Success Stories
Maryland: An Emphasis on Refundability

Maryland’s refundable EITC, enacted in 1998, is unique in that it complements a previously existing non-refundable EITC. The non-refundable credit can be characterized as a way to spread tax relief to low-income taxpayers as part of a larger tax cut plan.¹ Poorer families, however, would not owe income taxes even without the credit (due to other features of the income tax) so the existence of the non-refundable credit does not benefit those poorer families. By contrast, a refundable credit would benefit all working poor and near-poor families with children.

The effort to enact a refundable credit began in late 1996, when advocates from the Maryland Catholic Conference and the Homeless Persons Representation Project began discussing how to correct this lack of refundability. The existing non-refundable credit is set at 50 percent of the federal credit, higher than any other state EITC. As a result, the cost to the state treasury of making the full 50 percent credit refundable was judged to be prohibitively expensive. On the other hand, repealing the existing credit and replacing it with a smaller, refundable credit would result in a tax increase for many moderate-income taxpayers. The solution was to seek a smaller refundable credit equal to 15 percent or 20 percent of the federal credit that taxpayers could choose as an alternative to the larger non-refundable credit.

The EITC did not get much consideration in the 1997 legislative session. The legislature’s attention was focused on a proposal to reduce Maryland’s income tax rate by 10 percent. As proposed by Governor Parris Glendening, a Democrat, the tax cut would have largely benefitted upper-income taxpayers. It also was quite expensive and so was projected to require major cuts in public services. Many potential EITC supporters among human service advocates therefore concentrated their efforts on making the tax cut smaller and less weighted toward the top. These efforts were partially successful. As finally passed in spring 1997, the benefits of the tax cut were more equally divided among middle- and upper-income taxpayers than in the governor’s proposal, and revised revenue estimates showed that the tax cut would not require spending cuts as deep as had been anticipated. In the intense debate around the tax cut, however, the refundable EITC was set aside.

Following adjournment of the legislature, backers of the refundable EITC expanded their campaign. A formal coalition was formed, with members including the Maryland Committee for Children — a longtime participant in successful outreach partnerships to help low-income workers claim the federal EITC — plus Catholic Charities, the Maryland Food Committee, and a number of other organizations. The chairs of the Senate and House tax-writing committees, Senator Barbara A. Hoffman and Delegate Sheila Hixson, agreed to sponsor the bill. The state NAACP and members of the legislature’s Black Caucus and Women’s Caucus added their support. The coalition also secured support from major private corporations including two of the state’s largest employers, Baltimore Gas and Electric Company and Bell Atlantic. Fully half of the state’s Senators and one-fourth of members of the House of Delegates were cosponsors by the time the bill was filed early in the 1998 legislative session.

The advocacy efforts of the Earned Income Credit coalition were supported by several research reports by the newly-formed Maryland Budget and Tax Policy Institute. They released studies showing that income inequality in Maryland was on the rise and another, similar to the Kansas report, showing that most low-income children live in families where at least one parent works, but that parental income alone was not enough to make ends meet. Further, the Institute showed policymakers that low-income Marylanders pay a higher share of their income in state and local taxes than any other income and that families with income below poverty received no tax relief from the prior year's $550 million per year income tax cut. Both the state’s major newspaper, the Baltimore Sun as well as The Washington Post, endorsed the EITC proposal.

Opposition to the credit in 1998 came from the state’s comptroller, who expressed concern about complexity and the potential for fraud. But the fact that Maryland already had a non-refundable credit helped to mute those concerns, and one key legislator pointed out during a hearing that the EITC was less susceptible to fraud than other parts of the tax system.

The General Assembly passed the EITC bill toward the end of the legislative session, and the governor signed it. As in Kansas, the final boost for the credit came in the form of a higher than- expected revenue estimate, which enabled the state to enact a number of tax cuts. To moderate the fiscal cost of the credit, legislators chose to start the credit at 10 percent of the federal credit for tax years 1998 and 1999, rising to 12.5 percent for 2000 and to 15 percent for 2001 and thereafter. Legislators also agreed to language specifying that the credit should be phased in more rapidly if state revenue growth remained strong. In 2000, the state did accelerate the phase-in of the credit to 15 percent; the credit was further expanded in 2001, with phased-in expansion to 20 percent scheduled through 2003.

Montgomery County, Maryland also enacted a 15% refundable EITC in 1999. In order to provide the credit, the county initially contracted with the state comptroller’s office. Qualifying families were sent additional checks which were paid from county funds levied from income taxes. The state of Maryland subsequently passed legislation to allow inclusion of any county EITCs on the state’s tax form although no other county has taken advantage of this provision.

¹ A description of how the non-refundable Maryland credit came to be enacted in 1987, as well as case studies from New York and Wisconsin, may be found in the Center on Budget and Policy Priorities publication A Hand Up: How State Earned Income Credits Help Working Families Escape Poverty, 1996 edition