Budget anxiety on eve of vote

State's legislators unsure that revenue will cover expenses

April 01, 2001|By Howard Libit | Howard Libit,SUN STAFF

The softening national economy and slumping stock market may undermine revenue that Maryland lawmakers are counting on to pay for the ambitious spending plans they're set to approve this week.

Legislative leaders, fiscal analysts and independent economists suggest that the budget proposal for next year - as well as those for future years - may be too optimistic when it comes to predicting how much tax revenue the state will rake in, particularly from Marylanders' profits on stock sales, stock options and executive bonuses.

"This is the year to be very careful," says Anirban Basu, senior economist and director of applied research at RESI, an economic research center at Towson University. "The governor is proposing a very aggressive budget at a time he maybe shouldn't have."

But Gov. Parris N. Glendening and his budget officials insist that their budget plan for next year takes reasonable precautions, limiting new spending and keeping enough in emergency reserves to protect Maryland's basic services regardless of the economy and the stock market.

"If the president talks us into a recession, there will be pain and there's no way to avoid it," says Michael Morrill, a spokesman for Glendening. "We have done incredible things to minimize the impact of it."

The General Assembly is expected to finish work on Glendening's $21 billion budget and approve it by tomorrow night. It's likely to be about 9 percent larger than the current year's $19.5 billion budget.

Projects in jeopardy

But $130 million worth of construction projects has been delayed until the end of 2001 as a precaution against revenues falling below expectations, and legislators are warning that those projects are in jeopardy.

The projects include a new dental school at the University of Maryland, Baltimore and a new public policy institute at the University of Maryland, Baltimore County.

On Friday, the governor proposed adding another $30 million worth of projects to the list of those put on hold - pending the condition of the economy when the next set of revenue estimates comes out in December.

"I've told some of the colleges that they were better off getting their projects in bonds rather than current money, because at least we've guaranteed that we'll have the bonds," says Sen. Barbara A. Hoffman, a Baltimore Democrat and chairwoman of the Senate's Budget and Taxation Committee.

"If the economy has problems and the revenues don't come in, then we'll have this $130 million to help us out."

The uncertainty in Maryland's Assembly over the revenue for the coming years is occurring in legislatures across the nation.

Some states - particularly those in the Midwest and Southeast that are experiencing significant manufacturing slowdowns - are already making huge cuts to their spending plans. For example, Alabama's governor is trying to balance his budget by ordering a 6.2 percent, across-the-board cut in his state's education spending.

"The question of revenues is a big one for states to predict right now," says Arturo Perez, senior policy specialist on fiscal issues for the National Conference of State Legislatures. "Will the economic downturn turn into a recession? How long until the stock market bounces back? Those are the kind of things that make putting together a budget so difficult."

To be sure, with little reliance on manufacturing, Maryland has so far avoided much of the nation's economic downturn. Retail sales remain strong, and the state's unemployment rate continues to hover around historically low levels.

Nevertheless, the nation's struggling stock market is prompting headaches for states with large middle-class, stock-owning populations - particularly California, Connecticut, New Jersey, New York and Maryland.

"States are saying it looks like the year 2000 was the year when people sold their stocks and took big profits," says Elizabeth Davis, senior policy analyst at the Nelson A. Rockefeller Institute of Government's Fiscal Studies Program at the State University of New York. "But we're not going to see a lot of capital gains activity in 2001 unless things change dramatically."

In Maryland, with the nation's highest per capita income, taxes on profits from stock market sales - and other capital gains - have rapidly become a critical part of state's general revenue fund.

"Capital gains have become a far more important part of our revenues in the 1990s," says David F. Roose, director of Maryland's Bureau of Revenue Estimates.

Consider that as recently as 1995, capital gains - taxed in Maryland at the same rate as regular income - were less than 4 percent of the amount earned in the state from wages and salaries. For the current year, state officials estimate that capital gains have grown to more than 11 percent of wages and salaries income.

That means capital gains tax revenue for the current year is estimated to be about $515 million and is projected to grow to $560 million in the coming fiscal year - or about 5 percent of the state's total general fund revenue.

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