The number of high-income taxpayers in Maryland has dropped by one-third, raising concerns that the wealthy are fleeing the state for its tax-friendlier neighbors.
About 2,000 residents filed returns in the highest bracket of more than $1 million in taxable income in April, down from about 3,000 in April 2008, according to the most recent data from State Comptroller Peter Franchot. Final numbers, which he said likely would include at least several thousand more million-dollar earners, will become available in October after tax returns that received extensions are filed.
“There’s no denying that the [tax] increase has had an impact on a sector of our citizens,” Franchot said.
Last year, the cash-strapped Maryland General Assembly raised by three-quarters of a percentage point the personal income tax rate for people earning more than $1 million in taxable income. That includes small businesses that file as “S corporations,” meaning the income is not distributed solely to one individual.
“Higher taxes drive people away,” said University of Maryland economist Peter Morici.
The tax man cometh
Local income tax rates
for the wealthy:
» Maryland: 6.25 percent for people who earn $1 million or more, plus local add-ons
» Virginia: 5.75 percent for people who earn $17,000 or more
» D.C.: 8.5 percent for people who earn $40,000 or more
» Delaware: 5.95 percent for people who earn $60,000 or more
» Pennsylvania: 3.07 percent for all earners, plus local add-ons
Source: Tax Foundation
But he added that raising tax rates for these millionaires is less likely to cause top earners and entrepreneurs to flee the state than to dissuade outsiders from moving in.
“It’s hard to fathom what the government gives people in Montgomery County that it doesn’t give them in Fairfax,” Morici said, adding that the wealthy are less likely to take advantage of tax-funded services such as public education.
A Tuesday editorial in The Wall Street Journal blasted the Annapolis legislature for “fleecing the wealthy” and driving them away with the increase to 6.25 percent.
That amounts to a $7,500 tax increase to $62,500 in personal income taxes for residents earning $1 million, and a $37,500 bump to $312,500 for people earning $5 million, in addition to county taxes of up to 3.2 percent.
“On those missing returns, the government collects 6.25 percent of nothing,” the editorial said.
Franchot called the editorial “harsh” and “premature,” saying conclusions could not be drawn until October’s numbers are finalized, and added that the vast majority of tax drops would be caused by lower incomes resulting from the recession.
And while he expressed appreciation for the state’s wealthiest residents, he said, “I’m more concerned about the hundreds of thousands of working families who have seen what little wealth they have vanish.”
In 2007, Marylanders who earned more than $1 million accounted for one-quarter of 1 percent of taxpayers, but nearly 16 percent of income tax revenue for the state, according to Franchot’s office. Those who earned between $40,000 and $200,000 accounted for about 31 percent of taxpayers and 49 percent of revenue.
Overall numbers reveal a 27 percent decline in total income tax revenue to about $1.3 billion in April 2009, from $1.7 billion in April 2008.
Dr. James Pelura, chairman of the state’s Republican Party, worried what the drop-off meant for the less mobile middle class.
The wealthy “are fleeing,” he said, “leaving a shortfall in taxes that they used to pay, which results in higher taxes for you and me.”