Transcript md_tax_update_2007_and_2008

Maryland Tax Changes
2008
The State of Maryland’s
Economy and Expected Tax
Legislation in the 2008
Maryland Legislative Session
• Maryland is facing a a $1.5 to $2
Billion structural budget deficit.
• Maryland’s 2008 legislative session
will see the introduction of tax bills
designed to close this budget gap
and change Maryland’s tax
structure.
• Tax legislation we may see includes:
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Sales tax – Increase in rate
Sales tax – Taxation of services
Income tax – Increase rates
Gasoline Tax – Increase in rate
• There will be no “Blue-Ribbon”
Commission to study
Maryland’s tax structure and
suggest appropriate changes
• What role should Maryland
CPAs take in shaping the
prospective tax legislation?
CPA Advocacy Goals
• CPAs should have a voice in
advocating:
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Good tax policy
Workable tax laws
Clearly worded statutes
Comprehensive regulations
The need for sufficient
administrative infrastructure
MACPA State Tax
Committee’s Goals
• Hold “Town Hall” meetings to discuss
impending tax changes
• Incorporate MACPA member
feedback into a “whitepaper” that
advocates good tax policy
• Distribute whitepaper to legislators
These are dynamic times –
How did we get here?
• Why does Maryland have a
“structural deficit?”
• What are Maryland’s sources and
uses of tax revenue?
• What taxes are expected to
change?
Once upon a time there was a
budget surplus
Why did it go away?
• 1997 individual income tax cut of 10%
($500M annually after 5 year phase-in)
• Recession in 2001, followed by 3 years of
employment stagnation.
• Slowing of personal income growth
• 2002 Thornton: $1.3 billion spending
increase in 6 years (FY 03 – FY 08)
By 12/02 we had a mess
FY 02 – 06
“Muddling Through”
• Slow discretionary spending
• Divert revenues from TTF, local govts.,
and Program Open Space
• Reduce vacant positions
• One-time fixes
• Beef up tax compliance
• Fees
Easy come – easy go
• Spring 2005 - surprise – revenues far
exceed the estimates!
• Temporary “surplus” of $1.3 billion
• FY 07 budget easily balanced
• $978 million of reserves used to
balance the FY 08 budget
• State reserve fund now down to the
legal minimum – 5% of general fund
FY 08 – Where it Comes From
Individual
Income Tax
52%
Other
Revenues
9%
Cigarette Tax
2%
Premiums Tax
2%
Lottery
4%
Sales Tax
27%
Corp. Income
Tax
4%
FY 08 - And Where it Goes
State Agencies
24%
Ed./Library Aid
34%
Health
10%
Higher Ed.
8%
Entitlements
3%
Medicaid
17%
Other Local Aid
4%
Expected Legislation
• Sales tax rate increases to 6%
(Raises approximately $700 million)
• Additional services subject to sales tax ($150M);
– Last year’s H.B. 448 would have taxed 32 new services
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Business management consulting
Real property management services
tax prep
engineering
temporary help
• Top personal income tax rate increases to 6%
(Raises approximately $250M);
• combined rate will be among the highest in the country
Expected Legislation
• Corporate income tax rate from 7 to 8% temporary until slots revenue is realized
• Transfers of controlling interest in real estate
entity would be subject to transfer taxes
($14M)
• Vehicle excise tax rate from 5 to 6%
• Increase gasoline tax five cents per gallon?
• Cigarette and liquor tax?
Other Potential Tax Changes
• Corporate tax reform –
• Combined filing-recently passed in NY and
WV
• Disallowance of “excessive” compensation of
officers
• Increase $300 annual filing fees
• Scrutiny of tax incentive programs
• Mandatory employee medical coverage
• PASSED captive REIT addback
Sales Tax on Services
• Nexus and sourcing issues – Uncertain
where the service is performed
• Defining terms – What does management
consulting mean?
• Difficult to administer – Comptroller
budgeted $90K for new auditors
• Uncompetitive with neighboring states –
business activities will move to other states
How should we evaluate
these possible tax increases?
• What principles make good tax
policy?
• AICPA statement of guiding
principles of good tax policy
• Ten principles for evaluating tax
proposals
• Provides a framework for analyzing
changes to existing tax laws
AICPA Ten Principles
1. Equity and
fairness
2. Certainty
3. Convenience of
payment
4. Economy of
collection
5. Simplicity
6. Neutrality
7. Economic growth
and efficiency
8. Transparency and
visibility
9. Minimum tax gap
10. Appropriate
government revenues
Principle #1-Equity and
Fairness
• Similarly situated taxpayers should
be taxed the same
• To evaluate equity look at all taxes
paid by a taxpayer rather than just
one type of tax
• Is the tax system perceived as fair?
Principle #2 - Certainty
• Tax rules should be certain rather
than ambiguous
• Transactions should be easy to
identify and value
• Certainty comes from clear statutes
and administrative guidance
Principle #3 – Convenience
of Payment
• Tax should be due at a time most
likely to be convenient for taxpayer
• Collect tax on goods at time of
purchase
• Tax should be easy to pay withholding
Principle #4 – Economy of
Collection
• Costs to collect should be minimized
for both taxpayer and government
• Consider the compliance costs for
taxpayers
• Number of revenue officers needed
to administer tax should be
considered
Principle #5 - Simplicity
• Easy to understand rules for costefficient compliance
• Complexity leads to higher
compliance and administration costs
• Complex rules lead to errors and
reduced compliance
Principle #6 - Neutrality
• Tax law should have minimal
impact on taxpayer’s decisions
• The purpose of taxes is to raise
revenue not influence business
decisions
Principle #7 – Economic
Growth and Efficiency
• The tax system should not impede or
hinder the economy
• For example: Maryland tax law
should not pose competitive
disadvantages for Maryland
businesses relative to neighboring
states’ businesses
Principle #8 – Transparency
and Visibility
• Taxpayers should know a tax exists
• What is the tax liability and to which
level of government is it paid
• Invisible taxes are easily retained
and raised
Principle #9 – Minimum
Tax Gap
• Tax gap is difference between taxes
owed and voluntary payments
• Could be intentional or unintentional
• Structure taxes to minimize
noncompliance
Principle #10 – Appropriate
Government Revenues
• System should provide predictability
• Allow state to determine how much
will be collected
• Important for balanced budget
requirement
• Diversified mix of taxes provides
stability in changing economy
What Message Should CPAs
Convey to Legislators?
• We recognize the need for additional revenues
• Good policy makes good law - need for clear
legislative wording and definitions
• CPA’s can assist Comptroller with writing
regulations
• CPA’s can assist Comptroller with preparing a plan
that reduces the tax gap (see California plan)
What do we need from
Maryland CPAs?
• Provide the MACPA with examples of
how the new taxes will impact our
Maryland business clients
• Provide examples from current law of
how bad drafting of laws leads to
uncertainty and non-compliance
• Call, email or write your local legislator
and let them know where you stand
What do we need from
Maryland CPAs?
• Rate impending legislation against the AICPA’s
Guiding Principles of Good Tax Policy
• Find out who your legislator is by logging onto
the MACPA website: www.macpa.org
• Sign up as a “Key Person” on the MACPA state
tax website to receive legislative alerts
• Contribute the MACPA PAC
What do we need from
Maryland CPAs?
• Alert your business clients of the
impending tax increases and provide
examples of how they will be impacted
• Provide examples of bad legislations’
unintended consequences –
– MD snack tax,
– MD Out-of-state contractors tax
– FL experiment with sales tax on services
What do we need from
Maryland CPAs?
• Provide written feedback today on cards at
your seat
• Respond to upcoming electronic survey
• Educate your clients and provide us with
feedback
• Mobilize – Attend CPA Day in Annapolis
on January 23, 2008
To paraphrase Adam Smith from
his 1776 book - Wealth of Nations:
… in taxation a very considerable
degree of inequality is not near so
great an evil as a small degree of
uncertainty.
Questions?
Contact that MACPA State Tax
Committee at:
www.macpa.org
or email [email protected]