Glendening's income-tax cut 10 percent: Goal is better business climate, but what happens when economy slumps?

November 20, 1996

GOV. PARRIS N. GLENDENING's plan for cutting the state's high income tax rate should be applauded by members of the business community who have vociferously demanded just such reduction. But whether Maryland can afford the full 10 percent cut phased in over three years isn't at all certain, especially since the nation's long economic expansion won't last forever.

Paying for an income-tax reduction has always been the sticking point. Most officials agree that a lower tax rate would help boost business development and send a strong, positive signal to corporate executives. The governor's economic advisers estimate that lowering the state's 5 percent income-tax rate to 4.5 percent would spur the creation of 5,000 new jobs annually and give direct, immediate bottom-line help to Maryland's small businesses.

James T. Brady, the governor's business development secretary, pushed hard for such a tax cut. By doubling the state's tobacco tax, the governor claims to have found enough ** money to finance an income-tax cut. Still, there are troubling, unanswered questions about the long-term ramifications.

Much of the money the governor wants to use to lower the tax rate comes from one-time savings. That's fine over the next three years, but what happens in Year Four when this tax cut fully kicks in? All the one-time savings will be gone, leaving a yawning budget gap.

The governor's plan takes a decidedly sunny view of the economic future. It assumes the state economy will accelerate slightly, and there won't be any national recession. But what if there is? Demand for government assistance (welfare, unemployment benefits, Medicaid) would rise; less revenue would be generated through taxes, and yet hundreds of millions would have to be found for that tax cut.

All along, Mr. Glendening has taken an appropriately cautious view on lowering taxes. Turning to the tobacco tax makes considerable sense, given the potential health benefits that could flow from raising the state levy on this dangerous habit. But the legislature's budget adviser says the governor's plan comes up $262 million short in its arithmetic and that the fourth-year cost of the fully phased-in tax cut -- $450 million -- is never accounted for.

Expect legislators to look skeptically at Mr. Glendening's calculations and put their own imprint on a tax reduction bill. Above all, they must make sure the state will have the money to pay for a tax cut well into the next decade.

Pub Date: 11/20/96

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