Maryland ranks sixth on a list of states that would be hit hardest by the health care plan making its way through Congress.
Wealthy Maryland residents would spend more than half their income on taxes — nearly 56 cents of every dollar — with the proposed health care surtax, according to the report from Washington research group Tax Foundation.
Raising taxes on the rich is “the worst way possible to raise revenue,” said economist Gerald Prante, who helped conduct the nonpartisan study. “It discourages labor supply and investments on the high end. [Wealthy] people are the most sensitive to taxation.”
If approved by Congress, the three-tiered funding plan, which would take effect in 2011, would require a 5.4 percent surtax for couples with an adjusted gross income of more than $1 million and singles with an AGI of more than $800,000. The surtax would drop to 1.5 percent for couples with an AGI between $500,000 and $1 million and 1 percent for couples with an AGI between $350,000 and $500,000.
Maryland landed so high on the foundation’s list because of its so-called millionaire’s tax — a 6.25 percent tax for people earning $1 million or more that has been driving millionaires out of the state, said Joseph Henchman, director of state projects for the Tax Foundation.
Add to that Maryland’s steep state taxes, which are augmented by additional municipal taxes, and the state’s tax situation is through the roof, Henchman said.
Maryland created the “millionaire’s bracket” as part of an effort to “close a $1.7 billion inherited structural deficit,” said Shaun Adamec, spokesman for Gov. Martin O’Malley’s office.
He pointed out that the state has expanded health care to nearly 100,000 more residents during O’Malley’s term.
But lower top-income tax rates in neighboring states will “hurt Maryland’s long-term economic growth,” Henchman said.
Virginia and Pennsylvania ranked 24th and 37th, respectively, according to the foundation’s report. The District of Columbia is not ranked, but data indicate the District would fall three places behind Maryland to No. 9.
“Maryland for the last few years has been embarking on this effort to become the highest-taxed state in the nation,” Henchman said. “And certainly, people who are thinking about opening new businesses in Maryland, investing in Maryland or moving to Maryland — they will take notice of this and they will reconsider. … They will move to the state with the lower tax.”
In May, The Examiner reported a one-third drop in the number of high-income taxpayers in Maryland, raising concerns that the wealthy are fleeing the state for tax-friendlier neighbors.
But, Prante said, “the surtax itself won’t affect migration out of Maryland, because the surtax hits all states.” In fact, wealthy taxpayers in 38 other states would have to pay a top tax rate higher than 50 percent with the health care surtax.
The foundation combined states’ average local tax rates, top state and federal rates with the 2.9 percent Medicare tax and the 5.4 health care surtax to determine state rankings, Prante said.
