state taxes

Did you, yes, you, pay more income tax on your 2018 returns than on your 2017 returns?

If so, you are probably are not in the top 1% of income, or you had ordinarily taken the standard deduction even before the passage of the Trump tax plan in December of 2017.

More likely you are a middle-class taxpayer in a high-taxed state like blue-state Maryland and should consider sending the below letter or some version of it not just to Gov. Larry Hogan, but, more importantly, to your state representative in Annapolis who has chosen so far to ignore the impact of the 2017 tax hike on you. Here is my open letter to Hogan:

Dear Gov. Hogan/Maryland State Senator or Delegate,

I want to bring to your attention what I consider a grave misunderstanding regarding the impact of the federal tax plan on Maryland taxpayers.

As you may recall, in 2018, you, Gov. Hogan, supported SB-875 which was designed to “make us” whole by putting back at the state level many of the middle class tax deductions eliminated in the federal tax plan and decouple the state return from the federal return to enable the Maryland taxpayer to itemize deductions on the state return even if taking the newly increased standard deduction on the federal return. Current Maryland law prevents such decoupling.

As you are also quite aware, the Maryland state legislature has refused for the last two years to pass any legislation to “make us whole” choosing, instead, to take the windfall to the state treasury resulting from the elimination of middle class tax deductions and use that windfall to fund implementation of the findings of the Kirwan Commission.

Our comptroller, Peter Franchot, has publicly stated that he would not have used it for Kirwan but, rather, would have placed it in a “rainy day fund.” Either way, it was not going to go back to the middle-class taxpayers to “make us whole.”

This is where the confusion comes in. The windfall to the state treasury was a direct result of the elimination of the tax deductions.

Legislation proposed last year did not address this issue but only addressed the need to decouple the state return from the federal return.

This legislation failed to pass due to the members of the House Ways & Means Committee and the Senate’s Budget & Taxation Committee conflating the two issues.

When the federal tax plan was passed, one of the arguments for it was that there would no longer be a need to itemize with the newly increased federal standard deduction. It, of course, was a misguided assumption, especially in heavily taxed blue states like Maryland.

The result of not being able to decouple the state return from the federal return is that a large segment of Maryland taxpayers have been forced to forego the increased federal standard deduction since they must itemize at the state level and, accordingly, at the federal level as well to maximize their tax savings even though their itemized deductions at the federal level falls below the federal standard deduction.

This preclusion of availing themselves of the increased federal standard deduction benefits only the national coffers and has no impact on the state treasury.

In other words, if a Maryland taxpayer chooses to itemize to maximize his or her tax savings, he or she will do so and be processed as such by the state as was done in every previous tax year regardless of the federal tax plan.

This is a critical point misunderstood by the state legislators.

Accordingly, decoupling the state return from the federal return serves to enable the taxpayer to itemize on the state return as he would do regardless of the decoupling but also be able to take the standard on the federal.

The only additional cost would be the cost of some additional staff or the hiring of a contractor to process the itemizing at the state without the reliance of the IRS since the standard would be taken at the federal.

This cost is in the tens of thousands of dollars and in no way taps into the windfall estimated to be upwards of some $400 million per year received by the state treasury resulting from the elimination of deductions.

A bill supported by you, Gov. Hogan, that specifically addresses the decoupling without that issue being lost in the more considerable debate about the windfall should be non-controversial if explained adequately to the legislature, not an easy task, I will admit.

Certainly, we would also like your support for adding back the so many middle-class tax deductions for Maryland eliminated under the Federal tax plan and thereby, “make us whole,” but, at the very least, we would like to see the issue of decoupling finally addressed this year.

I look forward to your support of this critical issue to Maryland’s middle-class taxpayers.

Sincerely,

Paul K. Schwartz

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