While a majority of Maryland residents will pay less in federal taxes, state and local taxes will rise by an estimated $438 million in the 2018 tax year, unless state lawmakers address changes triggered by the federal tax overhaul, a report released from the comptroller's office Thursday said.
An estimated 28 percent of them would pay more in state and local taxes because of the changes, while 4 percent would pay less and 68 percent would be unaffected, the report found.
"I think the bottom line is that the majority of Marylanders are going to benefit from this tax legislation, at least in the short term," Comptroller Peter Franchot, a Democrat, said. "What remains to be seen is whether this plan provides long-term economic growth or if the predicted benefits are all just front ended: good for politicians, not very good for the long-term economy."
Part of the dilemma in Maryland is that in order for residents to benefit from federal tax cuts, they must choose to forgo many longstanding Maryland tax deductions.
Gov. Larry Hogan, a Republican, outlined legislation he supports to ensure all of state and local tax increases are returned to residents.
"Let me be very clear: under our proposed legislation Marylanders will not pay one cent more in state taxes as a result of the actions at the federal level," Hogan said.
If nothing is done, the governor noted that the problem increases in fiscal year 2019, when Marylanders will face paying at least $572 more in state and local taxes, while federal taxes will drop by $2.8 billion.
The comptroller's analysis found that the state and local tax increases would affect nearly 800,000 Maryland residents. Andrew Schaufele, director of the Board of Revenue Estimates, said taxpayers will need to take a close look at their tax circumstances.
"This is complicated for tax wonks," Schaufele said. "Hopefully software helps take these taxpayers to the proper bottom line for their situation."
The governor pointed out that there is a possibility that state residents could face an additional $1.2 billion in state and local taxes as a result of changes to personal exemptions and ambiguity in state law that the comptroller's office and the governor are asking the legislature to clarify.
Hogan said his proposal would make permanent a provision in Maryland law that prevents changes in the federal tax code from affecting Maryland state and local taxes. He said it will enable Maryland residents to choose to take the standard tax deduction at the federal level to itemize deductions at the state level.
Democrats who control the General Assembly also have made a priority of stopping the state and local tax increases caused by the federal law. They have proposed measures that would make it clear that Maryland residents could still claim personal exemptions at the state level that are believed to be lost under the federal law. It also includes a plan to create new charitable deductions.
Still, it's unclear what the governor and lawmakers will agree to do during the legislative session, which ends April 9. Hogan announced a negotiating team of former legislators who are now senior aides in his administration to work with the assembly on crafting a solution. Hogan also said his team will work with lawmakers on addressing rising health insurance rates.