Budget realities

February 05, 2007

It was a little disappointing to hear Martin O'Malley's political opponents claim last week that the governor's legislative agenda is chock-full of new spending and not enough budget cuts. That's not because Maryland isn't facing a fiscal crisis - it certainly is - but because the criticism misrepresents the problem. There's relatively modest new spending in Mr. O'Malley's budget - aside from what is required by law - and there are substantial cuts. Overall, the growth of state government is set at a slower pace than during most of the last decade.

The truth is Mr. O'Malley inherited his budget woes. That includes the bulk of a potential $1.05 billion deficit for the coming year. Thanks to an economic upswing (that unfortunately has petered out), the state had an excess of cash in what's known as its rainy day account. Well, the monsoon season has come. Mr. O'Malley proposed tapping into this reserve account (a strategy that was anticipated by his predecessor as well) to make up most of the difference.

But here's the important point: The budget isn't in deficit because of new spending, or because of the actions of former Gov. Robert L. Ehrlich Jr. The deficit's primary cause is twofold: Big-ticket items - a 10 percent reduction in the state income tax and the $1.4 billion Thornton aid to K-12 education - were adopted years ago without proper heed to their impact on state finances, and the state's antiquated tax structure is still too dependent on the income tax.

This is why the problem is generally referred to as a "structural" deficit. Imagine two lines on a graph, one anticipated tax revenue and the other state spending (without any new programs). The spending line has already begun to rise well above the revenue line. And the gap between them is expected to widen like the arms of a compass to $1.4 billion in fiscal 2009.

Can the shortfall be eliminated by spending less? Theoretically, yes. But when one considers that education and health care make up more than half the budget, the reality is absolutely not. The biggest ovations Mr. O'Malley received in his State of the State address were for restoring several programs that were reduced during Mr. Ehrlich's tenure.

That leaves taxes - and not just raising them but reforming the state's tax structure to conform to the realities of today's service-oriented, information-age economy. Mr. O'Malley's plan is to look for reductions first, and then build a consensus for tax reform next year. It's not the ideal strategy (we'd rather see tax reform on some modest level started this year), but it's understandable given the difficulty of the challenge. A problem decades in the making probably does require more than two weeks on the job.

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