Maryland's Deficit of Easy Budget Answers

April 6, 2004

By Steve Hill

Maryland could be facing a fiscal train wreck soon, but it's not the one you've heard so much about in recent weeks. Some residents see the state's inability to balance its budget as a clash of slots vs. taxes, and Republicans vs. Democrats. But what is at stake is much more serious than who has the upper hand in Annapolis. It is, quite simply, whether the two sides will go for a quick fix that endangers Maryland's long-term ability to provide essential services.

For those of you who are returning from a long safari, some background: Maryland, like neighboring Virginia and virtually every other state, has a huge budget problem. For the coming fiscal year, Maryland expects to bring in about $1 billion less than it will cost to provide the current level of services and spending mandated by law. Because costs are expected to grow faster than revenues, the shortfall will approach $2 billion -- or $1 for every $7 in state spending -- within four years.

Robert L. Ehrlich, the state's first Republican governor since Spiro T. Agnew, has a one-word response to Maryland's budget woes: Slots. His ambitious plan to expand gambling in Maryland, passed by the Senate, would bring 15,500 slot machines to Maryland at six locations. However, it would provide no revenue to address the $1 billion shortfall in each of the next two years. After that, this magical, pain-free "solution" would provide roughly a third of the revenue needed to maintain services at the current level and fund mandated increases in education spending.

Ehrlich told House members in March that he was willing to cut hundreds of millions of dollars out of the budget next year. With the education budget off-limits, that leaves health care, higher education, public safety and aid to local governments to absorb most of the cuts.

It is not clear how that could be achieved without gutting critical government services. A couple of examples:

Like every other state, Maryland has a two-fold problem: a growing number of people without health insurance and escalating costs for Medicaid. Addressing one seems to exacerbate the other. Maryland has responded to the crisis of health care by restricting eligibility levels and cutting some services. Cuts made last year to save money resulted in 4,500 fewer kids being insured. In a sure sign of desperation, the state made this cut even though the federal government wuld have paid two-thirds of the cost.

We all benefit from public safety expenditures and assume that government is taking steps to reduce crime. Most of us don't know that our parole and probation officers have an average caseload of 100 offenders per officer. The vast majority of those offenders need "intensive" supervision, a classification that requires a caseload of no more than 30 offenders per officer.

Without money to hire enough officers, Maryland has simply reclassified many offenders into lower risk levels. It makes the caseload math work, but parole and probation officers can't provide the necessary supervision and monitoring.

The House, under the leadership of Speaker Michael E. Busch, a Democrat, has taken an entirely different approach--one that would forestall additional cuts in these and other critical services. Late last month, delegates passed a comprehensive tax plan that would increase the state's sales tax by a penny (or 20 percent, depending on your perspective), raise income taxes for those with very high incomes, increase a tax credit for some of the working poor and lower the state's property tax.

The House plan would raise approximately $700 million per year, about a third of which would be dedicated to road, bridge and mass transit projects. The rest would pay for education and other services. The new taxes, combined with other spending cuts and fee increases, would wipe out the revenue shortfall for the next two years. And the House plan would avoid further dramatic cuts in areas such as health care and public safety, which are already woefully underfunded. But, like the governor's plan, the House proposal is a partial solution. It would leave the state with a shortfall of $1 billion within four years.

Maryland could get through this year without major increases in revenues or cuts beyond those already made. Ehrlich has proposed balancing this year' s budget by emptying the state's savings accounts and using the same kind of gimmickry practiced in the latter years of former governor Parris N. Glendening's administration.

But after five years of spending more money than it takes in, the state will run out of easy measures next year. There is no change left in the ashtray, and the state has already checked between the couch cushions.

As a longtime advocate for the interests of low- and moderate-income people, I prefer the House plan, which at least acknowledges a truth that few are willing to speak out loud: Maryland needs to raise taxes. But the stalemate in Annapolis threatens to obscure a fundamental problem that should concern Marylanders far more than which solution -- or hastily negotiated compromise -- emerges as the winner before the General Assembly's session ends on April 12: We need to rethink our broader notions about the state's tax structure -- and probably change that structure significantly.

Comprehensive tax reform will take time. The state could start by picking some of the low-hanging fruit -- for example, taxes on alcoholic beverages that haven't been raised in decades. Maryland's tax rate on liquor has not been increased since the 1950s; the tax rate on beer has been fixed since 1972, and amounts to less than a penny a bottle.

But our lawmakers should also take on tougher issues -- an unlikely prospect under the Ehrlich administration, admittedly. The state's corporate income tax, for instance, has so many holes in it that 70 percent of the state's 130 largest corporations didn't pay it at all in 2002, the most recent year for which data are available.

Which brings me to the state's two biggest revenue sources: income and sales taxes. Maryland's income tax hasn't been reformed since it was created and is woefully out-of-date. The top tax rate kicks in at a mere $3,000 of taxable income. Sean Dobson, a lobbyist for Progressive Maryland, a grass-roots organization, has pointed out the absurdity of this low threshold by repeating that "Dan Snyder and his chauffeur both pay the same income tax rate."

Maryland's sales tax, like that in most other states, is also a relic of the past and applies only to the purchase of goods, not services. For example, buy a lawn mower, pay the sales tax; pay someone to mow your lawn, don't pay the sales tax. Of course the guy mowing your lawn isn't really the problem. The growth in consumer spending is on professional services, such as accounting and health care.

The problem with taxing goods and not taxing services is that we spend less and less of our money on goods. Over the past two decades, consumers spent 20 percent less of their money on goods and 20 percent more on services. Under the current structure, sales tax revenue does not reflect Maryland's economic growth and finances fewer services.

Maryland's revenue structure is essentially the same as it was in the 1960s. Maryland is one of the only states where revenues don't keep up with economic growth and don't match the cost of providing public services. Talk of tax restructuring doesn't contribute to the current rush to the finish line over this year's budget. But unless we get comprehensive reforms soon, these fiscal showdowns will be repeated annually.

Note:

A shorter version of this article was published in the Washington Post Outlook Section on April 4, 2004.

Steve Hill is director of the Maryland Budget and Tax Policy Institute, a think tank that examines the state's fiscal policy.