Maryland’s 6% sales tax is due for an expansion, top legislative leader says

A serious conversation about expanding Maryland’s 6% sales tax is not just financially prudent but also “morally responsible” because lawmakers have already approved billions in public education spending without a way to pay for it, a top Democratic leader said Monday.

The change — which, as introduced, would actually lower the tax to 5% while expanding it to additional goods and services — is promised to fail in the Maryland General Assembly session scheduled to end April 8.

But House Majority Leader David Moon said his plan to raise up to $3 billion through the sales tax change is intended to launch a debate on how lawmakers can address a ballooning budget deficit while also keeping its commitment to the Blueprint for Maryland’s Future.

Legislators approved the education plan in 2020 without a full funding mechanism, and the billions of dollars in annual costs are in question after funding runs out in three years.

“I was among those who was resistant to the concept of us voting for all that Blueprint spending, the public education investment, which is what it is, and then leaving town without also simultaneously voting in the way to pay for it,” Moon, who voted for the Blueprint, said in a House Ways and Means Committee hearing on his bill. “Now here we are. We split the votes up, so folks got to take the freebie and vote for the education spending and we are left to have the adult conversation about what to do next.”

Moon’s plan elicited fierce opposition from Republicans and a wide range of business owners who said everything from legal services to car washes would be newly subject to the sales tax. Educational and health services as well as religious and nonprofit organizations would continue to not be subject to the tax but everything else would be included unless otherwise exempted. That would mean new taxes on hair cuts, spas, veterinary services, financial services and much more, according to a legislative fiscal analysis.

Mike O’Halloran, a lobbyist in Maryland for the National Federation of Independent Business, was among many who told the committee the changes would severely impact small businesses and consumers.

“There is not a single aspect of Marylanders’ lives this tax hike wouldn’t touch. Things like cutting grass, cutting hair, even the clown sculpting balloon animals at the county fair, is getting hit by this,” O’Halloran said.

Importantly, opponents this year also include Senate President Bill Ferguson and Gov. Wes Moore, both Democrats who have said they do not want to consider broad-based tax hikes this year.

Their resistance means any changes to the sales tax — as well as a sweeping income and corporate tax hike known as the Fair Share for Maryland Act — are on track to come up short this session.

Still, House Democrats have taken a more aggressive approach. The state is facing a more-than $3 billion structural deficit within four years, a problem that worsened just last week with a $255 million lowering of expectations for revenue. Another $3.3 billion transportation shortfall is putting at risk upcoming infrastructure improvements across the state.

“We just have to have the tough discussions and figure it out quite frankly,” House Ways and Means Committee Chair Vanessa Atterbeary, a Howard County Democrat, said in the hearing Monday.

Moore, Ferguson and other Senate Democrats have not ruled out tax increases in future years.

The governor’s own top legislative advisor, former Democratic House Majority Leader Eric Luedtke, was the last prime sponsor of the sales tax plan that Moon introduced this year.

Luedtke’s bill in 2020 similarly featured a protracted, opposition-fueled hearing in Annapolis and then did not pass out of committee. In both that year and now, no senator has proposed a similar bill in their chamber, another sign of the legislation’s slim chances.

Moon, of Montgomery County, is in his first year as the leader of the House of Delegates’ supermajority of Democrats.

Fielding a litany of questions about services that could be taxed, Moon said he took the broadest possible approach to start but that he’s open to significant changes, including exemptions for vital services like housing construction or funeral costs.

“Should we pull ‘death taxes’ out of there? I don’t like the sound of that. So sure, throw that on the chopping block,” Moon said, responding to a question from Baltimore County Republican Del. Bob Long about the potential sales tax on funeral services. “Again, this is the conversation we need to have.”

One amendment Moon is proposing immediately would exempt business services where the customer is another business, a change that would cut the largest portion of the proposed new revenue but that could limit the downstream effects on consumers, he said. That would result in something of a “middle option” for revenue. An even lighter option, he said, would be an approach where lawmakers selectively add services that could be taxed rather than starting broadly and exempting others.

Those kinds of details will likely have to be sorted out in the coming years, if at all, as Democrats who control both chambers and the governor’s office work out how to solve the budget problems.

Moore’s $63.1 billion spending plan for the fiscal year beginning July 1 intends to balance the budget by cutting some programs, pulling from reserves and borrowing more. Senate leaders who had the first crack at amending that plan presented their version Friday with no major changes. They’re expected to pass it to the House this week and then negotiate a final product before the annual session ends next month.