State evades harsh times

But economic woes bound to have impact in Md., experts say

Nearby states hurting

Revenue of sales tax, capital gains are first to show a decline

September 09, 2001|By David Nitkin | David Nitkin,SUN STAFF

A tidal wave of bad budget news is rolling through state after state, but only the first ripples are hitting Maryland's shores.

Grappling with the impact of a suddenly sluggish national economy, at least seven states raised taxes in the past year to generate significant additional income. A handful of others cut the budgets of most agencies.

And in fully two-thirds of the states, tax receipts are coming in lower than expected, meaning less money for services and programs.

But when a national think tank released a report last week chronicling those woes and others, Maryland was mentioned nowhere.

"What we've seen in past downturns is that the effects are not even across the country," said Liz McNichol, one of the authors of the report from the Center on Budget and Policy Priorities. "There is always the possibility that Maryland won't be hit as hard."

Maryland's fiscal condition stands in marked contrast to some of its mid-Atlantic neighbors.

Virginia was singled out in the report for risky budgetary "gimmicks" to pass a spending plan for the current fiscal year, largely to fund a car-tax cut.

Two states that raised taxes last year are also a short drive away. In West Virginia, a new video poker tax will generate $72 million a year. A New Jersey corporate tax change should yield $840 million over two years.

At least for now, Maryland is reaping the benefits of its "cautious fiscal position" during the unprecedented economic boom of the past few years, said Mahlon Straszheim, chairman of the economics department at the University of Maryland, College Park and an adviser to governors on their budgets.

"Some states cut their taxes more than we did," Straszheim said. "We have enjoyed far more of a fiscal reserve."

But Maryland residents shouldn't smile smugly yet. Storm clouds are collecting, and the worst could lie ahead.

An ominous sign was buried in the good news of last week's announcement of a higher-than-expected surplus for the budget year that ended in June: Sales tax revenues were significantly below estimates for the last two months of the year. The trend continued in July.

Also, the state has grown increasingly reliant over the past several years on capital gains revenue - from stock sales, stock options, and bonuses paid to executives and those in financial services. With the stock market in the doldrums, those revenues are guaranteed to shrink.

And Maryland has committed itself to some big spending over the next few years. Legislative analysts are predicting that in the 2003 budget year - which lawmakers will begin considering in January - the state could face a $440 million deficit in its roughly $22 billion budget caused by capital projects and higher wages for employees.

Taken together, those factors could cause pain in the coming months because, by law, the state must have a balanced budget.

"So far, Maryland has held up quite well compared with most states," said Donald Boyd, deputy director of the Nelson A. Rockefeller Institute of Government in Albany, N.Y.

"But you can't take it out of the national economy. The stock market isn't up in Maryland and down everyplace else."

Some experts believe that when the national economy rebounds - perhaps as early as the middle of next year - the state will emerge largely unscathed.

"If we are somewhat cautious in our spending going forward, if we're restrained, we will be just fine," said Anirban Basu, an economist with the RESI economic research institute at Towson University.

"I don't think we need to slash spending, but we need to be more restrained than we were last year, when we opened up the books."

Basu and others point to several components of the state's economy that have helped greatly during the past year.

First, the economic downturn has struck the manufacturing sector hardest, particularly in technology hardware such as fiber optic lines. Maryland, however, has a relatively small manufacturing sector, about half of the nationwide average.

Second, high numbers of federal employees - as well as jobs in institutions that rely on federal funds and consultants that provide services to the government - provide a buffer against downturns.

Additionally, Maryland is a fairly wealthy state. Many families have enough assets that they don't need to worry about the next paycheck. They've kept spending despite headlines about layoffs and low stock prices.

But other parts of the state budget and tax structure contain risk.

One economic study ranks Maryland among the 10 states most reliant on capital gains income for their budgets. Economists agree that capital gains receipts have all but evaporated, wiping out a big chunk of Maryland's revenues.

Another study has Maryland ranking first in the nation - tied with Pennsylvania - for the sensitivity of its sales tax receipts to outside economic forces.

"What this means is that it is potentially more subject to risk when the economy turns down, and would grow more quickly when the economy is good," said Boyd.

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