Gov. Martin O’Malley today proposed a $35.8 billion operating budget for the coming fiscal year that would shift a portion of the costs for teacher pensions to local governments, raise the income tax bills of Maryland’s high earners, change the way the state’s so-called “flush tax” to pay for Chesapeake Bay cleanup is levied and apply the sales tax to Internet purchases.

O’Malley (D) said he is still working on a proposal to potentially raise Maryland’s 23.5-cent gasoline tax to pay for transportation projects, adding that he will work with state legislators in coming weeks “to search for consensus” on hiking the tax. Lawmakers have said they expect the governor to seek an increase in the tax.

The governor also proposed a $3.6 billion capital budget that he said will spur job creation through infrastructure and construction projects, including a proposed $373 million for school construction.

O’Malley said the budget seeks to bolster Maryland’s recovery from the recession and continue to reduce the state’s roughly $1 billion structural deficit while not sacrificing funding for public education, health and safety. The plan represents a 3 percent increase over the current year’s operating budget.

It would create $311 million in new revenue, in part through income tax adjustments on high earners, which would bring in $182 million, and application of the sales tax to Internet transactions, which would net $21 million.

O’Malley’s proposal would cap income tax deductions and phase out or eliminate income tax exemptions for the 20 percent of Marylanders who earn more than $100,000 annually.

Deductions would be capped at 90 percent for those who earn more than $100,000 and 80 percent for those who earn $200,000. Exemptions would be reduced from $2,400 to $1,200 annually per person for singles making $100,000-$125,000 and couples who earn $150,000-$175,000. The exemptions would be eliminated for singles who make more than $125,000 and families that earn more than $175,000.

The changes would result in a family of four that earns $150,000 paying an additional $191 in income tax, O’Malley said. He added that 80 percent of Marylanders would see no hike in their income tax.

“I don’t like asking for this,” the governor said of the increase, adding that he nonetheless considered it equitable.

The budget also proposes a method by which local governments would begin to share the cost of paying public school teacher pensions, which have more than doubled in the past five years, to more than $900 million annually. The state currently pays 100 percent of the costs, while local jurisdictions shoulder the entire cost of teachers’ Social Security, which is lower.

Under O’Malley’s plan the state and jurisdictions each would pay half of the total cost of pensions and Social Security, a move that would shift $239 million of the burden onto local governments. The budget includes $244 million in revenue to soften that blow, O’Malley said, including $111 million that would come from hiking the income tax of high-end earners.

O’Malley said the shift is a fair one given that local governments hire teachers and set their salaries, which affects pensions.

County executives have vowed to fight the pension shift, saying that the added burden could prove financially crippling.

“It’s a difficult pill to swallow, and I’m not swallowing it,” Montgomery County Executive Isiah Leggett (D) said after emerging from a Tuesday meeting in which O’Malley briefed county officials on his proposal.

The governor’s budget also foresees doubling -- from $55 million to roughly $110 million -- the annual revenue that comes from the flat-rate flush tax on water and sewer bills, which pays for the upgrade of sewage treatments plants to make them more efficient at filtering pollutants, said Robert M. Summers, the secretary of the Department of the Environment.

O’Malley is proposing to adjust the rate so that higher consumers of water would pay more than those who use less. The rate still is being worked out and will come in the form of legislation, Summers said.

The change would result in a doubling of the fee -- which is now $30 annually -- for the average user in the coming year, he added.

Senate Minority Leader E.J. Pipkin called the governor’s budget a “Washington agenda on steroids,” adding that he believes it is designed to raise O’Malley’s national profile.

“It appears that there is no tax proposal that the governor will not do, and at some point the working families of this state are going to say 'enough' and that's what they're saying now, but it keeps coming,” he said.

Reporter Jeff Newman contributed to this report

skelly@gazette.net