When Congress passed the Tax Cuts and Jobs Act in December 2017, there was great uncertainty about how it would impact John Q. Taxpayer. The nearly 1,100-page law was rammed through the House and Senate, and the breadth of changes to the federal tax code was complex even for fiscal experts to interpret.
In Maryland, our nationally recognized Bureau of Revenue Estimates analyzed, using the best data available, the impact of the tax reform on average Maryland taxpayers and the state’s revenues. In the short term, most taxpayers would pay less federal income tax but have a higher state tax burden.
At the time, I stated it was unclear whether the initial period of economic growth and tax benefits were temporary and would vanish in the long-term.
The jury is still out, but my office has been fielding calls and emails from taxpayers seeing changes in their typical returns – those who are used to big refunds seeing either a much smaller amount or even owing the state money. Much of that depends on the individual taxpayer, whether they choose to take the standard deduction or itemize, and many other factors.
That doesn’t mean federal tax reform can be declared a success or a failure yet; it just means we’re in a period of adaptation and apprehension.
One thing we do know – and that we expected – is that uncertainty remains the driving factor behind changed spending habits.
To that end, the state’s Board of Revenue Estimates, on which I sit along with Treasurer Nancy Kopp and Budget Secretary David Brinkley, voted in March to decrease the state’s revenue projection for Fiscal Year 2019 by $138 million and to decrease the projection for Fiscal Year 2020 by $130.5 million.
For many working families and small businesses, this year’s tax returns are the first measurement of how the Tax Cuts and Jobs Act directly affected them. Those with higher tax liabilities and smaller refunds are having to tighten their belts, which means less discretionary spending that drives the economy.
In addition, the decrease in non-wage income affected by the market crash in December, as well as the negative economic impact of the 35-day federal government shutdown spanning the new year, led the board to significantly write down revenue projections.
It only highlights what I and many fiscal experts have been saying for months: We can expect and must prepare for an economic downturn in the next several years.
We need to continue squirreling away money in our Rainy Day Fund to prevent the types of drastic budget cuts, furloughs and tax increases that we witnessed during the Great Recession.
And despite the many needs we have as a state, we must exercise caution with respect to spending and fiscal policy decisions.
Those of us entrusted with fiduciary responsibilities in state government must show our constituents that we learned our lesson from the events that transpired over a decade ago, and that we are better prepared to weather a potential future storm.
As Maryland faces continued uncertainty during this highly volatile economic and political climate, we must prioritize creating a stable, predictable fiscal climate for working families and small businesses.