With budget shortfall, Ehrlich faces tough choices

He could raise taxes -- but at his risk, analysts say

March 30, 2003|By Tim Craig | Tim Craig,SUN STAFF

Michael E. Busch The campaign promises of 2002 are running afoul of the fiscal realities of 2003 for Gov. Robert L. Ehrlich Jr.

And for a Republican who pledged not to raise sales or income taxes, the conflict is proving to be anything but easy.

"If you made a pledge, it is impossible to break it without losing some credibility," said Charlie Black, a Washington-based Republican strategist. "I've seen people do it and survive, but it is always a negative for them."

Ehrlich ran for governor on a rosy platform of avoiding tax increases by trimming government and legalizing slot machines, devoting the profits to close a staggering budget deficit.

At the same time, he promised historic increases for public education and more aid for mental health and drug treatment programs.

When budget conditions worsened earlier this month, Ehrlich tinkered with his commitment by endorsing higher state property taxes and filing fees for corporations.

But those revenues do little to solve the state's long-term fiscal needs, causing many in Annapolis to believe the governor will have to jettison his promise on taxes.

"You are not going to be able to cut your way out of this budget," said House Speaker Michael E. Busch. "There are two options - a sales or income tax increase."

So far, the governor has vowed to veto higher sales or income taxes, even if Busch ties them to the passage of the slots legislation.

"I don't believe people voted for a major tax increase," Ehrlich said, though adding he would "re-evaluate" his pledge "every year."

But many budget experts believe a gubernatorial veto this year would only delay a debate over taxes until next year, when fiscal conditions could be worse.

Even if slots are legalized - which remains a big "if" - legislative analysts estimate a $742 million budget gap for fiscal year 2005. That estimated shortfall balloons to almost $1 billion the following budget year, and it continues to rise through 2008.

"I don't see how the state can be restored to long-term fiscal stability without a general tax increase of some magnitude," said former Sen. Robert R. Neall, widely regarded by both parties as an expert on the state budget.

Much of the deficit is the result of a $1.3 billion plan to correct inequities among school systems. During the campaign, Ehrlich pledged to fund this so-called Thornton plan, saying he would meet the promise even if slots didn't pass.

The grim budget news has some Ehrlich advisers sounding more open to additional revenues, even if sales and income taxes are not an option.

The governor "just stated what he couldn't accept, but there are 50 types of taxes he could accept," said Steven L. Kreseski, Ehrlich's chief of staff. Busch counters: "You are not going to be able to cobble alcohol, tobacco or car rental taxes together to fix this."

For the past two decades, higher taxes have been a delicate topic for Republican politicians, particularly ones who have spoken against them.

Strategists say Republican officeholders remember the backlash former President George H.W. Bush faced when he broke his "Read My Lips, No New Taxes" pledge in 1991.

"President Bush raised taxes and he never recovered, in terms of support from Republicans," said Brian Riedl, a budget analyst for the Heritage Foundation, a conservative Washington think-tank.

The governor, GOP legislators and strategist say, could face revolt from his own party if he agrees to higher taxes.

The repercussions could become so messy that one leading Republican tax opponent refuses to even discuss the possibility.

"I believe he will keep his pledge," said Del. Herbert H. McMillan, an Anne Arundel County Republican. "He is an honorable man, and, when he makes a commitment, he will keep it."

Privately, several GOP legislators said the administration blundered by not doing a better job pinning the budget shortfall on former Gov. Parris N. Glendening. They say that would have given Ehrlich more wiggle room to blame Glendening for an eventual tax increase - or the drastic cuts to core government programs that would be the alternative.

"Ehrlich inherited a bigger fiscal mess than anyone imagined or knew during the transition," said Scott Reed, a Republican strategist who was manager of former U.S. Sen. Bob Dole's presidential campaign. "It is Glendening's mess, and it should be laid at his feet."

But some Republicans say Ehrlich could have political cover to break his pledge this year by citing the war in Iraq and a stagnant national economy.

Riedl, who used to work for former Wisconsin Gov. Tommy G. Thompson, a Republican, said Ehrlich will likely find it is very difficult to significantly cut many government programs.

"Any cuts will likely fall pretty heavily on low-income individuals," Riedl said.

Ehrlich and the legislature have agreed to more than $600 million in cuts to balance next year's budget.

Riedl notes the public outcry in 1995 when the Republican-led Congress - which included Ehrlich - tried to slash many government programs.

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