By Rolando Garcia
ANNAPOLIS – Gov. Robert Ehrlich wants to increase fees. Legislative Democrats want to raise taxes. But no matter what revenue-producer is chosen, Maryland’s poorest citizens are likely to bear the biggest burden in closing the state’s yawning budget gap.
Although Ehrlich’s proposed $23.8 billion budget for 2005 balances the books mostly through spending cuts and one-time revenue sources, the government will still reach deeper into residents’ pocketbooks with hundreds of millions of dollars in new fees to pay for new environmental and transportation initiatives.
Among Ehrlich’s proposals are a $23.50 hike in vehicle registration fees, a $50 surcharge for traffic violations and a $200 surcharge for drunken driving citations, all of which pay for transportation improvements. A $2.50 monthly fee on sewer bills would pay for Chesapeake Bay preservation. Ehrlich also has proposed a host of smaller fee hikes on everything from fishing licenses to missing driver’s test appointments.
Democrats in the General Assembly insist the state needs a steady revenue source to fix the state’s structural deficit, and say Ehrlich’s fees are tax increases by another name.
Ehrlich has vowed to veto any tax increase.
Funding government through fees has the political advantage of being a more stealthy revenue source than large-scale tax hikes, said Nicholas Johnson, a state fiscal policy analyst for the Center for Budget and Policy Priorities. However, he added, the poor feel the fee bite much more than the affluent because they will have to fork over a larger portion of their income.
Advocates for the poor agree. They worry particularly about Ehrlich’s motor vehicle fees, which will hit low-income residents the hardest by making it more expensive to drive, they say.
“These aren’t fees on discretionary activities – you may need a car to get to work,” said Sharon Rubinstein, spokeswoman for Advocates for Children and Youth, a Maryland-based advocacy group. “For people living at the margins (the new fees) can pack a real wallop.”
Conservatives are also wary of Ehrlich’s array of fee increases.
Delegate Herbert McMillan, R-Anne Arundel, said a fee should be just enough to cover the cost of a particular government service and should not be used to replenish the general fund.
“Some (of the proposed fee hikes) are legitimate, others look a lot like a tax to me,” McMillan said.
For the poor, however, taxes are not usually a better option.
The most regressive taxes are those that charge consumption, such as sales and cigarette taxes, Johnson said.
Unlike the affluent, who can devote large portions of their income to savings, investments and untaxed services, the poor must spend much of their income on taxed items, even when, as in Maryland, food is exempt.
“(The poor) may be paying the same tax rate, but as a percentage of their income, they’re paying more,” Johnson said.
Some Democrats in the General Assembly have proposed raising the sales tax from 5 cents to 6 cents, which would bring in an estimated $600 million more in revenue annually.
However, an analysis by the Institute on Taxation and Economic Policy, a Washington, DC,-based think tank suggests the hike would exacerbate the inequities of Maryland’s sales tax.
With a 6 cent sales tax, the bottom fifth would pay 2.4 percent of their earnings, which means forking over $44 dollars more than they do now. The top 1 percent of income earners would pay .4 percent of their total earnings, meaning they would pay an additional $664.
However, with budget shortfalls projected to reach $1 billion next year and $1.6 billion by 2008, even progressives who would prefer to tax the wealthy, are willing to consider a sales tax hike to protect education funding and social programs for needy Marylanders.
“A regressive revenue source may be better than none at all,” said Steve Hill, director of the Maryland Budget and Tax Policy Institute.
However, raising the sales tax could put Maryland at a competitive disadvantage with neighboring states, such as Virginia, which has a 4.5 cent sales tax or Delaware, which has none.
Some Maryland shoppers may start purchasing more online to escape high sales taxes or opt to buy big-ticket items in Delaware, said Chris Edwards, a state policy analyst for the libertarian-leaning Cato Institute.
Even the bill that some have hailed as a solution to the state’s budget woes – approval for slot machines – would probably target those with the least to spend on gambling.
State lotteries and slot machines attract disproportionately low-income costumers, who spend more of their income on gambling than the affluent, said David Brunori, who teaches state policy at George Washington University.
“Gambling is a tax on those with poor math skills,” Brunori said. “You just don’t see upper-middle-class people in line to buy lottery tickets.”
One proposal targeting the wealthiest Marylanders would raise the income tax rate for incomes above $500,000 from 4.75 percent to 7.75 percent. The so-called “millionaires’ tax,” which has a dozen co-sponsors in the House of Delegates, would lessen the regressive nature of Maryland’s income tax system.
Because the top rate kicks in at such a low income threshold, rich and poor alike pay the same 4.75 rate, said Tom Hucker, director of Progressive Maryland, a liberal advocacy group.
“The tax burden,” Hucker said, “should fall to those best able to pay and those who’ve benefited the most from living in the state.”
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