O'Malley's Tax Plans May Hurt Democrats in 2012

In a recent post I criticized Governor O'Malley's proposed tax increase on gas and the plan to double the flush tax as too regressive to be acceptable. Now, the good folks at the Washington Post have done the math and show just how unfair O'Malley's tax increases would be.

According to an analysis by the Post low and then middle income Marylanders will face the most significant increases in their tax burden should all of O'Malley's proposals be accepted. And which group would see the smallest increase in their tax burden? Families earning over $500,000 per year. In fact, the percentage increase in tax burden for a single person earning $34,000 per year would be double that of a family earning $500,000 per year. Of the nearly $1 billion in tax and fee increases proposed by the governor only $200 million - 20% - would come from limiting tax deductions from higher income Marylanders. The remaining 80% on the increases come from regressive excise taxes.

President Obama has repeatedly argued for tax increases only on folks earning at least $250,000 per year, arguing that Republican opposition stems from the Republican party's desire to protect the wealthy at the expense of every one else. Martin O'Malley is no mere bystander in this national debate. As Chair of the Democratic Governors Association he is a spokesperson and symbol for his party. O'Malley's incredibly regressive tax proposals undermine the Democratic party message and suggest a party unconcerned with the plight of working class families - and that's no small problem. No doubt, defenders of the Governor's proposal will be quick to point out that the increased out of pocket costs for a family earning $500,000 per year will be $1,347 while the increase for a single person earning $34,000 will be $112. But ask yourself - who will feel the loss of income more acutely?

Working class voters will be crucial to the Democrats' success or failure in the 2012 elections. Forget all of the talk about Barack Obama winning in 2008 because of a surge in turnout by young or minority voters - by people who never voted before. Exit polls from 2008 show the share of first time voters  in 2008 was exactly the same as in 2004. The real key to Obama's and the Democrats' victories in 2008 was the return of working class voters to the Democratic fold.  As shown in the figure below, Democrats have been experiencing a steady erosion of support among working class voters since the late 1950s.

Source: American National Election Studies



In 2008 there was a reversal of the trend and working class voters returned to the Democratic party. These voters abandoned the party in the 2010 midterms and delivered control of the House of Representatives to the Republicans. If Democrats cannot win them back in 2012 the party will lose the White House and the Senate and Republicans will once again have unified control of the Executive and Legislative branches.

Democrats cannot win back working class voters by imposing regressive and punitive taxes on them in the midst of a weak economic recovery. Governor O'Malley's proposals would increase the cost of driving to work and the cost of goods and services through higher gas taxes, they would decrease disposable income by raising the flush tax (especially in rural and poor parts of the state where septic systems are common) and increasing utility costs.

And while Democrats nationally claim to favor progressive taxation that would ensure the wealthiest pay "their fair share" Governor O'Malley's plan would impose a greater burden (as a percentage of income) on low income, working, and middle class voters in Maryland as compared to the wealthiest earners in the state.

O'Malley has said that he gave a great deal of thought to his proposed tax increases. If true, that may be the saddest commentary of all. Democrats cannot win without the working class, and working class families cannot emerge from the great recession under the burden of regressive taxes.

Occupy Maryland: Where Millionaires Play and the Working Class Pay

Congratulations Maryland! According to a story in today's Washington Post, the Free State leads the country in Millionaires. Approximately 7.22% of Marylander households are part of the exclusive millionaires club.

There are about 2.4 million households in Maryland so that translates into roughly 173,000 millionaire households. I'm glad this information was released, because the state is currently considering, and Governor O'Malley appears to be supporting, a series of proposals to increase any number of taxes - the gas tax, the flush tax, car titling and registration fees, and the auto emissions testing fee. Indeed, the one tax that O'Malley does not seem interested in increasing is the income tax.

A few months ago, O'Malley accused the GOP of "worshipping" tax cuts for the wealthy. That may be, but it's clear here in Maryland that O'Malley is happy to bow down before the alter of tax increases on the poor and working class.

Now the data on millionaires is specific to families with at least $1 million in liquid assets, but let's consider questions of income in Maryland - afterall, the higher your income, the more likely you are to accrue $1 million in liquid assets. The median household income in Maryland is $69,000 a year. Under Maryland's tax schedule, the median household would face an effective tax rate on 4.67%. A household earning between $500,000 and $1 million would face an effective tax rate of 5.2%, earn over $1 million and your effective tax rate slowly approaches a maximum of 6.25%.

Nationally, the median income is $50,000 a year. Under the current federal marginal tax rates, the median household would face a tax burden of $6,650 - an effective tax rate of 13.3%. A household earning $1 million dollars would pay $290,000 for an effective tax rate of 29%.

In Maryland, the effective tax rate imposed upon a millionaire is roughly 11% greater than the effective rate charged the median household. Nationally, the effective tax rate assessed on a millionaire is 118% greater than the rate assessed on the median household.

Compared to Maryland's current marginal income tax rates, the current federal rates (signed into law by George W. Bush) are far more progressive.

So before the state considers placing an even greater tax burden on poor and working class Marylanders, lawmakers may want to consider making the state's income tax more progressive. Perhaps the burden of supporting the state should rest more heavily on those who can best afford to support it and who best benefit from the services and stability the state provides.

As pointed out in a prior post, according to the Congressional Budget Office, the bottom 20% of wage earners pay nearly 1% of their income on excise taxes on gasoline and motor fuel alone. By contrast, the top 20% pay only 0.3% of their income on such taxes. When all federal excise taxes are considered, the proportional burden placed on the bottom 20% rises to nearly 2.8%, while the burden placed on the top 20% is only 0.5%. A 3% burden compared to a 0.5% burden... that's the very definition of a regressive tax folks.

And lest we forget, Maryland's sales tax was already increased by 20% under O'Malley's watch and an analysis conducted by the Maryland Budget and Tax Policy Institute determined "Increasing the sales tax rate has a seven times greater impact on the lowest income families compared to the highest income families." Further with regard to state and local taxes the poorest 20 percent of Maryland families paid nearly twice as much, as a percentage of their income, in taxes as did the very richest Maryland families.

No wonder Maryland tops the nation in millionaires, what millionaire wouldn't want to live in a state with a nearly flat income tax and an increasingly regressive tax burden shifted to the poor? Who wouldn't want to tow their yacht to the Bay on roads and bridges disproportionately funded by the excise taxes and fees imposed on commuters, construction workers, single parents shuttling between school drop-offs and two part time jobs, or the unemployed driving to job interviews?

Perhaps the thinking is millionaires can pack up and move if their taxes are increased, but the poor are stuck here and will have no choice but too stay and pay? That's certainly not progressive thinking. Perhaps it's time to occupy Annapolis?