Maryland's Fiscal Problems Will Bite Business

By Jim Pettit

Maryland is caught in the throes of shrinking tax revenues, unaffordable spending and too little – too late spending cuts, all of which is papered over with federal stimulus dollars and fund transfers which lead to a structural deficit as far as the eye can see.

The Maryland budget has grown from $29 billion in fiscal year 2007 to $32.3 billion in fiscal year 2010, according to the non-partisan Department of Legislative Services. Yet, the Administration claims to have reduced spending by $4.6 billion since taking office. How can this be? The answer is numerous accounting gimmicks. These gimmicks will lead to a post-election year tax increase that restrains Maryland businesses during what will likely be a feeble economic recovery.

The Administration selectively counts "cuts" without regards to the state's entire budget. The $13.8 billion General Fund, or operating budget, is supported mostly by sales and income taxes. The remaining budget components are supported by bonds, real estate and motor vehicle taxes, tolls, other fees and federal funds. Regardless of the differences between the operating budget and other various accounts, state spending is funded through taxes and fees on individuals and businesses.

Federal stimulus funds, intended to build infrastructure and create jobs, are a prime contributor to claims of exaggerated budget reductions. Maryland is expected to receive $4.1 billion in stimulus funds, and $2.3 billion will support existing budgetary commitments, according to DLS. Thanks to federal funds, in fiscal year 2010 General Fund appropriations decrease by $516.8 million, or 3.6%, below fiscal 2009. The Administration counts this as a cut and at first glance it would appear to be one.

However, Legislative Services characterizes the year-over-year change as "misleading" because the half billion is replaced by federal stimulus dollars. Stimulus funds support Medicaid, education, and discretionary state spending. The Medicaid caseload has expanded to cover 36,000 childless adults, so the temporary stimulus is supporting a permanent program expansion. Stimulus funds are used in the place of general funds to sustain state funding through fiscal year 2011. When the funds are no longer available, policy makers will need to either raise taxes or reduce spending.

Another contributing factor of cuts not really being cuts is fund transfers. When one account is reduced, it is counted as a cut, even if money from another account replenishes it at an equal amount. Each year during this Administration some $1 billion in fund transfers take place. An example of this maneuver in FY '10 involves the Department of Natural Resources' Program Open Space where bonds are now issued for land purchases and the unused balance is transferred to the General Fund. The Administration claims a budget reduction of $172.3 million, but puts that same amount back into the General Fund, most of which is with borrowed money.

Further aggravating Maryland's fiscal condition, the General Assembly enacts new programs, known as spending mandates, without a plan to pay for them. An example of mandated spending is the Thornton education aid redistribution formula which costs $1.3 billion annually. And there are entitlements such as Medicaid. According to DLS, 66% of the FY '09 General Fund appropriations is devoured by mandates and entitlements.

Given reliance on the stimulus, fund transfers, mandated and entitlement spending, it's no wonder there is a projected deficit hovering between $2 billion and $2.3 billion until 2015. The bottom line is that spending has grown and taxes will have to be raised yet again absent real budget reductions. Should that be the case, Maryland will be embedded with tax and spend states like California and New Jersey that shrink their tax base by stifling economic activity and forcing employers and individuals to move to more competitive states.

One interest group is clamoring for more taxes to advance their agenda. The Maryland Budget and Tax Policy Institute, which advocates for government spending, suggests up to $1.7 billion in new annual taxes. These would include continuing the existing .75 percent additional tax on income over $1 million, enacting "combined reporting" of corporate taxes to widen the Maryland tax base to businesses with out of state operations, and increasing alcoholic beverage and fuel tax rates. The organization also believes that Maryland should add consumer services to the sales tax.

The new state tax code in 2007 in the form of higher income, sales, corporate and other taxes isn't enough to support the runaway budget. Revenues have actually declined $3.2 billion since 2007, while the taxes were estimated to generate $1.4 billion in new revenues. From 2007 to 2008, there was a 30% drop in the number of tax filers with incomes of $1 million or more, who were hit with an added tax surcharge in 2007, according to the Comptroller. Raising taxes during a recession has the opposite effect - revenues to the state decline.

Maryland businesses can help the Administration and the General Assembly understand that there is an alternative to ever-increasing taxes. John F. Kennedy and Ronald Reagan lowered taxes to stave off recession. When Maryland's budget problems are papered over with so-called reductions that aren't reductions, it will only lead to more taxes and fees. Forbes magazine ranks Maryland 42nd in business costs while Virginia is ranked number one overall. Businesses need to remind politicians of the implications of poor fiscal management. After the 2010 elections it will be too late.