O’Malley made Maryland’s income tax more progressive, but he also hiked regressive taxes


December 17, 2015

Maryland’s taxes looked very different after Martin O’Malley’s eight years as governor. Income tax changes made the state’s tax system more progressive, but sales tax increases moved things the other way. While O’Malley has not yet released a formal tax plan as a presidential candidate, we know he made several tax changes as governor.

When O’Malley assumed office in 2007, the state’s individual income tax was essentially flat—there were four tax rates, but the 4.75 percent top rate started at just $3,000 in annual taxable income.

By 2015, Maryland tax had eight brackets and a higher top tax rate of 5.75 percent on taxable incomes above $250,000. O’Malley and the legislature also increased Maryland’s personal exemption from $2,400 to $3,200 and the state’s earned income tax credit from 20 percent to 25 percent of the federal credit.

Most of the personal income tax changes—as well as an increase in Maryland’s corporate income tax from 7.0 percent to 8.25 percent—came about through the Tax Reform Act of 2007, when the governor and the legislature worked together to address the state’s structural budget deficit.

The act also levied a sales tax on computer services, but public backlash resulted in repeal the following year. A temporary 6.25 percent surtax rate on personal income above $1 million took its place and expired on schedule in 2011.

O’Malley and the legislature increased income taxes again in 2012, arguing that the state needed more revenue to maintain education spending.

In all, Maryland’s income tax became significantly more progressive during O’Malley’s term. But there were regressive tax increases, too. The 2007 Tax Reform Act also raised the state sales tax from 5 percent to 6 percent, and the cigarette tax from $1 per pack to $2 per pack. In 2011, the state’s alcohol tax went from 6 percent to 9 percent and two years later, annual inflation-adjusted gas tax increases were created as part of a larger transportation bill.  

There is no official tax incidence report for all of the tax changes that occurred during O’Malley’s term. However, Maryland’s Department of Legislative Services estimated the income tax changes in the 2007 Tax Reform Act reduced the average state and local taxes paid by Marylanders earning less than $100,000 a year but raised them for residents earning above that.

Meanwhile, the sales tax hike raised taxes on all Marylanders. For residents earning less than $100,000, the tax decrease was generally larger than the tax increase.

O'Malley taxes

This is one in a series of posts from the Urban Institute’s State and Local Finance Initiative examining the records of current and former governors running for president.


Always zoom out to examine a governor’s economic record


December 11, 2015

The Urban Institute’s new interactive graphics of historical state economic data provide an important tool for analyzing the records of governors running for president: context. A state’s economy depends on a lot more than what the governor does.

As a result, you should always keep (at least) three things in mind when you assess a governor’s economic record:

  1. The national economy
  2. The state’s long-term trends
  3. The governor’s limited ability to affect a state’s economy relative to other economic factors

State unemployment rates offer a good example of why you should always zoom out when considering economic data.

Lesson #1: The New Jersey and Ohio unemployment rates have dropped considerably since Governor Chris Christie and Governor John Kasich took office (in 2010 and 2011, respectively). But so has the national unemployment rate. Both governors’ terms began after the Great Recession, when unemployment was high, and both states followed the nation as the economy improved and unemployment dropped. In fact, the unemployment rate in both states has roughly mirrored the national rate for decades.

Christie Kasich unemployment record

Lesson #2: Maryland’s unemployment rate was below the national rate throughout former governor Martin O’Malley’s time in office—as much as 2.6 percentage points lower (in October 2009). But that was nothing new: the state’s rate was consistently under the national rate well before O’Malley took office.

O'Malley unemployment record

Lesson #3: Former governor Jeb Bush presided over the lowest unemployment rate (3.1 percent) in Florida’s history during March and April 2006. And for most of his second term, Florida’s unemployment rate was at least 1 percentage point below the national rate. But a year after Bush left office, Florida’s rate equaled the national rate, and a year after that it was 1 percentage point above it.

The big changes in unemployment were consequences of the national housing boom and bust, which affected Florida more than most states. In fact, Florida’s dip below and spike above the national unemployment rate closely mirrors its house price rise and crash during the same period.

Bush unemployment record

The takeaway from these three lessons is not that voters should ignore the economic records of governors. But voters should be leery of overhyped claims of success (or failure). Better yet, voters should look into something governors actually can control: policy decisions.

This is one in a series of posts from the Urban Institute’s State and Local Finance Initiative examining the records of current and former governors running for president.


On the campaign trail, little talk about legal immigration reform


December 2, 2015

There has been a lot of talk about immigration this election cycle. But candidates and the press focus almost exclusively on undocumented immigration, when the evidence also points to important problems with the legal immigration system.

A recent NPR chart of the candidates’ views on immigration policy only refers to their stances on unauthorized immigrants and border control. Of all the candidates, Marco Rubio, Martin O’Malley, and, most recently, Bernie Sanders offer the most detail on their websites about their plans for legal immigration reform, including fixing employment barriers and promoting family unity. But even these proposals are drowned out by the conversation about unauthorized immigrants.  

And as we know from experience with the Senate’s 2013 immigration bill (S.744), reforming our legal immigration system can be as painful and divisive as the fight over unauthorized immigration.   

What’s broken about America’s legal immigration system?

The current legal immigration system keeps families apart. Children who were separated from their parents through immigration spend, on average, about a quarter of their lives without one of their parents.

Waiting times are long. Over 4 million people are in line abroad waiting to reunite with family members. Annual caps on the number of certain family members allowed in may be too low. Re-entry bars prohibit applicants from coming back to the United States for years if they were once here illegally, keeping families apart. And affidavits of support, which require the sponsor to accept financial responsibility for the applicant, can discourage family reunification and keep the poorest families apart.     

If family considerations don’t move anybody, let’s talk business. The H-1B temporary worker visa program for highly skilled workers is also broken. The caps are possibly too low, the process is easily manipulated by a few firms, and there is little oversight. The H-1B visas have become a back door to permanent immigration, and skilled workers with no immediate family members in the United States have no other way to get in.

Employment-based permanent resident visas are hard to come by. From 2009 to 2013, only 12 to 16 percent of all permanent resident visas were awarded on an employment basis. The maximum number of these visas allotted to each foreign country is capped at 7 percent, which does not reflect the make-up of the US foreign-born population nor employers’ needs for more IT and STEM workers primarily from China and India.  

With the aging workforce and low fertility rates, immigrants keep the labor force growing and help somewhat with Social Security solvency. The United States is missing an opportunity to attract and retain talent because our immigration system puts too little emphasis on human capital. US global competitiveness is also at stake by not striking a better balance between family-based and skill-based immigration. All of these problems will persist even if unauthorized immigrants are put on a pathway to legalization or citizenship.

Addressing unauthorized immigration is important, but our legal immigration system needs reform too.


Seven promising policies to reduce wealth inequality


November 19, 2015

Democratic presidential candidates Bernie Sanders, Hillary Clinton, and Martin O’Malley have all taken positions on inequality and the middle class, with Sanders especially vocal on wealth inequality. At the second Democratic debate on Saturday night, Sanders called out the country’s “massive levels of [both] income and wealth inequality."

Wealth is often neglected in the inequality conversation. Income gaps are only part of the story when it comes to economic inequalities in America. Wealth inequality is even greater. And lack of wealth creates its own set of long-lasting harms, often handicapping economic mobility and leaving families exposed to financial risks. Policies aimed at helping low-wealth families save for emergencies, a child's education, a home, and a secure retirement can improve families’ financial stability and serve as a springboard to the middle class.

As the candidates continue to flesh out plans to address inequality and expand opportunity, what evidence-based policies should they consider? Based on our research, we’ve identified seven promising policies to shrink wealth inequality:

  1. Promote emergency savings with incentives linked to savings at tax time.
  2. Offer matched savings such as universal children's savings accounts.
  3. Reduce reliance on student loans while supporting success in postsecondary education.
  4. Reform safety net program asset tests, which can act as barriers to saving among low-income families.
  5. Ensure access to homeownership and maintain programs that can help lower-income families become successful homeowners.
  6. Limit the mortgage interest tax deduction and use the revenues to provide a credit for first-time homebuyers.
  7. Establish automatic savings in retirement plans.

By more efficiently and equitably promoting saving and asset building, more people may have the tools to protect their families in tough times and invest in themselves and their children.