ANNAPOLIS, Md. – Following an exhaustive analysis of the federal tax reform plan, Comptroller Peter Franchot joined Bureau of Revenue Estimates Director Andrew Schaufele to deliver a report describing how changes to the tax code will impact Marylanders and the state’s revenues.
“This report gives Maryland taxpayers a glimpse at how the complicated and sweeping reforms will impact their tax liabilities, at least in the short term,” said Comptroller Franchot. “What remains to be seen is whether this plan provides long-term economic growth or if the predicted benefits are front-loaded and we’ll be left with a big bill to pay down the road.”
The report estimates a cumulative federal income tax cut of roughly $2.8 billion for Maryland residents in tax year 2018. Seventy-one percent of Marylanders will pay less federal tax, 13 percent will pay more and 16 percent will see no change to their federal obligation. The roughly two million taxpayers expected to benefit will see an average gain of $1,741 per taxpayer.
The reduced federal liabilities are largely the result of several provisions in the Tax Cuts and Jobs Act: the doubling of the child tax credit, modifications to the standard deduction allowed for each filing status, changes to federal tax brackets and lower tax rates and a new deduction for qualified business income.
The impact on individual taxpayers’ state and local tax bills depends on whether they aim to minimize their combined federal-state-local tax burden or focus on their federal tax. Assuming most taxpayers prioritize greater overall savings, 68 percent of Marylanders would see no change in the amount of state and local tax owed, 28 percent would pay more and 4 percent would pay less.
The driving factors behind the changes to state and local income tax bills are the taxpayer shift to the State standard deduction – a consequence of taxpayers’ choices to no longer itemize at the federal level – and related changes to itemized deductions for such things as real estate taxes and home equity indebtedness. In addition, taxable income changes for moving expenses, alimony and 529 College Savings Accounts.
As for the impact on the state’s coffers, the report estimates Maryland’s general fund would increase by $28.7 million and $392.5 million in fiscal years 2018 and 2019, respectively. The Education Trust Fund would realize an additional $867,000 and $5.1 million, respectively.
Changes to the tax code will result in fewer charitable contributions because those donations don’t carry the same tax benefit as they had previously, according to the report. Some taxpayers may no longer benefit directly from home ownership, which may have an impact on housing prices.
While the report does indicate that more money will be placed in the hands of consumers and investors, creating positive economic impacts, it is unclear how the cost of the reform ($1.5 trillion added to the deficit in 10 years) will impact interest rates.
Lastly, the report points out the looming issue of funding requirements for existing entitlement obligations, such as Social Security and Medicare. If the tax cut does not pay for itself, the federal fiscal situation will be even more dire and will negatively impact the state’s and the nation’s economy.
The full report can be viewed online here.