because a large number of wealthy Marylanders live in Montgomery and that he is wary of cuts to transportation funding.

"I want to be supportive of resolving this, certainly as it relates to this computer tax, but Montgomery County cannot be the sole source of solving a statewide problem," he said.

Senator Richard Madaleno (D-18), who voted against the millionaire tax, from the Post:

Sen. Richard S. Madaleno Jr. (D-Montgomery) acknowledged that the number of those who would be affected by the millionaires’ tax is small. "But this is a class of people who generate a lot of tax revenue for Maryland and Montgomery County," Madaleno said. "To create a disincentive for them to stay would be damaging to the rest of us."

And again from the Post:

"Opponents of this tax are not going to characterize it as a millionaires tax," said Sen. Richard S. Madaleno Jr. (D-Montgomery), a member of the budget committee. "It's going to be just another tax increase. . . . This is just more fodder for conservative talk radio."

Madaleno echoed arguments by other Montgomery officials, who have suggested that a higher income tax rate could prompt people who are creating jobs in the county to move. He suggested making cuts in transportation funding to repeal the tech tax.

Madaleno also questioned the political consequences in his county of the governor's support for the millionaires tax.

"I think it could be damaging to O'Malley in the part of the state where he probably remains the strongest," Madaleno said.

Madaleno posted an essay on this topic and others on Free State Politics.

Delegate Craig Rice (D-15), who voted against the millionaire tax, from the Sun:

"This is another ill-fated Senate move," said Rice of the Senate bill, which he criticized for not replacing the computer tax with a long-term revenue source. "We need to move forward with taxing other services."

By an 8-12 vote, [House Ways and Means] committee members also rejected a proposal from Rice that would have cut $150 million from transportation projects but eliminated the tax on millionaires.

And from the Gazette:

"I think Montgomery County has work to do," said Rice (D-Dist. 15) of Germantown. "I think as a delegation, we have got to do a better job at standing together on these things. We should not be balancing tax policy on one class of people."

Delegate Luiz Simmons (D-17), who voted against the millionaire tax, from Maryland Moment:

Del. Luiz R.S. Simmons (D-Montgomery) said he is frustrated to see his county become the "last refuge of unimaginative people" during budget crises.

"The tax is always imposed on us," Simmons said, adding that he thinks state leaders perceive Montgomery as a land of wealthy suburbs that is immune to the social ills that require government spending. But he said much of the county is middle-class and struggling during the economic downturn.

"I'm not trying to give you gobbledygook, but if you take a cumulative effect of these tax increases, what you will get is a migration of people out of the county," Simmons said.

"It has nothing to do with defending the millionaires," he added. "I'm not a millionaire. I'm just concerned about us taking hits on many different fronts and the confluence of those is going to hobble our economy."

Delegate Herman Taylor (D-14), who voted for the millionaire tax, from the Gazette:

"You’re exchanging one for the other," Del. Herman L. Taylor Jr. (D-Dist. 14) of Ashton said of the new income tax bracket. "I don’t know if that’s a good compromise. Just like the computer tax, we’re going to have to wait and see. Instead of hitting millionaires’ businesses, we hit millionaires directly."

Delegate Jeff Waldstreicher (D-18), who voted against the millionaire tax, from the Gazette:

"The question is how do we replace those revenues in a way that is true to our progressive values and fair to Montgomery County," said Del. Jeffrey D. Waldstreicher (D-Dist. 18) of Kensington.

And here is Senate President Mike Miller’s assessment from the Sun:

Senate President Thomas V. Mike Miller said lawmakers from Montgomery County held the key to breaking the deadlock, noting that they were the most adamant opponents of both the "tech tax" and the proposed levy on those earning more than $1 million annually. He said the county also receives the most in state transportation funding, leaving its representatives reluctant to redirect that money.

The county "is in the eye of the storm," he said.

That it is, Mr. Miller. That it is.

The final vote tally among Montgomery County’s state legislators is:

For replacing the computer tax with a surcharge on people making $1 million a year or more:

Senator Brian Frosh (D-16)
Senator Rob Garagiola (D-15)
Senator Nancy King (D-39)
Senator Mike Lenett (D-19)
Senator Jamie Raskin (D-20)
Delegate Saqib Ali (D-39)
Delegate Kumar Barve (D-17)
Delegate Bill Bronrott (D-16)
Delegate James Gilchrist (D-17)
Delegate Hank Heller (D-19)
Delegate Sheila Hixson (D-20)
Delegate Tom Hucker (D-20)
Delegate Anne Kaiser (D-14)
Delegate Susan Lee (D-16)
Delegate Roger Manno (D-19)
Delegate Heather Mizeur (D-20)
Delegate Karen Montgomery (D-14)
Delegate Kirill Reznik (D-39)
Delegate Herman Taylor (D-14)

Against replacing the computer tax with a surcharge on people making $1 million a year or more:

Senator Rona Kramer (D-14)
Senator Rich Madaleno (D-18)
Delegate Charles Barkley (D-39)
Delegate Al Carr (D-18)
Delegate Kathleen Dumais (D-15)
Delegate Brian Feldman (D-15)
Delegate Bill Frick (D-16)
Delegate Ana Sol Gutierrez (D-18)
Delegate Ben Kramer (D-19)
Delegate Craig Rice (D-15)
Delegate Luiz Simmons (D-17)
Delegate Jeff Waldstreicher (D-18)

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Rich Madaleno on Taxes

In a thoughtful diary on Free State Politics, Sen. Rich Madaleno outlined changes in tax rates and the State's fiscal outlook since the special session, and why he opposed the surcharge on people with annual incomes over $1 million which passed the General Assembly. As it turns out, my past posts on this topic woefully underestimated the gap in tax rates between Maryland and Virginia for these very high-income taxpayers:

Our actual work this year began last October when Governor Martin O'Malley called the General Assembly back to Annapolis for an extraordinary special session to address the state's fiscal problems. In just four weeks of work, the General Assembly and Governor O'Malley worked out a comprehensive fiscal solution that included $600 million in spending reductions and $1.3 billion in tax increases to fund the state's general operating and transportation budgets.

The tax increases included raising the sales tax rate from 5% to 6%, raising the corporate income tax rate from 7% to 8.25%, and reconfiguring the personal income tax rates. Maryland's previous top rate was 4.75% for all income over $3,000. The new, more progressive rates result in a .25% rate increase (to 5%) for income over $150,000 and a .75% rate increase (to 5.5%) for income over $500,000. As a result of increases to the personal exemption and the new rates, people earning less than $100,000 will pay less in income taxes while people making more than $150,000 will pay more.

As you know, the General Assembly also authorized a referendum on the issue of slot machine gambling. If passed this November, the slots plan will authorize a maximum of 15,000 machines in five predetermined locations around the state. By the end of the special session, we were able to finally eliminate the state's ongoing structural deficit.

The regular session had the odd feel of a hangover after our frenetic fall session and opened with a real sense of melancholy following the unexpected deaths of three colleagues. Additionally, our new-found structural balance was not to last long as the nation's worsening economic condition began to take its toll on our projected revenues. In fact, much of the regular session's work seemed to revise, rewrite, or repeal our work from the special session.

While the governor's initial budget proposal in January was balanced to our original revenue estimates, state revenues from the income tax and sales tax both fell significantly below projections in the first quarter. These two revenue sources account for more than 80% of the state's tax revenues. When they fall, the budget quickly falls back into the red.

January's year-over-year growth in sales tax revenue alone saw the deepest decline in 15 years. This situation is not isolated as similar steep drops were seen by Virginia and the District of Columbia. As a result, the state's official revenue estimate was decreased by $330 million.

At the same time, fierce opposition to one of the new taxes passed in November began to push the legislature to repeal the expansion of the sales tax to computer services. The technology industry made a strong case that this tax would make Maryland tech firms uncompetitive especially with Virginia-based companies. However, this new tax was slated to produce $200 million in new revenue. When the decision was finally made to repeal this "tech tax," the General Assembly was faced with a $530 million shortfall.

To address this problem, I strongly advocated for a reduction in spending including a scaling back of the new spending initiatives we had enacted during the special session. These new initiatives included funding for transportation enhancements, health care expansion, Chesapeake Bay clean up, and higher education access. The General Assembly went along with the cuts to health care, bay clean up, and higher education but balked at reductions in the funding increase for transportation, which I proposed scaling back. Instead, the governor proposed another personal income tax bracket for income over $1 million. This new bracket will be 6.25% and will last for three years. When combined with the local income tax rate of 3.2% in Montgomery and Howard Counties, our new top bracket of 9.45% will be the third highest tax rate in the country and will be 75% higher than the top rate in Virginia.

It may be hard to pity the just more than 6,000 taxpayers who will be impacted by this tax. However, these few people, most of whom derive income from business ownership, account for nearly 20% of the income taxes paid to the state. In Montgomery County, where 40 percent of these taxpayers live, they account for almost 25% of the county's income tax revenue. I fear this new tax rate, which is a 30% increase over the old top rate, will seriously diminish our ability to retain or attract new businesses. Should even 500 of these taxpayers leave or simply declare residency in another state, by wintering longer in Florida for example, our state and county could see a significant reduction in tax revenues.

As a result of the deteriorating economy and last minute revisions to our tax code, I leave Annapolis this year, frankly, with a great deal of concern about our state's long-term fiscal outlook. Even with all of the difficult decisions of the past six months, we are still facing a serious fiscal situation. The economic news seems to get worse by the week. Energy prices continue to rise while home values fall. Job growth has stopped, and the stock markets are volatile. Should the slots referendum fail in November and the economy perform as anticipated; the state will once again be facing a nearly billion dollar structural deficit.

I sincerely hope this does not occur, but I believe we need to plan for the worst. That is why I proposed additional spending reductions to close our short-term deficit. During the committee debate on the tech tax repeal and income tax swap bill, I proposed an amendment to reduce General Fund support of the Transportation Trust Fund by $150 million annually. This was a cut in one-half of the sales tax revenue diversion we implemented during the special session.

My amendment would still have provided $4 billion next year for transportation operations and construction and $6 billion for construction projects over the next six years. It would also have left transportation with at least a $300 million annual enhancement. I was only proposing a reduction in the increase not a reduction in current services or projects - a modest one-third reduction in the increase.

Some of my colleagues have said they voted against my amendment due to our region's traffic problems. A review of the new projects proposed by the department to be funded with this new revenue reveals, in my opinion, few which will impact traffic in any meaningful way. For example, the only new Montgomery County road projects that will be funded by the new money allocated during the special session are intersection improvements around the Bethesda Naval Hospital to prepare for the relocation of Walter Reed, a new grade-separated interchange at Georgia Avenue and Randolph Road, planning for a new interchange on I-270 at Watkins Mill Road, and planning for improvements along Georgia Avenue from Forest Glen Road to 16th Street. I would argue that none of these projects will result in any improvement to congestion except for traffic flow in the immediate vicinity of these intersections.

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Madaleno Surprises Many (Part II)

(See here for Part I). How are Senator Madaleno’s votes and statements playing in District 18? Is he in serious trouble at home?

As a constituent of Madaleno’s, I have been completely surprised by his votes and his statements on this issue. Like many others in District 18, I am a strong supporter of progressive taxation and of paying the taxes that are necessary to meet our societal needs (including transportation). I imagine that if I were in Annapolis, I would have been pushing hard for the millionaire-tax increase.

Not only that, but I am past president of the Forest Estates Community Association, whose Crossing Georgia committee has been lobbying hard for our own little transportation project at the Intersection of Death (formerly known as the intersection of Georgia Avenue and Forest Glen Road). We’ve been pushing that since 2003. The governor’s budget did not fund this project, but Madaleno got the Department of Transportation to cover it as part of another project. But a massive cut in transportation funding doesn’t exactly bode well for our project, at least in the short term.

So I’m none too pleased at this turn of events. And I’m probably not the only one in District 18 feeling this way.

Nevertheless, I seriously doubt that Madaleno is in serious political trouble at home. He certainly isn’t in trouble in my home.

In the five years that I’ve known him, I have seen that Sen. Madaleno is one of the strongest advocates Annapolis has for progressive taxation. During the months leading up to the special session, he pored over the budget numbers and tried to come up with a tax package that didn’t rely so much on raising the sales tax. He worked with a small group of other liberal Democrats in the legislature to push a far more progressive program long before the special session began. Unfortunately, the rest of Maryland isn’t like District 18, and his efforts were not successful.

But they were noticed - by me, and by other people who want a more progressive tax structure. I have no doubt as to his commitment to progressive taxes. His entire political history is one of someone who is in government not to help the wealthiest who need it the least, but to help those who need it the most.

And on the Intersection of Death, Madaleno has been an amazing advocate on this issue since 2003, when I first met him and my community association first proposed the idea. He regularly raised the issue with officials in the Ehrlich administration when no one else was paying attention to this issue. Many other pols have joined this cause in the last 18 months, but Madaleno was there at the beginning.

For this and many other reasons, I have no doubt at all to Madaleno’s commitment to the Forest Glen project specifically, and to transportation funding in general.

So when a legislator who is so clearly in agreement with me on these basic issues and who has such a sterling record of service takes a turn I don’t expect, I highly doubt that he’s doing this to protect millionaires. And he’s not doing this out of hostility to transportation (or any other) government spending. This isn’t some 60s sitcom where someone gets hit on the head and suddenly changes personality. Rich Madaleno has not gone over to the political dark side any more than he thinks he’s King Tut out to kill Batman.

More than any other legislator I've ever had, Rich Madaleno has earned the right not to be accused of bad motives, but to instead be given the benefit of the doubt.

One of the other things I know about Madaleno is that he is one smart cookie. He understands budget and tax issues in a way that I know I never will. So that, combined with the things I know about his politics, makes me feel quite comfortable that he knows what he’s doing. He has the same goals that I do, and he feels that the position he is taking is the best way to reach those goals.

After the session is over, I plan to sit down with him and ask him to explain it all to me. Maybe I’ll agree with him. Maybe I won’t. And maybe I won’t even understand. But whatever the case, I know that he is honestly doing what he thinks is best to achieve the goals that we both share. I find myself in much the same situation as when he voted for slots in the fall.

It’s a rare politician who can earn that kind of respect from me. And I have seen evidence that others feel the same way. After all, it’s not every politician who could have run unopposed in a primary for an open senate seat.

So I expect that most of the constituents who are upset by Madaleno’s actions this week will nevertheless judge him not by the actions of one week, but by the greater backdrop of five years.

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Madaleno Surprises Many (Part I)

Among the tiny slice of people living in District 18 who follow the politics of the General Assembly, the big news this week has been Rich Madaleno’s position relating to the much-hated computer services tax. Under a plan pushed hard by Gov. O’Malley and Sen. President Miller, that tax would be replaced by (1) an increase in the income tax rate for millionaires, and (2) a cut in the transportation budget. Madaleno would prefer ditching the millionaire-tax increase and cutting the budget even more - not a position one might have expected, and one that has clearly displeased the powers that be in Annapolis.

Madaleno bucked the governor, the president, and possibly a number of people in his district by opposing the plan. As reported in places such as the Baltimore Sun:

Some members of the Senate's tax committee argued for using budget cuts alone to compensate for its repeal, saying that the millionaires levy was effectively a tax against hundreds of small business owners who file personal income taxes rather than corporate income taxes.

"I just don't see how, at a time when we're unwilling or unable to move forward with the computer services tax, that we should move forward with another tax on small businesses," said Sen. Richard Madaleno, a Montgomery County Democrat who voted against the bill.

So, with his typical “It’s not nice to fool Mother Nature” attitude, Miller was quick to publicly threaten Madaleno. According to the Washington Times, “Miller said Mr. Madaleno endangered his political future by voting against the tax increase.”

Lest there be any doubt as to Miller's intentions, the Sun makes it clear:

After the hearing, Miller said he was "disappointed" in Madaleno and attributed the freshman senator's refusal to fall in line with the governor's proposal to being "young" and "probably nervous."

Miller hinted darkly that Madaleno, a freshman senator and fiscal expert, was "pegged for leadership" but had let down the boss, who is known for rewarding loyal senators with coveted committee leadership slots.

Let’s not forget that Miller only recently promoted Madaleno, a freshman senator, to a subcommittee vice-chairmanship. He is quite comfortable using his position to reward his allies and to punish others.

But is Madaleno really in trouble with Miller and O’Malley? While I don’t know for certain, I suspect not. First, the committee vote that Madaleno lost was 10-5; this was going to easily pass out of committee with or without Madaleno’s support.

Second, Madaleno worked long and hard during the special session to push reluctant colleagues on Miller and O’Malley’s tax package. The bill passed the Senate with zero votes to spare; Madaleno made the difference, and both Miller and O’Malley knew it. With his encyclopedic knowledge of budget and tax issues, he was able to make very persuasive arguments to nervous colleagues. Were it not for Madaleno, the special session could very easily have failed, making the governor look foolish for having called it.

In return, both Democratic leaders gave Madaleno the back of their hands on the gay-rights issues that are so important to him. Miller, in fact, was actively hostile not only to marriage but even to civil unions, and he even voted against a small bill to give domestic partners the same tax exemption rights as other families when they make changes to the title of their homes.

And when it came time to directly fund research into the transportation project at the Intersection of Death, a project that Madaleno has said is one of his top priorities, O'Malley's Department of Transportation said no.

Also, as Madaleno told the Sun, this is the first tax increase he hasn't supported in the six years he’s been in the General Assembly (the first four as a delegate). We’re not talking about someone who routinely defies senior members of his party when tax increases are on the table.

I have no doubt that Mike Miller is mad. O’Malley may be, as well. But Madaleno's actions this week have not done them any harm, and he has helped them immensely in his short time in the Senate. I suspect they know that they’re stronger with him than without him.

Only time will tell if I’m right on this score.

And what about outside of Annapolis? How are Madaleno’s votes and statements playing in District 18? Is he in serious trouble at home?

That is the subject of part II of this post.

(Hey, if I don't break it up, then no one will read it all the way through)

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In Defense of Taxing Millionaires

The current battle over whether to replace the hated computer services tax with an income tax surcharge on millionaires has become a defining ideological struggle among Maryland state legislators, especially those from Montgomery County. Many MoCo Democrats, including a few really good ones, argue that millionaires pay enough. Today I take up the banner for the rest of us.

The best case for the other side has been presented by David Lublin, founder and owner of this blog. His central arguments are budgetary and geographic. David points out that millionaires pay a lot of taxes. He does not want them to move out because if they do it will hurt our capacity to fund programs we need. He also describes both the computer tax and the millionaire surcharge as targeting MoCo because both affect lots of people who live in the county. “You're replacing one tax which targets Montgomery County with another that does exactly the same,” he writes.

David’s argument is logical and pragmatic, and I respect it. But a millionaire surcharge is a worthy alternative to the computer tax for three reasons.

First, let’s examine how people who earn a million dollars in a year get their money. I will bet that the majority of them do not earn a million dollars every single year. Rather, many of them will earn in the mid-to-upper-six digits in most years but then obtain an occasional spike. That spike may be from a payout in a lucrative lawsuit settlement, a capital gain or an inheritance. Would people in this category really move out of the state because they had to pay a couple extra thousand dollars in a year when they got lucky?

As for the super-rich, those who do earn a million dollars in every single year, they already can park their compensation in tax-deferred vehicles like 1031 exchanges or establish part-year residency in no-income-tax states like Florida and Nevada.

The Washington Post reports that 6,150 Maryland residents reported at least one million dollars in income in 2005 and 2,535 lived in MoCo. How many of those residents earned a million dollars in every single year over the last five years and would therefore be really tempted to move? Possibly several hundred, but only the Comptroller’s office would know for sure. Are these several hundred people really worth the colossal amount of political capital that MoCo’s state legislators are expending on their behalf?

Second, anyone who believes that the economic well-being of our county is a linear function of the number of millionaires who live here does not understand the source of our prosperity. Montgomery County’s vitality comes from its excellent schools, the entrepreneurialism of its small businesses (including those in the tech sector), its highly-educated and diverse population, its attractive neighborhoods and, of course, federal spending. Millionaires live here for those reasons just like the rest of us do. If tax rates were the sole determinant of their residency, they would all have moved to Virginia long ago.

Third, Maryland’s working and middle classes have already paid their share. Just last fall the legislature’s special session passed a regressive tax package. Last October, I calculated that the Governor’s original $1.7 billion proposal derived 61% of its revenues from regressive sources like the sales tax hike. The package that was ultimately passed was worse. The Maryland Budget and Policy Institute analyzed the session’s product and found:

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 increase overwhelms the progressive features of the income tax changes.

Now I am not opposing all regressive taxes. The cigarette tax, for example, saves lives. The gas tax encourages mass transit use and fuel efficiency. But when a billion-dollar-plus tax package is comprised primarily of regressive measures, that sends a message about the legislature’s priorities. And the principal reason for relying on regressive taxes like the sales tax was the desire by some legislators – including some from MoCo – to limit income tax increases for the rich. Now some of these legislators are talking about cutting transportation funding as an alternative to the surcharge.

Isn’t relieving traffic congestion also a high priority for this county? If the rest of MoCo’s residents sit in gridlock to protect the rich from paying more taxes, isn’t that an example of replacing one measure that targets Montgomery with another, as David says? MoCo Democrats rightly criticized Governor Ehrlich when he diverted transportation funding to avoid raising taxes. And we should not forget how Virginia has suffered for its inability to finance its transportation infrastructure.

Furthermore, let’s recall the unholy moment in which the computer tax was spawned. The creature was conjured from the abyss by the Maryland Senate for the sole purpose of not raising taxes on millionaires to the extent that the Governor originally recommended. Interestingly, no member of the Senate’s Budget and Taxation Committee will admit to fathering the wailing beast in whatever dark corner of the Senate chamber such acts are usually committed. If the Senate had adopted the Governor’s admittedly imperfect proposal, we would never have the computer tax or the current row over the millionaire surcharge.

I once blamed Senate President Mike Miller for the computer tax and the regressive special session tax package, but he proved me wrong. Back in January, I reported the following from our now-legendary blogger interview with him:

Regular readers will recall how I criticized the Senate President for the regressive character of the special session tax package. Leaping into the jaws of the lion, I asked him the following question:

“The tax package that was passed by the special session collected the majority of its revenues from raising the regressive sales tax. If you could have that one back and do it over, would you have taxed the rich a bit more to give the working people a break?”

Miller did not back down from the sales tax. He described it as “the most regressive but also the most acceptable” of the taxes, claiming that he received little protest on it. “But I wish I could have had more from the income tax.” Miller noted, accurately, that part of the Montgomery County delegation, backed by their County Executive, pushed back against the Governor’s rate increase for the top income tax brackets, thereby limiting the legislature’s ability to raise them. “You need 24 votes to pass something through the Senate and I didn’t have the votes to spare!”

And so Mike Miller is actually to the left of a good part of the MoCo statehouse delegation on this issue. That’s right readers, print those bumper stickers: MIKE MILLER: TOO LIBERAL FOR MOCO.

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Just Say No to Both

Sorry, Adam. I gotta disagree with you on this one. The computer tax is a terrible tax. However, I think the rest of the legislature must have started chuckling to themselves when Sen. Rob Garagiola proposed the surcharge on millionaires to replace it. Here's why I think Sen. Rich Madaleno is right and neither tax is a good idea.

1. You're replacing one tax which targets Montgomery County with another that does exactly the same. No wonder the rest of the legislature is willing to go along if Montgomery's delegation says yes.

2. The recession is just beginning. Unlike the federal government, Maryland cannot just endlessly borrow more money to cover expenses since it must balance its budget. Do we really want to do all the painful tax increases at once? Perhaps legislators ought to take another look at the budget or some of the other alternatives you've proposed as well.

3. Del. Tom Hucker's argument is politically appealing in the Democratic primary but doesn't make economic sense for the State. While it is hard for people to escape higher federal taxes by leaving the U.S., getting out of Maryland isn't too hard. At what point do the very wealthy start retiring even earlier to Florida or moving across the Potomac to Virginia. Just because they can afford to pay the tax doesn't mean that they are going to pay it. And I don't want to bash the very wealthy: I like having wealthy taxpayers live here--even at lower tax rates they still pay a heck of a lot which means others can pay less or we can have more services.

4. The federal tax cuts which favor the wealthy referred to by Del. Hucker are soon to end under existing federal law--the Republicans set it up that way because it is the only way they could claim that they would balance the budget over the long term. This shift becomes even more certain with Democratic majorities in Congress and if a Democratic president is elected next year.

5. Progressive or regressive is measured not at each level of government but the whole scheme of taxation. State taxes tend to be much less progressive than federal taxes precisely because the states compete for them. Moreover, you have to compare how progressive states are not just in terms of taxes but in spending. We do well here.

6. I don't buy that the governor's tax package was incredibly regressive (or necessarily regressive at all). Yes, the sales tax went up with wealthy people tend to spend more and pay more of it even if it ends up being somewhat regressive. However, the income tax change was progressive. The sin taxes are voluntary, after all.

In short, Rich is right on this one. Interestingly, both Rob and Rich deserve kudos for taking stands against their immediate political self-interest. I can't imagine that a surcharge on the wealthy gets Sen. Garagiola that many kudos in his affluent and marginal legislative district. Similarly, Rich represents a very Democratic district and doesn't gain any points in the critical Democratic primary for suggesting that there are costs to the same proposal.

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NoCo and the Computer Tax: BFF

So you’ve never heard of NoCo and BFF and don’t understand how they relate to the computer tax? Read on!

The Washington Post is reporting that Governor O’Malley is floating a deal to get rid of the much-hated computer services tax. He proposes to replace its revenue with three sources: a surcharge on millionaires increasing their income tax rate to 6.25% from 5.5%, “diversion” of transportation funds and more budget cuts. Senator Verna Jones (D44 – Baltimore City) proposed to pay for repeal through a high-earner surcharge alone, but the Governor would like to rely on multiple sources instead.

Why is the Governor treading so carefully with the rich? Why, it’s because of our politicians in Montgomery County!

Here is County Executive Ike Leggett’s reaction to the Governor’s plan:

Leggett said he favors a repeal, partly because the planned tax significantly affects the thriving technology industry in the Washington suburbs. Leggett said, however, that he opposes raising the top personal income tax rate because a large number of wealthy Marylanders live in Montgomery and that he is wary of cuts to transportation funding.

"I want to be supportive of resolving this, certainly as it relates to this computer tax, but Montgomery County cannot be the sole source of solving a statewide problem," he said.

Even blogger hero Senator Madaleno was lukewarm:

Sen. Richard S. Madaleno Jr. (D-Montgomery) acknowledged that the number of those who would be affected by the millionaires' tax is small. "But this is a class of people who generate a lot of tax revenue for Maryland and Montgomery County," Madaleno said. "To create a disincentive for them to stay would be damaging to the rest of us."

Senator Brian Frosh and Delegate Tom Hucker were more accepting of the surcharge, but there are enough MoCo legislators who agree with the County Executive that the delegation has become a significant hurdle to repeal. Many MoCo legislators don’t want the computer services tax. And they don’t want a millionaire surcharge. And they don’t want transportation cuts. That is why, by the power vested in me as the author of this blog post, I am officially changing the nickname of our county from MoCo to NoCo.

Now there are alternatives and I laid one out a couple weeks ago. An extra point hike in the corporate tax rate, combined reporting and installation of the Governor’s original upper income tax rates would pay for the computer tax repeal. And the first two components would spread the pain more evenly across the entire state than a straight surcharge. Plus, all three components are progressive taxes and would partially mitigate the special session’s overwhelmingly regressive tax package.

But if NoCo politicians do not offer an alternative soon – whether it looks like mine or not – we all know what is going to happen. The Governor will make a deal with the General Assembly leaders and the delegations from Baltimore City, Baltimore County and Prince George’s County. Some variant of his proposal will pass because the pressure to repeal the computer tax is reaching a fever pitch. And guess where the diverted transportation money will not be going? You guessed right: some project in NoCo will have to wait a few more years. And who is going to be shedding tears for us in other parts of the state? You guessed it: absolutely no one.

And what if NoCo’s politicians successfully resist repeal? NoCo and the computer tax: Best Friends Forever. And there you have the title to this post.

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