Looking at the Bright Side of Doomsday

PETER JAY

April 12, 1992|By PETER A. JAY

HAVRE DE GRACE — Havre de Grace. -- I guess this isn't doomsday. The sun is still shining. The birds are singing. The fire and brimstone must have been delayed.

We're supposed to say thanks to the groggy members of the Maryland legislature. But they would have deserved a lot more credit if a few more of them hadn't gone along to get along. When the General Assembly ended its regular session last Monday without approving any of the substantial tax increases Governor Schaefer thought Marylanders deserved, it was hard to tell whether this inaction was attributable to courage or to terror. As is true of most human affairs, probably both were involved.

But in any case the short-lived result -- a "doomsday" budget to those who view major annual increases in state spending as the natural order of things -- was unexpectedly constructive, and much less painful than portrayed. And even if doomsday never arrived, legislators and their constituents have learned some useful lessons.

Without any new taxes, the state would certainly have had less to spend in the next fiscal year than otherwise. But it still expected to spend more next year than in the current year.

Without any new taxes, it anticipated giving its subdivisions some $95 million less than it would have with them. But even without those taxes, next year's state-aid package would still have been larger than this year's. This is Armageddon?

As the regular session of the legislature droned to a close, the major tussle was between the Senate leadership's plan to raise sales taxes and the House leadership's plan to raise income taxes. It's really hard to say which was worse. An increase in either pushes Maryland from being a high-tax state to a super-high-tax state, a clear prescription for choking off economic growth.

Each plan represented the traditional Maryland approach of rushing back to the tax cow every time cash gets a little low to see if there wasn't one more teat to squeeze. Nobody paid much attention as the cow started to lose weight, but this year the old girl decided to kick.

The House of Delegates tax proposal, with the fingerprints of the teachers unions all over it, was for a new top income tax bracket of 6 percent on income over $100,000. (Actually, with a 50 percent piggyback for Baltimore City and the counties on top of that, it was 9 percent -- and the House wanted to raise the piggyback to 60 percent.)

There are about 75,000 taxpayers in the state making that kind of money, and many of them live in Montgomery County. Some of these have telephones -- and know how to use them. Surprise! The pro-tax Montgomery senator, Larry Levitan, suddenly decided that perhaps the sales tax approach would be better. It would further depress retail sales, of course, but that's a secondary concern in Montgomery.

Governor Schaefer has insisted that the no-tax-increase budget he calls "doomsday" would have devastated Maryland. And he has made sure that many of the cuts he has been forced to impose thus far have been those calculated to anger the most people.

But it's still possible to reduce state spending substantially without firing the police or closing the schools. Pension reform, one obvious area, hardly got a glance in the recent session; legislators who have been around for a decade remembered the blood that was shed to impose a semblance of order on an out-of-control program in the early 1980s.

The most readily correctable problem with the pension program, which covers about 88,000 state and local government employees, is one of actuarial assumptions. The state currently assumes that employee wages will increase 7 percent a year, and that pension-fund investments will return 7.5 percent. Both numbers are irrational, and the spread between them is dangerously small.

By holding wage increases to 6 percent, and estimating investment income at 8.5 percent, about $50 million a year would be saved. Add another 1 percent to that spread (assuming 5.5 percent wage increases and 9 percent investment income, say) would save another $50 million. That's just arithmetic, politically volatile or not. And there's no need to reduce anyone's pension ** benefits.

The investment income of the pension fund over the last five years, by the way, has averaged 11.6 percent. In 1983, during the stock market boom, it was 40 percent. An assumption of 9 percent would hardly be risky.

Major private companies make sure their pension plans have at least a 2 percent spread between estimated wage increases (which determine contributions) and estimated investment income.

McCormick, to take one local example, has a 4 percent spread -- estimated wage increases of 6 percent and estimated investment earnings of 10 percent. A similar spread for the Maryland plan would save more than $150 million a year.

Is that all too complicated for our legislators? You know, I don't think so.

A lot of us have underestimated these ladies and gentlemen. They've learned during this session, and they're going to learn more. Eventually, we may get away from the kind of thinking that equates a stable tax rate with doomsday. It would have been nice if this had been the year.

Peter Jay's column appears here each Sunday.

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