Baltimore lawyer Eric Hontz had heard about how some blue, high-tax states like Maryland weren’t expected to fare well under the sweeping changes to the federal tax code that President Donald Trump and congressional Republicans enacted in 2017.
But the 36-year-old Reservoir Hill resident didn’t realize how hard he’d be hit until he started doing his taxes.
Hontz estimates he’ll have to pay thousands more in taxes this year than last — a burden he says will force him to rent out a room in his family’s house.
“This is the continuing screwing over of the millennial generation,” he says. “It seems like the hardest ones hit are dual-income couples.”
Across Maryland, many people are receiving similarly bad news as they do their taxes. The comptroller’s office reports the state’s average tax refund so far has decreased by about 6.1 percent — to $983 — since last year, a drop the director of revenue estimates calls “extraordinary.”
“It will be interesting to see what happens as more of the tax base learns of this and gets more vocal,” said Andrew M. Schaufele, who leads the Bureau of Revenue Estimates.
Despite assurances, 9 percent of Maryland taxpayers are likely to pay more for 2018
While the sweeping changes in the federal tax code — and state legislation approved last year by both Maryland’s Democratic leadership and Republican Gov. Larry Hogan — have resulted in lower or unchanged taxes for most Marylanders, about 1 in 10 taxpayers in the state, or 280,000 people, will see their total tax bill rise this year.
In all, Schaufele said more than a quarter of Maryland taxpayers — about 28 percent — are likely to pay more state taxes when they file their return for 2018, due April 15. The higher payments will result in a windfall for the state budget of about $400 million.
And it’s possible many more Maryland taxpayers could end up with tax hikes — potentially as many as 900,000 — if those residents don't properly navigate the new tax code for maximum benefit while filing their returns, Schaufele said. He estimates the people negatively impacted by the tax changes will come from nearly every income bracket, but the hardest hit group will be taxpayers earning $25,000 to $50,000.
Schaufele said he’ll know more as more people file their returns.
Complicating matters is that in response to the tax overhaul, some employees and employers adjusted the amounts withheld from paychecks to account for changes under the new tax law. That means they got a little more in their take-home pay last year, but it’s resulting in a smaller-than-expected refund now. The average federal tax return is down 8.7 percent, according to the Internal Revenue Service.
Steve Wions, a Baltimore-area Jackson Hewitt franchise owner with 12 offices, said most Marylanders are seeing lower refunds — not necessarily higher taxes. “It’s just that they received that money throughout the year,” he said.
Nevertheless, as they do their taxes, some Marylanders are learning they're among the roughly 10 percent who have to pay more. Some report having to cancel family vacations. Others say they’re struggling to make medical payments. Some are just ticked off.
That includes people like Michael McDonough, 80, of Catonsville, who received a federal tax cut of about 10 percent — but had his gains wiped out by a corresponding increase in state taxes of more than 20 percent.
Study: 31 percent of Marylanders would pay more under Trump tax plan
“I’m mad as hell and I can’t take it anymore,” said McDonough, a retired account manager who traveled to Annapolis this week to ring alarm bells. “It’s unconscionable that nobody on either side of the aisle is doing anything about it.”
About 35 angry taxpayers showed up at the State House last week to try to raise awareness about the issue and pressure the General Assembly to pass a bill aimed at fixing the problem. The legislation, sponsored by Del. William J. Wivell, a Washington County Republican, would allow individuals to itemize deductions for state income tax purposes even if they don’t also itemize on their federal return — a change in the state tax code that would result in Marylanders paying about $155 million a year less in taxes.
“How many of you are in favor of tax hike on middle-class taxpayers?” Paul Schwartz, the legislative chair of the Maryland chapter of the National Association of Retired Federal Employees, asked lawmakers at a bill hearing in the House Ways and Means committee.
Of the windfall to Maryland’s tax coffers, Schwartz said, “Where did this money come from? This is money that came from the impact of the federal tax plan on blue-state taxpayers like in Maryland. It is our money and we want it back.”
At issue is the impact on Maryland of the federal Tax Cuts and Jobs Act of 2017, which made significant changes to federal law — taxing income at lower rates by altering the tax brackets; expanding the child tax credit; and roughly doubling the value of the standard deduction.
Big winners on the tax plan, which provided tax cuts for most Americans, included corporations and the wealthy. The bill negatively impacted some Maryland taxpayers, including those who typically have itemized deductions on their tax returns. Under the new federal law, it’s now advantageous for many people to take the standard deduction on their federal return. But under current state law, only taxpayers who itemize for federal income tax purposes can itemize on their state income tax return.
Taxpayers in Maryland, a high-tax state, also were hurt by the bill’s provision that capped deductions for state and local taxes on federal returns at $10,000. There had been no limit under the previous tax law.
“Your income does not have to be super high before you start being limited by that,” said Susan Keller, a principal in the tax department with Ellin & Tucker who specializes in high net worth clients.
After Congress passed the legislation, Governor Hogan, House Speaker Michael Busch and Senate President Thomas V. Mike Miller all said they’d try to shield Marylanders from paying more in state taxes. And, early in the 2018 legislative session, both chambers in Annapolis unanimously passed a bill to ensure that Marylanders would still be able to claim their personal exemptions. That legislation benefited about 92 percent of Maryland taxpayers — and stopped what would have amounted to a $1.2 billion hike in state and local taxes.
Gov. Larry Hogan says he will submit legislation to protect Maryland taxpayers from federal overhaul
But instead of protecting every taxpayer, Democratic legislators crafted a plan that — with Hogan’s blessing — kept what they knew would be at least $200 million in higher state taxes resulting from the federal law. Lawmakers decided it was necessary to keep the money to help pay for increases in state aid to local school systems as Maryland moves to implement the recommendations of the Kirwan Commission, which is tasked with crafting a plan to improve pre-K to 12 education across the state.
Lawmakers were also concerned with possible looming deficits for the state. The Department of Legislative Services projects a structural deficit of about $900 million by fiscal year 2021.
Hogan initially attempted to address the tricky issue of deductions that were eliminated at the federal level by seeking to “decouple” Maryland’s tax code from the federal law and preserve a multitude of deductions that benefit Maryland taxpayers.
But the bill quickly ran into problems in the Senate, after the Comptroller’s Office predicted the complex changes would cause Maryland to lose hundreds of millions of tax dollars it was already collecting. A Senate committee decided to scrap Hogan’s bill and, instead, approved two bipartisan tax cut bills: one that increased the standard deduction by $500 for individuals and $1,000 for married couples, which provided a small tax cut but not enough to make all taxpayers whole; and a second that allowed some young, low-income working adults who don’t have dependents to benefit from the state Earned Income Tax Credit. Together, those bills provided an estimated tax cut to various taxpayers totaling $100 million.
Wivell said more needs to be done.“Our constituents are negatively impacted by inaction on this issue,” he said, adding that he’s hearing from “several who will have to adjust their lifestyle, including [to pay for] medical expenses.”
The Smithsburg lawmaker said he realizes his bill has “probably zero” chance of passing unless he can convince Democrats to join him. He said he’ll need taxpayers to reach out directly to their representatives for that to happen.
“I’m a Republican in a sea of Democrats” in the General Assembly, Wivell said. “If people don’t contact their legislators and complain about this, it won’t go anywhere. If people are up in arms, they should let them know.”
Representatives for Miller and Busch declined to comment for this article.
Amelia Chasse, a spokeswoman for Hogan, said “providing tax relief for our citizens is one of the governor's top priorities.” She noted he has proposed legislation this year that would result in about $500 million in tax reductions over five years if approved by the Assembly.
“The legislation that passed last year made some progress helping those impacted by the federal tax changes,” Chasse noted. The governor’s original proposal, she said, would have gone much farther.
Baltimore Sun reporter Lorraine Mirabella and The Associated Press contributed to this article.