`Structural deficit' is for long haul

Concept: A new term in use in Annapolis defines a gap that exists between revenues and expenses that won't easily go away.

February 09, 2003|By David Nitkin | David Nitkin,SUN STAFF

SOMEWHERE ALONG the way, as Maryland's revenue picture went from bad to worse, a scary term entered the Annapolis lexicon: the "structural deficit."

It sounds much more troubling than a plain-vanilla "deficit." It's light years removed from the slightly euphemistic "shortfall."

House Appropriations Chairman Howard P. Rawlings, a Baltimore Democrat, calls the structural deficit a huge problem looming in the future, one that must be fixed now.

Ehrlich administration budget Secretary James C. "Chip" DiPaula Jr. claims that the governor's proposed budget wipes out two-thirds of the nasty structural deficit in one swoop, but concedes that a big chunk remains.

But just what is a structural deficit? What does adding one 10-letter adjective in front of a familiar noun do?

"It's something that is hard to define, hard to measure and hard to prove," said Donald J. Boyd, director of fiscal studies at the Rockefeller Institute of Government in Albany, N.Y. "The concept means that as you look forward into the future, your current revenue structure won't generate enough money to pay for your services."

"The issue is the structure, not just this year because of the economy," Boyd added. "Your eyes are bigger than your stomach."

Economics textbooks offer a similar explanation, dividing deficits into two types: cyclical and structural.

The former is short-term and a temporary occurrence. Fix it once, by delaying projects or using savings, and it goes away. Problem solved.

The latter is a gap that exists between revenues and expenses even during healthy economic times, one that won't go away without a big overhaul -- such as raising taxes or eliminating programs.

Put another way, even if the economy were humming along, employment was at its maximum, and tax revenues were rolling in, the state still wouldn't have enough money to pay for all the things it wants to buy.

Is this truly Maryland's problem?

In one sense, the new term is being loosely applied as lawmakers and the governor seek to restore fiscal order.

For starters, under the constitution, Maryland -- like most states -- is not allowed to run any deficit whatsoever. The General Assembly is required to approve a balanced budget when it convenes each year.

Additionally, we're still at a trough in the economic cycle. The dictionary definition would suggest that the time to figure out if a structural deficit exists is when times are good, not when times are bad.

That's why some think the term portends more sizzle than steak.

"I do think that the largest part of the use of the term `structural deficit' is as a mask for just good old tax hikes," said Steven B. Miller, policy director of the Nevada Policy Research Institute, a conservative think tank. "People using the term know that the word `deficit' doesn't have as much oomph or punch any more to frighten taxpayers. They're always working on strengthening their armor."

But even if the phrase is not precise, it could still serve as effective shorthand to describe real problems in the state's finances.

Budget experts seem to agree that profound changes have occurred over the past few years in the way Maryland and many other states raise and spend money.

Lawmakers have yet to address those changes. The conversation is continuing in Annapolis, but its unclear how much progress will be made before the session ends April 7.

The culprits:

Capital gains: Maryland's personal income tax collections grew strongly in the late 1990s and into the current decade, fueled heavily by capital gains taxes paid on stock options and bonuses. But with the stock market suffering three consecutive down years, income tax growth has slowed drastically.

Maryland gets nearly half its revenues from income taxes, said Michele Mariani, senior special projects reporter for Governing magazine who examined the state's finances for a report released last week. That's a higher proportion than in many other places.

Budget writers should not anticipate a return to the stock-market boom years, she said: "You cannot build your tax system hoping that it's ever going to come back again."

Cutting taxes

Income tax cut: When times were flush, Maryland lawmakers approved a 10 percent income tax reduction phased in over five years, with the final portion coming in 2002. Some now wish they hadn't returned the money, which amounts to more than a half-billion dollars yearly.

Education and health care: A year ago, the General Assembly passed a landmark school-funding formula, recommended by a panel known as the Thornton Commission, that committed Maryland to spending $1.3 billion more on public education yearly, but did not offer a way to pay for it. Now the bill is due.

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