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Md. taxpayers face their own fiscal cliff

If Congress fails to prevent automatic tax increases by year’s end, the typical family in Maryland will pay a bigger bill than the typical family just about anywhere else in the United States.

The Tax Foundation, a nonprofit, nonpartisan tax research group based in Washington, D.C., found in an analysis of U.S. Census and Internal Revenue Service data that a four-person family in Maryland with a median household income would owe an extra $7,200 in taxes next year if some potential tax increases are not averted through lawmakers’ efforts to avoid the “fiscal cliff.”

That’s the highest dollar-figure increase in the nation, and the second-highest increase by percentage of income.

“If Congress fails to deal with the fiscal cliff, Maryland taxpayers will be disproportionately impacted,” said Scott A. Hodge, the Tax Foundation’s president.

Much of the jump is attributable to more tax filers being forced the pay the alternative minimum tax, which is based on a formula intended to prevent the super-rich from using deductions to drastically lower their tax bill.

The alternative minimum tax kicks it in at a certain dollar threshold depending on a taxpayers’ filing status, but that threshold is not adjusted for inflation. Congress usually makes legislative adjustments, but has yet to do so this year.

If it doesn’t pass a measure retroactively, an extra 26 million middle-class taxpayers may be forced to pay AMT rates for the last year’s earnings.

Hodge said the problem is exacerbated in Maryland because it has the highest median income in the nation for a four-person family — more than $106,000 — and because state and local taxes are higher than average.

“The AMT is triggered when taxpayers’ deductions are in excess of a certain percentage of their income,” Hodge said. “The whole point was to prevent high-income people from using too many deductions. So Congress put in these percentage triggers.

“So, yes, it is partly because of the higher median income. But also factor in high state and local taxes, which are a key component in determining whether or not a family could be captured by the alternative minimum tax.”

Economist Anirban Basu, chairman and CEO of the Sage Policy Group Inc., said the tax hike would be especially devastating to business people.

“Often the people who take these deductions are people who are taking risks, including starting a business,” Basu said. “And also, the folks who are affected by the AMT are entrepreneurs who did something they thought they would benefit from a deduction by doing … and then they find out they’re trapped.”

Basu, who is also a member of a Maryland coalition of business leaders, politicians and academics, expressed dismay at the impact on Maryland residents of a tax bill that was suddenly $7,200 higher than last year’s.

“That’s just a massive, devastating, can’t-make-my-mortgage number,” he said. “No state has as much interest in having the fiscal cliff resolved as does Maryland. AMT is just one reason. Even if that family is not affected by the AMT, they would be affected by higher taxes.”

The payroll tax credit, child tax credit and a series of cuts first enacted during President George W. Bush’s administration are also set to expire.

According to some, the tax climate in this state has made matters worse than they might be otherwise.

Anti-tax group Change Maryland has fought a persistent public relations battle with state leaders over Maryland taxes. Its chairman, Larry Hogan, former Republican Gov. Robert L. Ehrlich Jr.’s appointments secretary, has been a frequent critic of Gov. Martin O’Malley’s administration when it comes to business climate and tax rates.

“O’Malley has raised taxes and fees 24 times, taking $2.4 billion out of the economy annually on the state level,” Hogan said in an emailed statement. “He ought to be the loudest voice advocating for hard-working Marylanders on Capitol Hill where the timing of these looming tax increases could not be worse.”