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Expanding Maryland鈥檚 sales tax to most services would generate more than $3.7 billion in new taxes in five years, according to the fiscal analysis released on the eve of a bill hearing expected to draw crowds to Annapolis on Monday.
However, the bill would also decrease the state鈥檚 current sales tax rate from 6 cents per dollar to 5 cents.聽Taken together, the reduction in the tax rate and the expansion to services would increase state sales tax revenues by $2.9 billion in the 2025 fiscal year, according to the analysis.
Business groups across the state oppose the聽 from House Majority Leader Eric G. Luedtke, a Democrat from Montgomery County, which would extend the state鈥檚 sales tax 鈥� albeit at a lower rate 鈥� to many everyday and business services that haven鈥檛 been taxed previously.
Luedtke put forward the bill as聽. Republican Gov. Lawrence J. Hogan Jr. has begun running ads against the proposal and vowed that it鈥檚 鈥�.鈥�
Legislators will begin grappling the implications of the tax proposal at a hearing before the House Ways and Means Committee on Monday afternoon.
Previous efforts to levy sales taxes on services in Maryland, and in most other states, have failed in the past. And if Luedtke鈥檚 proposal is to move forward, lawmakers will have to figure out challenges including how to quantify and track the value of services, and how to tax complex transactions such as legal contingency fees.
Luedtke鈥檚 bill as currently drafted could have a dramatic effect on businesses.聽More than $3 billion in the increased taxes would be for business services, professional services and information services, which are largely consumed by other businesses.
The bill would impose taxes on everyday services as well:
- $141.4 million in 2025 on leisure and recreation services, which includes amusement parks, fitness centers and movies.
- $172.6 million on maintenance and repair services for things such as cars, campers, electronics and jewelry.
- $131.5 million on personal services, including veterinary care, funeral services and dry cleaning.
Small businesses might face competition from nearby states. Fiscal analysts estimated that 5% of transactions on services could decrease, either because consumers are dissuaded by increased costs, or they choose to shop across state lines.
Analysts estimate that Marylanders would spend about $796.5 million less on taxes for retail goods by 2025, thanks to the 1%reduction.
Maryland鈥檚 current sales and use tax is the state鈥檚 second-largest source of general fund revenue 鈥� estimated to bring in about $5 billion this year. Shifting the state鈥檚 sales tax has been a source of discussion in Annapolis for years, as consumption has shifted from tangible goods towards services and digital goods.
The General Assembly last considered expanding the state鈥檚 sales tax to some services in 2012. That measure, which would have applied to about 30 types of services, was estimated to generate about $600 million annually at that time.
In an聽,聽Andrew Schaufele, director of Maryland鈥檚 Bureau of Revenue Estimates noted that Maryland鈥檚 current sales tax policy 鈥渋s increasingly out of step with consumption patterns.鈥�
The state has seen weak growth in sales and use tax revenues in past years, and the shrinking tax base increases the volatility of state revenues, because consumers will avoid spending during economic hardships.
Comptroller Peter V.R. Franchot, a Democrat who plans to run for governor in 2022, has said recently he 聽to fund education reform proposals, and would prefer reforms that can be done within the state鈥檚 existing budget.
A 10-year education reform plan proposed by the Commission on Innovation and Excellence in Education has driven much of the Legislature鈥檚 agenda in the 2020 session, as lawmakers search for additional revenue to cover the increased education costs. An聽聽by key legislative committees could require state education spending to increase by more than $2.9 billion annually by 2030.
On Friday, one of Hogan鈥檚 political entities launched a 30-second ad condemning the sales tax proposal.
鈥淭his one tax hike would destroy everything we鈥檝e done for the past five years to turn our economy around,鈥� Hogan tweeted.
Four states broadly tax services: Hawaii, New Mexico, South Dakota and West Virginia.
