By the MACPA's State Tax Committee

As the Maryland General Assembly considers significant tax policy changes in Governor Moore’s proposed budget, the MACPA State Tax Committee has examined the technical and administrative implications of these provisions. Our analysis highlights several areas of concern, particularly regarding compliance burdens, administrative feasibility, and economic impacts.

Key Issues at a Glance

Personal income tax increases

• State personal income tax rate increase to 6.5% affects pass-through entities (PTEs) such as small businesses and CPA firms.
• Total marginal rate rises to 9.7% (10.7% for capital gains) with added county piggyback taxes of mostly 3.2%, placing Maryland among the highest-taxed states.
• 2008’s “millionaire’s" tax data showed high-income flight, reducing revenue instead of increasing it.
• Federal SALT cap restrictions heighten the financial impact, making Maryland less competitive.

Estate tax exemption reduction and succession planning

• Lowering the estate tax exemption from $5 million to $2 million increases tax burdens on small business owners and could force asset liquidation.
• Repeal of the inheritance tax is positioned as revenue-neutral but will likely fail to offset lost estate tax revenues due to the full estate tax credit for inheritance tax it paid.
• Negative impact on business retention and investment, potentially driving out decision-makers and wealth holders.

Corporate tax changes: Systemic and administrative challenges

• Corporate tax rate decrease from 8.25% to 7.99% is minimal and unlikely to influence corporate location decisions.
• Combined reporting implementation concerns:
  -- Volatile tax revenue outcomes reported by Maryland Business Tax Reform Commission.
  -- Creates winners and losers across industries, leading to unpredictable tax burdens.
  -- Adds compliance complexity for businesses already navigating outdated state tax processing systems that are still in process of being modernized.
• Maryland Comptroller's IT infrastructure has known inefficiencies, making seamless implementation of combined reporting very difficult without substantial investment.

Key considerations for Maryland’s tax administration

1. Compliance costs: Increased tax rates and regulatory changes will require extensive guidance for taxpayers and CPAs.
2. Revenue volatility: Projections from combined reporting and estate tax changes remain uncertain and could destabilize the state’s annual budgeting.
3. Administrative feasibility: Ongoing technology infrastructure challenges raise serious concerns about the timely and accurate rollout of tax changes.
4. Business climate: Higher tax burdens could drive high earners and businesses to lower-tax states like Virginia, Delaware, and Pennsylvania.
5. Legislative precedent: The 2008 "millionaire’s" tax led to documented outmigration, reinforcing concerns about unintended economic consequences.

The State Tax Committee will continue monitoring legislative developments including all additional proposed tax changes and providing expertise to promote tax policies that foster economic growth while ensuring administrative efficiency. Policymakers, tax professionals, and business leaders must stay engaged in discussions to develop sustainable solutions.