Wednesday, Nov. 21, 2007

O’Malley signs tax increases and slots measures into law

Leggett: Montgomery ‘fared better’ than expected

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ANNAPOLIS — Income tax rates will go up for middle income Marylanders. Sales taxes will go up 20 percent. Computer services will be subject to the sales tax. Corporations and smokers will pay more in taxes. Automobile purchasers face an increase in taxes and fees.

On Monday, Gov. Martin O’Malley signed legislation that increased a range of taxes, outlined $550 million in budget cuts and established a framework for the legalization of slot machine gambling.

The bills were the outcome of a special session, begun Oct. 29, to close a $1.5 billion gap between projected spending and expected revenues for fiscal 2009, which begins July 1.

Most of the tax measures kick in Jan. 1, raising about $500 million from the current financial year to bank for the next.

The Senate fought off filibusters to prevent votes. Although Republicans engineered the delaying tactic, Sen. Jennie M. Forehand (D-Dist. 17) of Rockville joined with the GOP at session’s end in a protest over including computer services as services subject to the sales tax.

‘‘What we accomplished in these last few weeks is something that is hard to accomplish even over the span of three years,” O’Malley said Monday.

O’Malley was joined by Senate President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach and House Speaker Michael E. Busch (D-Dist. 30) of Annapolis as he signed the legislation.

‘‘I think this is a day that moves Maryland forward and puts all the demons behind us that we struggled with for the last six years,” Busch said.

The legislature agreed to a 20 percent increase in the sales tax, from 5 cents on the dollar to 6 cents. The increase is expected to raise $315.2 million during the last six months of fiscal 2008 and $687.1 million for all of fiscal 2009.

The sales tax was expanded to cover a list of computer services, raising about $190 million, to include computer facilities management, custom programming, consultants and disaster recovery services. The tax does not cover Internet access, training or repair.

On income taxes, the net result is about $28.1 million more annually for the state; $197 million because of new brackets, which are offset by a new exemption scheme that reduces the increase by $130.4 million and a $38.5 million improvement in the earned income tax credit.

Now, Maryland essentially has a 4.75 percent flat tax, which remains the rate for individuals whose net taxable income is less than $150,000 year and joint filers who are less than $200,000.

At that income level, a 5 percent rate kicks in. A 5.25 percent bracket starts at $300,000 a yearfor individuals and $350,000 for joint filers. And a 5.5 percent bracket covers all filers whose net taxable income exceeds $500,000 a year.

The personal exemption increases from $2,400 to $3,200 for individual filers earning less than $100,000 a year and for couples earning less than $150,000. As income increases, the exemption decreases to a minimum exemption of $600 exemption.

The vehicle titling tax jumped from 5 percent to 6 percent, but the tax applies only on the price difference between the new car and the trade-in. Previously, Maryland was one of the few states in which the tax applied to the entire cost of the new car. A $23 titling fee jumped to $50.

County Executive Isiah Leggett spent much of the past week and a half buzzing around the State House, meeting with O’Malley and Montgomery lawmakers. He canceled an economic development trip to India, sending aides to represent him.

‘‘I think we fared better than what we thought we would a few weeks ago when we had been looking at Draconian cuts and possible changes in formulas that could have had huge impacts for us,” Leggett (D) said.

Georgette Godwin, president and CEO of the Montgomery County Chamber of Commerce, said she was concerned about the unintended consequences the tax measures could have on small businesses.

‘‘There were things that were tax measures considered during the session without the benefit of public comment and that’s always a concern,” she said.

A real nail-biter of the session was whether the House of Delegates would pass the gambling legislation. The Senate has been far more receptive to legalizing slot machines.

On Friday, the House passed a referendum bill, 86-52. Because the measure amended the state constitution to legalize video lottery terminals, as slot machines are known legislatively, the chamber needed a three-fifths majority, or 85 votes.

Voters will decide in November 2008 whether to allow slot machines at five locations: in Allegany, Anne Arundel, Cecil and Worcester counties and in Baltimore city.

The General Assembly made changes to appease opponents of the Worcester County site, not far from Ocean City, by forbidding hotels, restaurants and other attractions at slots venues.

Then early Sunday morning, the House passed a companion bill that spells out how to manage slot machines and divide the proceeds, which are projected to be $1.6 billion a year.

That bill needed only a simple majority, 71 votes, to pass and delegates voted 71-44. Fifteen delegates were registered as not voting, caught off guard by Busch’s decision to cut off speeches.

Sixteen of Montgomery’s 24 delegates voted for the referendum and 12 for the implementation legislation. Only five delegates voted against both measures: Dels. Luiz R.S. Simmons (D-Dist. 17) of Rockville; Jeffrey D. Waldstreicher (D-Dist. 18) of Kensington; Benjamin F. Kramer (D-Dist. 19) of Derwood; Heather R. Mizeur (D-Dist. 20) of Takoma Park; and Charles E. Barkley (D-Dist. 39) of Germantown.

Del. James W. Gilchrist (D-Dist. 17) of Rockville said he remains opposed to slot machines even though he voted in favor of both bills.

‘‘This is crystal ball work, but I can’t make a clear case that slots is more doomed keeping it here or sending it to referendum,” Gilchrist said. ‘‘This wasn’t a defeat, but an organized retreat.”

Some tax measures were axed.

The lawmakers shot down any increase in the gasoline tax. They also rejected an accounting method called combined reporting. Some believe multistate corporations are able to shield profits from taxation by shifting them to unprofitable or out-of-state subsidiaries.

The Senate insisted on killing a proposal to increase the hotel tax from 5 percent to 7.5 percent. ‘‘This one we cannot do,” Sen. Ulysses Currie (D-Dist. 25) of Forestville said at a work group to hash out the differences between the House and Senate tax measures.

The conferees also agreed to exclude a provision that would tax ‘‘little cigars” and moist snuff. The issue, championed by Sen. Nathaniel F. McFadden (D-Dist. 45) of Baltimore, will be heard during the regular legislative session that begins in January.

Higher exemptions for blind and elderly also were rejected in favor of the House plan for higher exemptions for everyone. A property tax cut also was discarded.

New spending was included in the legislation as well. About $400 million was set aside for transportation projects. Another $110 million was earmarked for new helicopters for the Maryland State Police.

One provision directed the comptroller to verify an attorney has paid all taxes owed. The lawmakers believe this will raise $1.5 million; Comptroller Peter V.R. Franchot (D) in a letter to Chief Judge Robert M. Bell in September estimated tax scofflaws among the bar accounted for $2 million to $3 million in unpaid taxes.

Staff Writers Alan Brody and Janel Davis contributed to this report.

The details

The General Assembly agreed to the following during the three-week special session that ended early Monday morning. Gov. Martin O’Malley signed the changes into law on Monday afternoon.

Tax increases totaling $890 million

Sales tax goes from 5 cents to 6 cents.

Sales tax expanded to computer services, which includes computer facilities management, custom programming, consultants and disaster recovery services. It does not include Internet access, training or repairs.

New income tax brackets:

— 5 percent for individuals earning $150,000 a year and couples with $200,000

— 5.25 percent for individuals earning $300,000 a year and couples with $350,000

— 5.5 percent for individuals and couples earning $500,000 and more a year.

Personal exemptions increased from $2,400 to $3,200. Sliding scale decreases exemption as income rises.

Corporate income tax increases from 7 percent to 8.25 percent.

Tobacco tax doubles to $2 per pack of cigarettes.

Vehicle titling tax goes from 5 percent to 6 percent. Trade-ins will be deducted from the value of the new car being taxed. Vehicle titling fee increases from $23 to $50.

‘‘Snowbird” provision changes resident requirement to three months; it was six.

20 percent tax on electronic bingo and tip jars.

Close the controlling interest ‘‘loophole,” which prevents companies from buying and selling property while avoiding the state transfer tax.

New spending

$400 million for transportation projects.

$110 million for new state police helicopters.

$50 million for Chesapeake Bay programs.

Health care for 100,000 uninsured Marylanders.

$20 million for Prince George’s Hospital, pursuant to agreement between county executive, council and state.

Budget cuts ($550 million)

$330 million specified; remainder O’Malley must identify.

Thornton funding will increase by the least of the consumer price index, a measure of surrounding jurisdictions on state education funding, or 5 percent, whichever is less.

500 vacant positions eliminated from state budget.

Slot machine gambling

Referendum is set for November 2008 election. A majority vote will allows slots parlors in Allegany, Anne Arundel, Cecil and Worcester counties and in Baltimore city.

A framework for managing slot machines and distributing an estimated $1.6 billion annually in proceeds.

What didn’t pass

Gasoline tax increase.

Combined reporting, which allows large corporations to shield profits from tax, either by moving the money to out-of-state ledgers or onto the books of unprofitable subsidiaries. The General Assembly will study issue.

Higher exemptions for blind and elderly.

Hotel tax increase.

Tax on ‘‘little cigars”; to be studied in next legislative session.

Property tax cut.