Businesses from carwashes to legal practices are opposing a Maryland bill that would lower the sales tax rate but extend it to services.
During a March 2 Maryland House Ways and Means Committee hearing, a range of industry groups spoke out against H.B. 1628, including the Maryland State Bar Association, the Maryland Defense Counsel Inc., the Maryland Hotel Lodging Association, the Maryland Association for Justice Inc., and the Mid-Atlantic Carwash Association.
The bill, proposed by House Majority Leader Eric Luedtke (D), would expand the sales tax to include most professional services and reduce the tax rate from 6 percent to 5 percent. According to Luedtke, as consumption has shifted from goods to services, sales tax revenue hasn’t kept pace with the growth in the economy, and the tax has become a less reliable source of revenue for the state.
"We’re going to need to grapple with this issue of expanding the sales tax to services to update the tax," Luedtke said. He noted that the proposal is one option on the table for raising revenue to fund the Blueprint for Maryland's Future, an education reform plan. According to H.B. 1628's fiscal note, the proposal could generate about $2.9 billion per year in general fund revenues by fiscal 2025.
However, the fiscal note warns that significantly extending the sales tax base to services would be a difficult undertaking, noting that Louisiana, Massachusetts, Michigan, Nebraska, Pennsylvania, and Utah have unsuccessfully proposed notable sales tax base expansions.
During the hearing, opponents of H.B. 1628 largely argued that the bill would be regressive and would drive up the cost of doing business in Maryland, which could result in layoffs or relocations.
Dwight W. Stone II, president of Maryland Defense Counsel, said the bill could cause firms to lose out-of-state clients on patent and copyright matters, tax matters, and other issues. Several large firms are headquartered in Maryland but could relocate if there were a reason to do so, Stone added.
Meanwhile, the bill was supported by the Maryland State Education Association and some Baltimore businesses. Supporters said the bill would provide funding to improve the state's public schools, which could help provide a more educated workforce.
Willy Moore, president of Baltimore-based Southway Builders, said he thinks the bill will need to be amended, but that the uneducated workforce in Baltimore is bad for the construction industry.
Roy Meyers, a professor of political science at the University of Maryland, Baltimore County, said the legislation would increase the fairness of the sales tax and reduce economic distortion. Noting that the Tax Foundation has argued in favor of broadening the sales tax to services and reducing the sales tax rate, he said the proposal is an example of how good public policy can be made by reaching across the aisle.
In written testimony, the Council On State Taxation opposed the bill, saying it would “inappropriately expand the application of Maryland’s sales tax to many business inputs without an exemption for business-to-business transactions.”
“COST does not generally oppose legislation that broadens a state’s sales tax base to business-to-consumer transactions. However, H.B. 1628’s proposed sales tax expansion to include services — many of which are predominantly provided to businesses, without providing an exemption for business inputs — directly violates the economic principle that an ideal sales tax should tax household consumption and not business inputs,” Stephanie Do of COST wrote.
Gov. Larry Hogan (R) has called the proposal "the largest tax increase in our state's history" and has vowed to fight it.
Another bill that would expand the sales tax to services, H.B. 1354, was on the agenda for the March 2 hearing, but most of the testimony was centered on H.B. 1628.
H.B. 1354, introduced by Dels. Lorig Charkoudian (D) and Julie Palakovich Carr (D), would instead expand the sales tax to apply to specific services that were identified as luxuries by the bill's sponsors.
Those services include fur cleaning or storage services; golf course or country club memberships; marina services; art moving or storage services; tanning; tattooing or piercing; interior design or decorating services; dog walking; boat repair services; watch, clock, or jewelry repair services; scheduled or nonscheduled air transportation; travel arrangement or reservation services; and lobbying.
The bill is expected to raise substantially less general fund revenue annually than H.B. 1628 would — $64 million in fiscal 2021 and $72.1 million in fiscal 2025.