Acknowledging that worsening state finances mean campaign promises must be bent, Gov. Robert L. Ehrlich Jr. released a new budget-balancing plan yesterday that relies on an increase in the state property tax and higher fees from corporations.
The governor's $453 million package, which also includes tapping into a previously untouched reserve account and cutting more deeply into the budget, was embraced by Democratic General Assembly leaders trying to extract themselves from a growing fiscal hole.
"It's a tremendous step forward for us in solving our budget problem," said House Speaker Michael E. Busch. "It's what the citizens need to see from their leaders."
Some Republicans, however, were grumbling that Ehrlich appears to have violated a central campaign pledge of no tax increases. The governor continues to insist he would veto any bill that would increase sales or income taxes.
Still, Ehrlich endorsed a move that would generate $187 million for state operations by forcing the Board of Public Works to increase Maryland's property tax rate by 5 cents per $100 in assessed property value. The state share of property tax bills is a fraction of what homeowners pay to their local jurisdictions.
Asked why a tax increase has become acceptable, administration Budget Secretary James C. "Chip" DiPaula said, "It's clear to me that people do not understand the depth of the problem we're in, and it got worse this week."
This week, state officials said that tax collections for the next 15 months would be $218 million less than expected.
Ehrlich's proposal compensates for that loss, as well as for a change in his slot-machine plan that would charge racetrack owners $230 million less in one-time fees.
After learning of the proposal, Republican senators immediately gathered in private to talk about alternatives to a property tax hike. "It's a huge pill to swallow," said Sen. J. Lowell Stoltzfus, the Senate minority leader.
Cutting Thornton funds
One option discussed by GOP senators would be halving the $148 million in new school aid required for next year by a landmark education funding formula recommended by a panel known as the Thornton Commission. Within six years, the formula calls for $1.3 billion yearly in additional public education money. "I will go on record as saying we need to cut Thornton," Stoltzfus said. "It's too much, too fast."
Other Republicans said the tax increase appeared acceptable, because lawmakers would not have to vote on it, and because state law requires that property taxes be used to repay money borrowed for construction projects. Until now, lawmakers had diverted general tax money to pay the bonds.
"They see it as the lesser of the three evils - income, sales and property taxes," said Del. Carmen Amedori, a Carroll County Republican, noting that property taxes are deductible on federal income tax returns.
State Treasurer Nancy K. Kopp and Comptroller William Donald Schaefer, who along with Ehrlich make up the Board of Public Works, said yesterday that they endorse the idea.
"I salute the governor for proposing a partial solution to the budget problem," said Senate President Thomas V. Mike Miller.
Ehrlich is also proposing an $85 million increase in annual corporate filing fees. Business leaders told the governor they would prefer to pay higher fees, rather than seeing a corporate tax increase or a change in the state's tax code. Legislative panels are considering bills to close certain corporate tax loopholes, but business groups are arguing against a change.
To cover a new $106 million shortfall in the current year's budget, caused by a slowdown in sales and income tax collections, Ehrlich is proposing a transfer from the state's $500 million rainy day fund.
Lawmakers have been hesitant to touch the fund for fear of jeopardizing the state's AAA bond rating, which allows the state to borrow money at the lowest possible cost. But state officials say the bond rating should not be hurt if lawmakers plan to restore the money.
"You should be reluctant to tap the rainy day fund, but budgetarily, [money is] pouring out," said Del. Kumar P. Barve, the House majority leader from Montgomery County.
Ehrlich's budget plan still relies on $165 million in slot machine proceeds for next year, but Senate and House leaders say they will pass a budget without those dollars -meaning they will make deeper cuts than the governor has proposed.
Yesterday's package from the governor relied on an unspecified $85 million in cuts, which he left for legislators to make. But House members working throughout the week had already trimmed roughly $200 million from the $22.8 billion spending plan by late yesterday. The House Ways and Means Committee could vote Monday on additional revenue bills.
Lawmakers said they were confident their work, combined with Ehrlich's proposal, would produce a balanced budget, even without slots.
Ehrlich's proposal, called a supplemental budget, also included $17 million in new spending this year and next, some of which reversed cuts in sensitive areas he proposed in January.
He said he would restore $2 million of the $4 million cut from Maryland's child-care referral network, which links low-income working parents with providers.
The plan boosted lead-paint inspection and abatement efforts by more than $1 million, and gave more than $10 million to a variety of public safety programs. A Baltimore gun prosecution initiative would receive $1 million, and state police would get $3.6 million - part of which would pay for overtime accrued during last month's record snowstorm and last year's sniper shootings.
State property tax rate increase from 8 cents per $100 of assessed value to 13 cents per $100 of assessed value. For example:
Assessed value Current tax New tax
$100,000 $80 $130
$150,000 $120 $195
$300,000 $240 $390