Dels. act on minimum wage hike

(Jan. 31, 2014) Lower shore legislators have pitched changes to an obscure part of the tax code – known as “subtraction modification” – as a means to alleviate the increasingly likely possibility of a minimum wage increase in Maryland.

State Sen. Jim Mathias and Delegate Norm Conway have cross-filed Senate Bill 0059 and House Bill 0397, respectively, both of which would create an income subtraction for the “add-back” tax benefit given to those employers with payroll taxes for tipped employees above the minimum wage.

“The goal is for the employers to enjoy the same tax treatment in Maryland as they do with the federal government,” Mathias said.

Similarly, Del. Mike McDermott is pushing House Bill 0075, which would create a similar subtraction for income from certain retirement investments.

“Basically, it would exempt that first $50,000 of retirement income from someone’s tax schedule,” McDermott said. “I think it would make us more competitive with some other sates around us that don’t have income tax or already exempt retirement income, so they’re more attractive to people in their later years.”

Both efforts attempt to alleviate what is perceived by some in Annapolis as the skyrocketing cost of investing or operating a business in Maryland, an issue only augmented by the continuing debate over a statewide minimum wage.

The mechanism being proposed to reduce costs for retirement investment and payroll is the subtraction modification, a method used by the Internal Revenue Service.

The IRS considers a number of forms of income to be tax-exempt. In a number of cases, if a tax credit or dedication is claimed for this income, the resulting savings must be declared as an “add-back,” meaning that the value of the tax savings must then be declared as gross income that may itself be taxable.

Because state taxes are based on federal adjusted gross income (AGI), this additional amount is also subject to Maryland taxes. Both initiatives would seek to subtract that value from Maryland taxable income.

The federal government gives employers of tipped employees a credit for any federal payroll taxes that they pay on tips in excess of minimum wage. Since employers have limited control over what tipped employees actually earn, any taxes on earnings over an average of $7.25 per hour are credited back to the employer.

If tipped employees collectively earned $100,000 over the minimum wage, for example, their employer would’ve likely paid a $7,650 “excess” in payroll tax given the combined 7.65 percent federal rate for Social Security and Medicare. If claiming this deduction, they would then have to pay income tax on the $7,650 when filing with the state.

According to a policy analysis note, allowing a subtraction of this income would save employers of tipped employees roughly $2.2 million per year.

“It’s that much less revenue on the state side, but it’s an incentive to businesses to hire more employees and make capital investments,” Mathias said.

It could also be a relief for businesses who are wary of the push in Annapolis to raise the minimum wage. Although Mathias does not support the move, Gov. Martin O’Malley has put it at the top of his legislative agenda, and has received widespread support in the Democratic-majority Senate.

“They are still considering with the bill that the minimum for tipped employees will go from 50 percent up to 70,” Mathias said. “I have tried to explain that this is killing our restaurants here, and for them to at least take [the tax subtraction] into consideration to help the restaurants out.”

Tipped workers currently must receive at least 50 percent of the minimum wage as hourly compensation, with the rest of their income in tips.

Raising that margin, along with an overall wage increase, could potentially double the base wage of tipped employees, although this additional earning would likely be consumed by increased taxes.

McDermott’s proposal would likely have a similar effect, putting more income into the hands of resort-area retirees who would be more likely to spend it on local amenities.

McDermott is also staunchly opposed to raising the minimum wage. The current $7.25 is set by the federal government, but Maryland could set it higher.

“If we’re not going to trust what the federal government does, then why would we go ahead and adopt an Annapolis standard?” he asked. “The last 25 years in Annapolis has been a lot about taking away local control.”

Instead, many Maryland Republicans are suggesting that individual counties set their own minimum wages in lieu of the state.

“We have counties, such as Montgomery and Prince George’s, who have already decided that they’re going to have a higher minimum wage, which is within their purview,” McDermott said.

However, he noted, Worcester County has the highest unemployment in the state at 14 percent for November 2013. It also has the lowest average weekly wage, $629, for the 2012 tax year. A higher minimum wage, McDermott said, will only force employers to cut jobs and raise prices to match increased costs, removing any benefit of the higher wage.

“This will not help,” he said. “We’ve raised the cost of business so high in this state that [employers] have to do anything to raise their bottom line.”

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