Democratic lawmakers in Maryland, Washington and several other blue states want to close budget gaps this year by raising taxes on high earners, a move supporters say ensures wealthy people pay their fair share but critics say will hurt economic growth.
Maryland Gov. Wes Moore (D), who last session took a hard line against tax increases, on Wednesday proposed lowering income taxes levied on most residents while raising them on roughly the top 20% of earners to address a $3 billion shortfall.
“Marylanders who have done exceptionally well financially will be asked to contribute a little bit more,” Moore said while presenting his budget, “so we can make targeted investments in economic growth, and targeted investments in public safety, and targeted investments in education.”
State budgets are tightening nationwide as revenue growth slows, federal pandemic aid dries up and the cost of providing public services such as education, health care and child care increases. Some blue states now face yawning deficits they must fill this year, either by cutting spending, raising taxes, or both.
Read more: Lawmakers grapple with post-Covid budget deficits
Although voters tend to oppose higher taxes, Democrats are hoping to avoid painful spending cuts by raising taxes in targeted areas where they expect less political blowback. That includes “sin taxes” on cigarette sales, cannabis sales and gambling, and, increasingly, taxes paid by top earners.
“Lawmakers typically avoid raising taxes when the economy is expanding,” Lucy Dadayan, principal research associate with the Urban-Brookings Tax Policy Center, a joint venture between two Washington, D.C. think tanks, told Pluribus News. “However, the need to address budget shortfalls and fund essential services is driving these discussions across multiple states.”
Proposals to raise taxes on high earners are driven by several factors, she said, including persistent income inequality and voters’ growing support for asking people who earn more to contribute more to fund government services.
Progressive advocacy groups also have been mobilizing to make the case for higher taxes on high earners, said Jonathan Huskey, communications director at the State Revenue Alliance, a network of state groups that advocates for raising taxes on the wealthy.
“We are ready for this debate, and this fight, in a way that we haven’t been in the past,” he said.
So far this session, Maine Gov. Janet Mills (D) has proposed raising taxes on cigarette and cannabis sales and taxing video streaming services. New York legislative leaders have signaled their willingness to raise taxes to fund public transit.
But the boldest proposals so far have come from Maryland and Washington.
Washington’s outgoing Gov. Jay Inslee (D) last month proposed a new 1% wealth tax on state residents’ global assets over $100 million, as well as raising taxes on certain big businesses, to address the state’s $12 billion two-year deficit.
Incoming Gov. Bob Ferguson (D), who was sworn into office Wednesday, has yet to present his own budget plan but has indicated he would prefer to cut spending rather than raise taxes.
Meanwhile, Democratic lawmakers are circulating their own plans to tax the rich. Senate Democrats are discussing creating a wealth tax, raising the capital gains rate, and increasing taxes on big businesses and on homes sold for over $3 million, among other ideas, the Seattle Times recently reported.
In Maryland, Moore has proposed doubling the state’s standard income tax deduction, combining its bottom four income tax brackets to create a single bracket taxed at a 4.7% rate, and adding two new brackets on earnings over $500,000 and over $1 million. The top rates would be 6.25% and 6.5%, respectively.
Moore would also impose a 1% surcharge on capital gains income for households that earn more than $350,000, money his administration would spend on economic growth initiatives.
Moore’s budget includes an array of other tax changes he said would simplify the tax code, and would raise taxes on gambling and cannabis sales.
Overall, he would raise almost $1 billion in new taxes while cutting about $2 billion in spending to balance the state budget.
Republican lawmakers in Maryland and Washington State are vowing to fight efforts to raise taxes. They say state leaders should focus on cutting spending rather than go looking for new revenue.
There is “absolutely no way” that Republicans would support “any type of tax increases,” Maryland Senate Minority Leader Stephen Hershey (R) told the Baltimore Banner this week. Hershey said the last time Maryland raised taxes on high earners, many left the state for lower-tax destinations.