Glendening is optimistic

Schaefer wary

both are right

October 28, 2001|By JAY HANCOCK

SINCE last summer state Comptroller and former Gov. William Donald Schaefer has warned of sputtering tax-revenue growth and budgetary risk.

For just as long Gov. Parris N. Glendening has insisted that Maryland's economy is "fundamentally sound" while acknowledging the need for fiscal prudence.

They're both right.

The present governor is correct in suggesting that Maryland is much better off economically than the nation and that its prospects are also relatively bright.

Doppelgovernor Schaefer, however, is smart to worry about Annapolis' cash register. One lesson from the extraordinary 1990s is that economic growth and tax-revenue growth are not the same thing.

Pardon the numbers.

Between 1995 and 2000, Maryland's annual economic output grew by about a third, not adjusted for inflation. But tax revenue collected by Schaefer's office increased by substantially more - 38 percent.

The difference meant that Maryland collected $400 million more last year than it would have if tax proceeds had expanded at the same rate as the economy.

It was nice to have the money. It helped pay for land preservation, university construction and mass transit. But don't get used to it. It might not last.

The extra $400 million did not come from higher tax rates that will continue spewing out cash.

Nor did it result from better enforcement. Schaefer is a fine fiscal bloodhound, ambushing Broyhill sofa smugglers at the border, and the Department of Natural Resources is making life difficult for the criminal yachting class.

But the newly zealous pursuit of sales-and-use tax scofflaws and other tax offenders hasn't generated anything close to $400 million.

The extra money looks largely like a one-time side effect of stampeding cattle on Wall Street. Big gains in the stock market in the second half of the 1990s fueled similar increases in the collection of capital gains taxes as Marylanders cashed in their profits.

As the fourth-richest state, Maryland was in good shape to benefit from the bull market. Fiscal analysts estimate Maryland's capital gains tax collections popped from $148 million in 1995 to $493 million in 2000.

With stocks in the dumps, state officials expect a much lower capital gains haul in the future. And they're worried about other taxes, too.

The Washington tax cut signed in June phases out federal estate taxes between now and 2010, while eroding state death taxes and making it impossible for states to collect the tax after 2005.

The bottom line for Maryland is an estimated revenue loss of $28 million next year and more than $80 million annually after 2005, according to the state's Bureau of Revenue Estimates. Accelerated corporate depreciation measures being touted for Congress' economic-stimulus jolt could cost another $50 million or more a year, according to bureau director David F. Roose.

And that's not even accounting for the recession. Economic torpor will hurt the harvest of sales tax, earned-income tax and other levies, too.

But while no one denies that Maryland's economic growth is slowing, the state seems in far better commercial condition for this slump than it was for the one a decade ago.

In the first half of the 1990s Maryland had to deal with: 1) Newt Gingrich threatening to wipe out entire federal agencies. 2) Inefficient manufacturers clobbered by imports. 3) Merger artists buying and downsizing Baltimore's big corporate headquarters. 4) World peace, which shrank the federal government and creamed defense contractors.

Now Gingrich is a consultant. Maryland manufacturers, while still vulnerable, are much better equipped to compete. Baltimore doesn't have many more Fortune 500 companies to sell. The federal government is ballooning again. And Maryland's war industry is mobilizing.

After stagnating for most of the 1990s, total federal spending in Maryland jumped 7.4 percent last year. A defense-spending kicker should bump that even higher.

For Maryland's economic outlook, "The biggest thing is its proximity to Washington and the spending that's going to come out of Washington," says Jeff T. Petry, an analyst who follows the state for Economy.com.

Another plus is that, because Maryland didn't go nuts economically last decade, we're not stuck with too many buildings and workers for the present climate, says First Union economist Mark Vitner. The dot-com bust has left Herndon, Va., with a reported 20 percent vacancy rate, and Vitner suspects actual vacancies are much higher.

Schaefer's fiscal skittishness is rooted in his last years as governor, when a two-year plunge in Maryland's output caused bad budgetary pain.

Glendening has already cut annual spending by $205 million and will probably be forced to make new economies.

But this is not 1991 all over again.

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