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.