Competing plans from Maryland Republicans would cut the state’s income tax in an effort to boost the economy and slash state spending.
But economists question if the money that will go back into residents’ pockets under the plans will provide the boon the state’s economy needs.
Maryland House Republicans have proposed to cut the state’s income tax rate by 10 percent, phasing in the cuts over three years.
According to state fiscal analysts, the tax cut will deliver a $525 million blow to revenue in the $39.2 billion budget that Gov. Martin J. O’Malley proposed in January for fiscal 2015.
By 2017, the state will lose about $770 million in annual revenue. About 22 percent of the state’s revenue is expected to come from individual income taxes in fiscal 2015.
“I’m hesitant to say this would help the state,” said economist Daraius Irani, executive director of the Regional Economic Studies Institute at Towson University. “It’s hard to use tax cuts on the way to prosperity. It’s a balancing act.”
To accommodate lost revenue, Irani said the state will need to cut programs, or find another source of revenue.
By law, state budgets must balance.
The House proposal does not detail how the state will balance the budget with less revenue, but proponents say the lost revenue will be made up by increased consumer spending and investing. If approved the tax cuts would go into effect July 1.
Using the federal Bush-era tax cuts as an example, Irani said that when the federal government cut taxes, it ran up the deficit to balance the lost revenue and still fund the wars in Iraq and Afghanistan, contributing to the currently large federal debt.
“The concern is that when we cut taxes for a short-term benefit we end up hurting our long-term prospects,” he said.
In a competing plan released on Feb. 17, Republican gubernatorial hopeful David R. Craig has proposed initially cutting the income tax rate across all brackets to 4.25 percent and also raising the personal exemption from $3,200 to $5,000.
According to a release from Craig’s campaign, Maryland can afford tax cuts if it employs budget reforms “including zero-based budgeting, reviewing department and agency operations, eliminating coordinating offices of the Governor and accounting for dynamic growth through increases in disposable income that will lead to greater sales tax revenues and an expanding tax base among other heightened economic activity.”
Cutting the tax rate to 4.25 percent saves married couples an average $352 each year and singles about $176, according to Craig.
His plan would later reduce taxes further to a rate of 3 percent before eliminating the income taxes entirely. Craig claims his plan will save taxpayers $2.55 billion.
An annual household savings of $170 or $350 is small, the kind of money residents put toward an appliance or clothing purchase, Irani said.
“Is it really going to be the kind of growth that Maryland needs?” he asked. “People will spend money regardless, the state is not in a situation where it needs to stimulate that.”
What Maryland needs is to stimulate is growth in sectors like cybersecurity, he said.
With state funding supporting its highly ranked public school and university systems and business incubators that attract many to the state, Irani said balancing a cut in income taxes without sacrificing the quality of those amenities will be a challenge.
“Sure, there’s room to cut in the state’s budget, the question is, is it room enough to decrease income taxes down to zero?” he said.