Tax cut has its critics: Can state afford it? Legislators support governor's intentions but express caution

November 21, 1996|By Thomas W. Waldron and William F. Zorzi Jr. | Thomas W. Waldron and William F. Zorzi Jr.,SUN STAFF

As he described his ambitious agenda of tax cutting and spending increases this week, Gov. Parris N. Glendening was the picture of optimism.

Under his leadership, he said confidently, the state can absorb a major cut in the income tax, avoid layoffs, pay for a costly infusion of additional aid to Baltimore's schools, and find money for expensive initiatives such as new scholarships for middle-class Marylanders and pay raises for state police.

Others are not so sure.

While legislators say they would love to give Marylanders a break on their income taxes, many spent yesterday picking holes in the governor's plan and wrestling with a bottom-line question: Can the state afford it?

"There's not anyone on [the budget committee] who wouldn't like to see a tax reduction," said Sen. Barbara A. Hoffman, chairwoman of the Budget and Taxation Committee. "But there's not one who would buy a pig in a poke. I want some confidence that we will be able to pay for it."

Glendening has proposed cutting the state's personal income tax rate by 10 percent over three years, beginning in January 1998.

Legislators pointed out yesterday that the governor's plan relies heavily on a one-time revenue source, makes a rosy assumption about the Maryland economy and delays some potentially wrenching budget decisions until after the 1998 election.

For example, the governor plans to use $218 million in a reserve fund -- essentially the state's savings account -- to balance the budget in the next three years. That source, though, would likely be used up by the fourth year, when the tax cut would be fully in place.

Glendening also counts on a 4 percent to 5 percent annual growth rate in the state's economy during the next four years -- an assumption that legislators say may be too high.

And finally, Glendening's budget-balancing plan as outlined for reporters Tuesday stops after three years -- before the full effect of the phased-in tax cut would be seen in the state's annual budget.

In the third year, the tax cut would mean a loss of about $310 million in state revenue.

But by the fourth year, the tax cut translates into a loss of $450 million. The governor's plan accounts for only a small fraction of that $450 million, according to the legislature's Department of Fiscal Services.

"The key is in the out years," said Senate President Thomas V. Mike Miller Jr. "When you get to the fourth year, you're looking at $450 million less. That means some substantial and well-meaning programs will have to be eliminated."

The governor's plan calls for reducing the state's top personal income tax rate from 5 percent to 4.5 percent over three years. Once the cut takes full effect in 2000, an average Maryland family of four with an adjusted gross income of $50,000 would save $167 in taxes, administration officials said.

In all, the governor's tax cut plan would require the state to make some $700 million in unspecified budget cuts over the next four years, according to the legislature's fiscal analysis.

"Obviously there's a little bit of smoke and mirrors at this point," William S. Ratchford II, the legislature's chief budget analyst, said of the governor's proposal.

But Glendening said the spending cuts would be relatively easy in a state general fund budget that is expected to reach about $7.8 billion next year. The governor this week made a point of calling Cardinal William H. Keeler and sent aides to reassure social-service advocates that programs for the poor would not suffer because of the lost revenue.

State budget Secretary Frederick W. Puddester acknowledged that the administration's budget projections omitted the fourth year, but said it would have been difficult, in any case, to predict how the state could trim its budget so far into the future.

"At that point, we are fairly far out there on the forecast, and to say where we might find money four years from now is just speculation," Puddester said.

In the first three years, the tax plan counts heavily on large savings in the state's expensive Medicaid program for the poor and disabled, thanks to a shifting of patients into managed care.

While the legislature's fiscal analysts don't dispute the governor's projected savings in Medicaid, some lawmakers say they worry that the savings will not materialize as projected.

"Those savings are not going to be as easy as they say," said Del. Robert H. Kittleman, the Republican leader in the House of Delegates. "It's going to take a while to implement that program."

Perhaps the loudest criticisms of Glendening's plan were directed at his proposal to double the state excise tax on cigarettes -- from 36 cents a pack to 72 cents.

"If you're going to cut taxes, tell us where you're going to cut, but don't raise them somewhere else," said Senate President Miller, who represents an area in Southern Maryland that has many tobacco farms.

And several legislators, including House Speaker Casper R. Taylor Jr., criticized the governor for using a declining revenue source -- the tobacco tax -- to help pay for a permanent cut in income taxes.

Glendening, in his remarks Tuesday, said he was raising the cigarette tax in part to balance the budget, but more importantly to discourage smoking. If he is successful at reducing the bTC number of Marylanders who smoke, then the revenue from the cigarette tax would go down.

Despite the many criticisms, some legislators predicted that the General Assembly could work with Glendening's proposal.

"He's framed the debate in the right way," said Del. James C. Rosapepe, a Prince George's County Democrat and a legislative leader on tax issues. "It's a good proposal, but it can be improved, and it now puts the burden on us in the legislature to do that."

Pub Date: 11/21/96

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