Maryland Gives its Wealthy Citizens a much-needed Tax Break

Election wars can get really nasty, and Maryland is seeing this front and center.

In Maryland, Republican candidate Larry Hogan has been gaining many eyeballs with his television ad declaring that if they could, more than half of Maryland residents would happily leave the state due to its heavy taxation and governmental regulations.

Hogan was right on and Gov. Martin O’Malley and the Maryland state legislature understood what was at stake so they changed the estate tax rules in this small northeastern, increasing the wealth transfer tax exemption limits to match federal thresholds. Now, whether this translates into more votes for Gov. O’Malley will remain a mystery until D-day, but the move has once again sparked debate about the state taxes in Maryland.

Old Regime vs. a New Order

Tax attorneys in the state say that the old law stated that all residents’ estates worth more than $1 million would be taxed at 10%, provided the property was left to linear descendents of the family. Other tax lawyers believe this is cold hearted and is actually double taxation because the person who died already paid income taxes as well. Under the new law change, the limit is set to increase over several years until it ultimately matches the federal exemption.

Starting 2015, the exemption cutoff increases to $1.5 million, to $2 million in 2016, and so on until it meets the federal exemption limit in 2019, which is estimated at $5.9 million. The state exemption is then expected to match the federal thresholds for years to come, apart from minor adjustments for inflation.

Gov. Martin O'Malley.

Gov. Martin O’Malley.

Virginia, and 41 others states in the country, have no death tax imposed on residents. So in comparison, the increase of the exemption cutoff point in Maryland from the current $1 million to $6 million is not impressive since most other states are dumping this tax or never imposed it to begin with. Michael Phelps, you may want to change residences at some point in your life!

Why the Tax Break Makes Sense

The Tax Foundation, which is a non-partisan research institute based in Washington D.C., estimates that the state of Maryland lost approximately $5 billion in personal income tax collections during the period of 2000 to 2010 mostly due to higher-income individuals from the Old Line State moving to other states where the taxes are lower such as Texas and Florida. This was recently confirmed by Montgomery County Executive Ike Leggett who referenced the state’s tax revenue loss in a speech to the Montgomery County Chamber of Commerce.

An Annual Loss

Legget pointed out that as many as 700 to 800 households in the top 3 percent income bracket in the state leave for better tax havens each year. These trends clearly show that the tax revision attempted by Gov. O’Malley is not just based on common sense and caving into the demands of wealthier folks, but it is primarily about recognizing that the state needs to curtail the exodus of its citizens and stop this preventable tax loss. But O’Malley has a long way to go still if he wants to compete with other low tax states.

This is a smart move for Maryland but the citizens of its largest city in Baltimore are still unhappy about their Orioles.