Good afternoon, Chairwoman Hoffman
and members of the Committee. Thank you for the opportunity to address this
committee in open forum on the matter of Senate Bill 385. Let me begin by noting
that the Maryland Taxpayers Association (MTA) Board quickly reconized that the
bill involved complex issues and asked me to conduct an indepth assessment for
presentation to the Committee.
The Association commends co-sponsors of the bill for their support in principle
of refunding revenue surpluses to taxpayers. MTA believes, however, that tax
equity and administrative considerations associated with the bill argue persuasively
for amendment of the proposal.
PROs
On the positive side, SB 385 projects
the sense that at least some elements of the General Assembly are sensitive
to the tax burdens Marylanders bear and are prepared to contain that burden.
That perception alone is an important factor in attracting new businesses and
retaining older businesses in the State.
Use of sales tax rates as a tax relief delivery vehicle offers several potential
benefits if properly structured. First, in theory at least, lowering sales tax
rates would increase progressivity of the tax system and benefit lower income
groups the most. Second, reduction in the sales tax rate could forestall collection
of tax and leave those funds with the taxpayer to save or spend, stimulating
higher output of the private sector and increasing State income tax collections.
Third, businesses must pay sales tax on their purchases of taxable goods and
services within the State and would share in the tax relief, potentially realizing
some reduction in the cost of doing business here. Fourth, lowering the sales
tax rate could improve the competitiveness of Maryland retailers versus competitors
in surrounding States and catalog retailers. Realization of these potential
benefits depends heavily on the magnitude of the rate reduction and the efficiency
of rate reduction passthrough to taxpayers, however. To produce beneficial results,
the tax relief provided must be real in substance as well as form.
CONs
Careful assessment of the potential
for using a sales tax mechanism as vehicle for delivery of tax relief reveals
a number of adverse features. It becomes clear that tax equity implications,
the efficiency of tax relief delivery, and administrative complexity of the
bill warrant attention.
Tax equity concerns arise on several counts. First, the bill relies exclusively
on reduction in sales and useage tax rates to provide tax relief when unexpected
income tax receipts likely contributed more to surplus general fund revenues.
Second, SB 385 risks diversion of a share of the intended tax relief from taxpayers
to point-of-sale product support vendors and to certain sales tax collection
agents (retailers). Third, sales of many types of goods and services are highly
seasonal; temporary rate reductions would skew the distribution of tax benefits
toward those taxpayers making purchases during the reduced-rate-window.
However, sales tax paid by businesses on their purchases is generally a trivial
factor in their cost structure; any tax relief granted business by reduction
in sales tax rates would have little affect on the general business environment.
Moreover, Revenue Administration Division reports show $3.591 millions of personal
income tax liabilities to the State for 1997 compared with "Sales and Use
Tax Collections, Fiscal Year 1998" of $2,180 millions. These data suggest
that personal income taxes contribute more than one-and-a-half times as much
to surplus revenues as sales tax receipts from all sources.
Seasonal patterns in purchases of goods and services could exacerbate the tax
burden inequities suggested by of income and sales tax shares in total revenue.
Implementation of tax relief via temporary application of fractional percentage
tax rates as envisioned in the bill would also materially impair the efficiency
of tax relief delivery. Additionally, the mechanism envisioned for setting the
volume of tax relief introduces needless administrative complexity and potential
for political "gaming." Data for fiscal year 1998 can illustrate these
points.
The Department of Legislative Services' fiscal briefing report shows excess
revenue for FY1998 of $212.6 millions arising from General Fund revenues totalling
$8,071.7 million against expenditures of $7,859.1 millions. This surplus amounts
to 9.75% of sales and use taxes collected over the entire fiscal year. Granting
tax relief of the same magnitude in a half year would require reducing the tax
rate by twice the surplus share in expected receipts or by 19.5%. SB 385 provides
that the tax cut established under section 11-104, paragraph (2) of the Maryland
code "shall be rounded up to the nearest 1/4 cent." Thus, a sales
tax rate of 4.25 cents per dollar is implied.
Point-of-sale support providers would be needed twice during the year to implement
necessary changes in sales tax calculations -- once to reduce the rate to 4.25
cents on the dollar of sales and once to restore calculation formulas to five
cents on the dollar. Retailers would incur the expense of those services initially,
but consumers would bear the full incidence of those costs -- and more -- in
many cases.
To avoid forcing a reduction in retailer profit margins, five cents sales tax
would still be applied to a portion of three out of four dollar transaction
amounts; whole cents are the lowest unit of account in our currency system.
Only transactions in dollar amounts that are evenly divisable by four would
reflect a true tax assessment on the transaction. On the other hand, retailers
remit sales tax to the Comptroller based on their aggregate sales volume, not
on sales tax collected. Thus, retailers with large numbers of small dollar amount
transactions could expect to collect more in sales taxes than they would be
obligated to remit to the Comptroller. Their customers, many of whom most likely
live on incomes at the lower end of Maryland's income distribution, would continue
to pay five cents per dollar sales tax on most of their purchases at these establishments.
Upscale retailers and merchandisers of big ticket items like business suits,
refrigerators, cars, boats would likely be unable to recover the costs of point-of-sale
rate adjustments while their customers, most of whom enjoy middle to upper incomes,
would realize much larger pass through of the tax rate reduction.
Reliance on Board of Revenue projections based on incomplete, partial year data
further adds to needless administrative complexity. Actual fiscal balances for
the prior fiscal year are known by December as shown in "The Fiscal Briefing."
Foregoing collection of a known surplus for the prior year projects legislative
sensitivity to existing tax burdens as much as, or more, than foregoing collection
of a projection that is subject to manipulation and political gaming.
RECOMMENDATIONS
MTA recommends reconfiguration of
SB 385 tax relief delivery mechanisms to automatically distribute prior fiscal
year surpluses above some threshold amount such as one percent of appropriated
expenditures. Equitable burden sharing argues for refunds in proportion to tax
paid by personal income tax return filers. However, refunds of equal amounts
per tax return filer might be used to simplify implementation. For example,
roughly 2 million individuals filed returns showing Maryland taxable income
in 1997, a number very similar to the estimated number of Maryland households.
This suggests a $212 million surplus like that realized in FY1998 could trigger
automatic refunds approximating $100 per person to each filer. $100 per household
would equate to roughly $40 per person in the "average" State household.
Alternatively, reduce the sales tax rate to zero over a window of time sufficient
to forestall collection of taxes equivalent to prior year surpluses (four or
five weeks in January - February for a $212 million surplus). This would avoid
imposing needless costs on retailers, greatly improve the efficiency of tax
relief delivery, minimize the potential for political "gaming" of
the magnitude of tax relief to be provided, and make the relief visible to taxpayers.
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