Changes in federal tax law likely to have an impact -- but how deep?
Changes in federal tax law likely to have an impact -- but how deep?
This year, as last, President Donald Trump and his policies will loom large over the Maryland State House and the 90-day legislative session that begins Wednesday.
In this case, the discussion will be driven by taxes.
Lawmakers on both sides of the aisle agree that changes to federal tax law finalized late last year will have a significant impact as the governor and General Assembly finalize a spending plan for fiscal 2019.
“I think a lot of us are still trying to figure out what the federal government is trying to do to us,” said Sen. Andrew Serafini, R-Washington and a member of the Senate Budget and Taxation Committee. “It’s really going to be about trying to figure out what is in the bill. There could be some other things down in there that we haven’t seen that will affect us.”
Republican Gov. Larry Hogan, is expected to release his budget in a few weeks just as the comptroller completes a report on how Maryland might be affected by changes in federal tax law signed by Trump.
One of the biggest changes is a cap of $10,000 on state and local tax deductions that can be taken on federal returns.
The change will hit residents of high-tax states, including, Maryland the hardest.
A recent report by the Government Finance Officers Association based on the most recent data available from 2015 found that nearly half of Maryland residents take advantage of the deduction. The average amount of the deduction taken in the state exceeds the federal cap.
Hogan, who campaigned on a desire to balance the state budget and deliver a tax cut to Maryland residents, announced last month that he would seek to return a projected windfall that will result from those changes.
Hogan, speaking in December, estimated the amount that would accrue to state coffers as a result would be in the “hundreds of millions of dollars.”
Still, some conservative lawmakers say a balance must be struck between cutting state revenues and taming the budget and paying for current planned expenses.
“The tax plan giveth and the tax plan taketh away,” Serafini said. “How we address this and the impact on high taxpayers and hold them harmless will be an issue,” Serafini said.
The report from the Office of the Comptroller assessing the impact of the new federal tax law on Maryland, is expected by the end of January, around the same time Hogan releases his budget.
“It’s going to be a comprehensive, top-to-bottom review,” said Joseph Shapiro, a spokesman for the comptroller. “There isn’t really one area or another that it will look at.”
Also looming over the legislature is a report from the Kirwan Commission that is expected to urge state officials to pump hundreds of millions of additional dollars into public education.
Legislative budget analysts are already building in some assumptions in advance of the legislative session.
Last month, analysts told the legislature’s joint Spending Affordability Committee that some taxpayers can be expected to shift how they report earnings and deductions between the current and coming tax years to take advantage of the federal tax system changes.
“This is all pretty speculative,” Theresa Tuszynski, principal analyst for the Department of Legislative Services, said in comments to the panel late last month. “It’s reasonable to expect that taxpayers who can have a very strong incentive to shift income from tax year ’17 to tax year ’18 and also to bring expenses and deductions into tax year ’17 to reduce taxes in tax year ’17.”
That shift is projected to push state tax revenues down in fiscal year 2018 but increase them in the following year to the tune of about $100 million, according to Tuszynski.
Douglass Mayer, a Hogan spokesman, said the idea of returning the projected windfall to the state that results from the federal tax law changes doesn’t conflict with the governor’s goals of balancing the budget or eliminating the ongoing annual gap between projected revenues and spending.
“Maryland revenues have grown 3 percent annually over the last three years,” Mayer said. “This state doesn’t have a revenue problem. We have a legislatively mandated spending problem in this state.”
Mayer declined to provide details of Hogan’s final budget before the election prior to its release later this month.
Initiatives versus cuts
In recent months, Hogan has announced several initiatives to reduce violent crime in Baltimore City, widen the Baltimore and Capital Beltways along with other highly congested state thoroughfares, and fund education priorities, including a computer sciences program that would increase job training for workers entering the field.
Last year he also, through the Board of Public Works, trimmed $86.3 million out of the current budget after a state panel lowered revenue expectations. Some of those cuts announced by Hogan will require legislative actions this session.
Mayer suggested, however, that Democrats, who once called on Hogan to do something about federal tax reform, are now eyeing the projected additional revenue for programs.
“You’ve heard of the song ‘Blinded by the Light’”? Mayer asked. “I think they’re blinded by the cash even though it’s not theirs.”
Democratic lawmakers this year are calling for a state budget that not only eliminates 100 percent of the projected structural spending gap for fiscal 2019 but also leaves a $100 million surplus.
But such moves would be contingent again on the effects of the federal tax changes and whether Congress re-authorizes funding for the Children’s Health Insurance Program, commonly known as CHIP.
Del. Maggie McIntosh, D-Baltimore and chair of the House Appropriations Committee, called for flexibility in some of the Spending Affordability Committee recommendations based on “the uncertainty of the federal government actions vis-à-vis the tax bill.”
McIntosh raised concerns about how the state would handle potential cuts to CHIP.
“So, if children’s health is not reauthorized or other uncertainties that we cannot at this point predict happen, I’d like us to be able to come back and revisit this,” McIntosh said of a recommendation to eliminate 100 percent of the projected fiscal 2019 structural budget gap.
Congress has yet to address with any finality the funding needs of the insurance program that serves about 140,000 Maryland children living in poverty.
In a letter last month, Hogan called on federal lawmakers to reauthorize the program. In Maryland, the cost of the program already exceeds $100 million.
House Speaker Michael E. Busch said in December that the state would have to find a way to pay for the program should federal funding dry up.
In a letter to congressional leaders of both parties Tuesday, Gov. Larry Hogan pushed for the program’s immediate renewal.
He noted that costs to the state to keep the program going will increase to $30 million in the current fiscal year and $121 million in the 2019 fiscal year.
Last month, federal legislators authorized nearly $3 billion for the program nationally as part of a stop-gap measure. The authorization, however, will only fund the program through March rather than the five-year plan that had been expected.
Additionally, the state is still in limbo awaiting a decision on federal funding for its unique Medicaid program that could result in $2 billion in cuts if that aid evaporates.
Lawmakers are also pushing Hogan to expand government employment especially the hiring of additional corrections officers.
“I would encourage the governor to fund some of the positions in the upcoming budget, and I hope he will do that,” said Busch.
That push may also include a call for raising salaries.
Legislators said the state spends about $70 million in overtime on prison staffing, money that could pay for more officers and to increase salaries.
Busch said Maryland is hindered in filling vacant positions because it has fallen behind in terms of salaries for a demanding and dangerous job.
“We’re 29th in the country in state salaries even though we’re fifth in the nation in personal income,” Busch said. “So, in other words, under this scenario, our state employees are well underpaid, particularly in the area of correctional officers.”
Republicans, including Del. Nic Kipke, R-Anne Arundel and House minority leader, agreed that there should be an effort to hire more corrections officers, but he attributed the slow rate of hiring on stricter employment standards in the wake of federal prosecutions involving state corrections officers.
“I think they’re eager to hire as many corrections officers as they can, and it’s just been a challenge because of the standards,” Kipke said.