Changes to federal tax law, coupled with recent changes to the state tax code, could create challenges in forecasting revenue at least in the short term, analysts and lawmakers said Thursday.
“We all know this is a time of transition,” Sen. Karen Lewis Young (D-Frederick) told a gathering at the Maryland Association of Counties conference in Ocean City. “We have rising costs, uncertain revenue forecasts and new pressures on state and local budgets alike.
“When Washington sends mixed signals, the challenge for Maryland and our counties only grows,” said Lewis Young, a member of the Senate Budget and Taxation Committee. “Predictability is critical in financial planning.”
But changes to the state tax code in this year’s legislative session, coupled with changes in the federal law that were part of President Donald Trump’s legislation, may make that predictability difficult at first.
“We have a mix,” said Chief Deputy Comptroller Andrew Schaufele. “I think we’re all still digesting that.”
A report on how the federal changes will affect state tax revenue is expected in early September.
Some effects could be significant: 40% of the state’s revenue comes from personal income tax.
Personal income tax in Maryland — state and local — is tied to the federal adjusted gross income.
“This is meant to make it simple, anybody whose done taxes knows it isn’t simple, but this is the easiest way to get us all forward,” Schaufele said.
In general, the state tries to conform to federal tax law.
For example, tax changes made in 2017 when Trump was president increased the federal standard deduction. The change incentivized many state residents to take the standard deduction rather than itemizing.
Those same taxpayers were then required to take a standard $4,000 deduction on their state taxes even though many of them would have fared better if they could have itemized.
Schaufele said that generated an additional $450 million annually for the state.
The recently passed federal legislation increased the standard deductions again. Schaufele said increasing the state and local tax cap deductions to $40,000 and adding in other sorts of deductions including car interest loans could mean more residents return to itemizing their taxes.
“What all this means to all of us that are here to talk about budget finance is that you have a very complicated world with a lot of money flowing to individuals, to the state, to the local government, and the state law changes and the federal law changes are about to just mix it all up,” Schaufele said.
Some of those deductions could be paused automatically for one year. Making that pause permanent would require legislation.
“There’s going to be a ton of interplay here,” Schaufele said. “We’re going to be doing a lot of modeling, trying to figure out what it is, but it’s going to be very challenging.”
Adding to the uncertainty in revenue forecasting are the looming federal job cuts. Schaufele said so far the state has not experienced the effects of those cuts.
“We know it’s coming,” he said. “It’s a matter of time.”
Schaufele said the reductions and the effect on state revenues will be “significant. It’s going to play out in a crazy way.”
And when those federal employees lose their jobs, the effects could be hidden initially, as displaced workers also see bumps in taxable income related to leave that is paid out, according to Harford County Treasurer Robert Sandlass.
“It’s going to be hard to figure out what is the ongoing revenue and what is the one-time revenue,” he said. “A person could be laid off. They could get a severance package or a buyout, and for that quarter, their number is going to go up, and obviously the job is going away.”