A Baltimore-based think tank has an idea for how lawmakers can fund the ambitious multi-billion-dollar-annual recommendations of the Kirwan Commission: overhaul the state’s tax system.

The liberal Maryland Center on Economic Policy published a report on Friday outlining ways to change the state’s income tax, corporate tax and sales tax systems in a way that would generate $1.9 billion annually by 2030, while limiting the damage to the pocketbooks of low- and middle-income Marylanders.

The Kirwan Commission – or, more formally, the Commission on Innovation and Excellence in Education – will release an interim report to the General Assembly this week that outlines a plan to remake the state’s public education system over the next decade, with sweeping reforms expected to cost about $3.8 billion annually once fully implemented. The state’s share, based on current cost-sharing agreements, would be about half that amount, with the rest falling to the counties.

As the commission wrapped up its policy work on Friday afternoon, Center on Economic Policy Executive Director Executive Director Benjamin Orr said his organization wanted to force a conversation about tax reform as lawmakers begin to look at funding.

“Marylanders are facing an important choice. We can continue to spend our resources on ineffective tax breaks that benefit limited special interests and don’t help our economy, or we can fix our schools and support thriving communities across the state,” Orr said.

The center broke down its funding recommendations into three categories:

Changes to the tax code, primarily affecting businesses and wealthy residents, that would generate $560 million;

Changing the state sales tax to include a tax on services and online sales, which would generate $460 million, a figure partially offset by increased tax credits for lower-income families; and

Restructuring the state’s income tax to lower rates for low- and middle-income residents while raising rates at higher tax brackets. With other changes to state tax policy like increasing the rate of taxes on capital gains, income tax changes could generate $920 million, the organization said.

Maryland’s current tax system “creates a revenue system that doesn’t keep up with Marylanders’ needs, that further concentrates wealth and power in a few hands, and does nothing to reduce the economic barriers that hold back many Marylanders, especially people of color,” MDCEP Research Analyst Christopher Meyer, who wrote the report, said Friday.

The proposed reforms would have only minor effects on most low- and middle-income Marylanders, Meyer said. For the 60 percent of tax filers whose income is less than $80,000, the proposals would mean an additional tax responsibility of about $5 a month. The 95 percent of households with income under $280,000 a year would bear the burden of less than half of the total revenue increase, he said.

Increased revenue is needed not only to fund the Kirwan recommendations, but also to make up for lost ground after cuts to education during the Great Recession, Orr said.

“After a decade of eroding funding since the Great Recession, we need to invest in proven strategies like those outlined by the Kirwan Commission,” he said.

The report notes that the state’s last major overhaul of the public education system in 2002 never met its full potential because of a series of cuts required by the economic downturn.

Before the Thornton Commission’s recommendations were implemented back then, only four school districts in the state were fully funded, the report says. By 2008, 23 systems had the funding that was identified as adequate under the Bridge to Excellence Law. But the state’s education funding formulas were adjusted to provide lower payments starting in 2009, and by 2015, only six districts were still fully funded, the report states.

Although annual inflation increases resumed after six years of cuts, full funding for school systems would have required an “extra-large catch-up adjustment” that’s never been made.

“This decision made the cuts effectively permanent,” the report states. “Underfunding is now baked into our school funding formula, even in years when there are no additional cuts.”

A Kirwan Commission-based workgroup is expected to meet over the next year to provide recommendations on how the funding formulas should be changed, an issue the legislature would take up in 2020.

The legislative push

Orr was asked Friday whether there was an appetite in Annapolis to adopt the center’s recommendations, especially with a cadre of freshmen lawmakers and Republican Gov. Lawrence J. Hogan Jr.’s promises to avoid tax increases.

“I think that there is a strong appetite for increased investment in education. And if we’re serious about that, then this plan or something like this is going to be necessary,” Orr said. “…We firmly believe that this is going to be a conversation.”

Orr said some pieces of legislation have already been drafted, including bills that would require combined corporate tax reporting and an expansion of the Earned Income Tax Credit. Center on Economic Policy employees are also having conversations with legislative leadership, Kirwan Commission members and individual lawmakers to drum up support, he said.

Ultimately, lawmakers will have a choice, Orr said, “slashing funding for things like health care and transportation … Or you consider an approach as we’ve outlined here that pays for those investments in a way that does not increase need in other areas.”

Lawmakers offered mixed reactions to the report on Friday.

“I don’t see any appetite for raising taxes, I’ll tell you that,” Sen. Nancy J. King, a Kirwan commission member and chair of the Senate Budget & Taxation Committee. “I love all the stuff that’s in Kirwan. I just don’t know how we’re going to pay for it all. It’s going to probably be a slower track than we thought it was going to be.”

Her vice-chair, Sen. William C. Ferguson IV (D-Baltimore City), who just joined the commission, said Friday that nothing is off the table when it comes to discussions on funding the commission’s recommendations.

“Now is the time, before the next recession, to really start having a conversation about tax reform in the state of Maryland,” Ferguson said. “…I think there are a number of places in our tax code that really need some deeper attention. It comes down to a fundamental choice about priorities. I would guess that most Marylanders would say that public education is the top priority for the state to prepare for the future. I think with tax reform, we can make that a reality.”

Del Maggie L. McIntosh (D-Baltimore City), a commission member and chair of the House Appropriations Committee, said the conversations are going to have to start soon.

“Either this year or immediately next year, certainly over the interim,” McIntosh said. “Because from my perspective, I look at all the different places we could get some money to fund Kirwan, the bottom line is, I believe, we will have to change tax laws.”

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