What surplus?

July 24, 2005

TO HEAR GOV. Robert L. Ehrlich Jr. tell it, one would think he's got a billion dollars stuffed in his desk. He doesn't (as far as we know), but thanks to $373 million in higher-than-expected tax revenues, Maryland's financial situation is a bit brighter right now. Is the surplus as grand as claimed? To perceive it, one must subscribe to certain bipolar accounting techniques where everything, from deficits to surpluses, is greatly exaggerated.

First, let's apply the antidote of truth to Mr. Ehrlich's most outlandish claim - that he resolved a $4 billion deficit. Not true. What the governor has done is balance the budget three years in a row by raising taxes and fees, transferring funds and cutting some programs. His efforts included a lot of borrowing from Peter to pay Paul (the state's transportation trust fund is still owed a quarter-billion dollars). His more impressive achievement was to slow the rate of budget growth without greatly diminishing services. But close the structural deficit? Only from a dangerously short-term viewpoint.

Here's the problem: In the long term, the cost of government is outpacing tax revenues. The recent economic downturn greatly amplified this imbalance. Why are state finances so out of whack? Federal cost-shifting and the rapid growth in education and health care costs, mostly notably Medicaid, certainly contribute. The legislature's embrace of the Thornton school aid plan and Gov. Parris N. Glendening's 10 percent income tax cut were billion-dollar budget-busters, too. They weren't financed by either new taxes or spending cuts. And the fact that Maryland has a creaky old tax system - little changed since the Agnew administration - is a factor as well.

The danger in Mr. Ehrlich's rhetoric is not simply that it's misleading but that it might be taken seriously by the public. This year's splash of black ink is best seen as a short-term beneficence created, in no small part, by a real estate bubble that's destined to pop. The worst thing the governor could do right now is to spend this new-found money on new programs or to broadly cut taxes.

The better course would be for Mr. Ehrlich to repay the reserve funds he has borrowed from (Program Open Space included), boost the revenue stabilization account (so that it can actually be tapped during the next downturn without com- promising Maryland's bond rating and spare the next governor from having to raise taxes) and set aside more money for public school construction (a capital cost that doesn't burden future budgets). Such a plan might not excite special interests and big campaign donors, but it would be a responsible - and reality-based - policy, given the circumstances. The only question is whether anyone running for governor next year is clearheaded enough to endorse it.

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