Md. budget gap persists in spite of U.S. recovery

Spending expected to top revenues by $700 million

November 25, 2003|By David Nitkin | David Nitkin,SUN STAFF

The graphs inspire grins. The stock market is up. Jobless claims are down. Consumers keep buying cars and homes.

But Maryland's projected $730 million state budget gap just won't go away.

Gov. Robert L. Ehrlich Jr. announced last week that -- except for public education and Medicaid health spending -- every area of Maryland's operating budget has to be cut next year.

State officials will meet in the coming weeks and are expected to report that the projected shortfall remains despite a recovering national economy and a surge of federal spending in Maryland.

"How is it that the economy could be good and we're still facing a shortfall?" said Anirban Basu, an economist and chairman of Optimal Solutions Group. "It's policy. The economy has done its job."

The recovery won't produce enough tax revenues to pay for all the spending planned by the state for several reasons, experts say.

For starters, the current fiscal year's budget, as well as next year's, are based on the expectation of healthy growth.

The state budget comes up more than $700 million short for the fiscal year that begins next July even if income and sales taxes, the lottery and other revenues grow by 4.6 percent, as projected, said Warren Deschenaux, head of the Office of Policy Analysis for the state Department of Legislative Services. That's just a little below the historical average of a 5 percent annual increase in tax receipts, he said.

"We've factored in growth," Deschenaux said. "If it doesn't get good, we're really stuck."

Less rebound room

Economists and other budget-watchers also say that because Maryland fared better than many other states during the last recession -- losing fewer jobs and seeing more new businesses start -- there's less room on the upside.

"Maryland did not have the type of recession the nation had, and thus will not have the type of recovery the nation had," said Dana M. Jones, an advisory member of the state Spending Affordability Committee, which seeks to limit the growth of the state budget based on projections on the performance of the economy.

But while tax revenues are projected to grow at an acceptable clip, state spending is expected to rise much faster.

Lawmakers are under pressure to keep paying for a six-year education reform package that is supposed to add $1.3 billion in annual kindergarten-to-12th grade education spending by the end of six years.

And Medicaid, the federally mandated program for the poor and disabled, is growing at 25 percent a year and is jointly funded by states.

`A structural deficit'

Maryland's operating budget is about $11 billion. When programs funded by the federal government, the state's transportation trust fund, and other sources are included, Maryland spends $22 billion.

"The real issue to keep in mind is that this is a structural deficit that was created by preceding budgets based upon growth assumptions that will not materialize," Jones said.

Ehrlich has said that Maryland has a spending problem, not a tax problem. That's why he rejects calls to increase the state's sales and income taxes, and is planning cuts to agencies. The governor said he won't let good news about the national economy alter his plans.

"Part of the reason we got into the jam we did was undue enthusiasm," Ehrlich said. "We're obviously enthusiastic. All the signs are there for a strong recovery. We can't base our projections on the recovery."

Maryland is in the same position as dozens of states struggling with the worst fiscal conditions in decades. The economic downturn revealed flaws in the way the states collected money and planned for the future.

States' dilemma

"Even after the crisis is over, many states will face fiscal difficulties for several years to come," according to a report on state budgets released this month by the Nelson A. Rockefeller Institute of Government.

"State tax structures are unlikely to generate a revenue boom like that of the late 1990s for quite a few years," the report said. "Financial markets have risen sharply this year but remain far below their peak, capital losses from three successive years of market declines will allow many taxpayers to reduce future income tax liabilities, and difficulties collecting sales taxes on Internet transactions will continue to be a drag on the second-largest state tax source."

For Maryland to grow out of its current budget problem, tax revenues would have to skyrocket. Analysts say the state gains about $100 million in tax money for each percentage-point gain in revenues from income, sales taxes and other sources.

"Every percent that we beat the estimate is $100 million off the gap," said Deschenaux, the policy analyst. "To close the gap, we'd need 11 percent growth. I don't think anybody thinks that is going to happen."

More than half of the money collected to pay for state operations comes from income taxes paid by individuals, with sales and use taxes providing 28 percent and the lottery contributing 4.5 percent.

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