State reports tax revenue jump

Good news on January receipts doesn't change long-term deficit outlook

February 21, 2007|By Andrew A. Green | Andrew A. Green,Sun reporter

New state revenue estimates show an uptick in tax collections in January, good news for Maryland officials who had feared that lackluster receipts would force them to deeply cut this year's budget and rethink the spending plan now under debate in Annapolis.

Estimates of income, sales and other taxes released by the Bureau of Revenue Estimates this week show state revenues are up by about 2.9 percent for the period running from July through January.

The growth rate for July through December had been a percentage point lower, a trend that would have blown a $100 million hole in the current budget if it had kept up for the rest of the fiscal year.

But reaction to the news was muted by the state's long-term budget projections. The state expects annual revenue shortfalls of $1 billion or more for the next several years, a problem known as a structural deficit. Rick Abbruzzese, a spokesman for Gov. Martin O'Malley, said the latest figures give the administration little comfort in either the short or long term.

"The bottom line is the state still faces a significant structural deficit that will require structural reforms over the next four years," Abbruzzese said.

In the short term, the state won't be out of the woods until the middle of next month, when the Board of Revenue Estimates meets to make its official report on Maryland's finances.

"The question is, what about February?" said Comptroller Peter Franchot, who leads the revenue estimates board and whose office is responsible for the revenue reports. "We're up now, but we're still skeptical about the revenues."

The most marked improvement in the revenue figures came from personal income taxes. So far in this fiscal year, which began July 1, personal income tax collections are up 4.8 percent over last year. As of the end of December, collections were much weaker, representing a growth rate of 2.5 percent.

Maryland is highly dependent on the income tax and is growing more so because other major revenue sources aren't keeping pace with the state's growth. Sales tax receipts, the second biggest revenue source, are up 2.7 percent this year. Corporate income taxes are down sharply, 7.1 percent, not counting a one-time bump from a legal settlement that made last year's revenues look artificially high. Lottery revenue has dropped 4.7 percent this year.

As a result, when the December income tax figures came in so low, budget watchers in Annapolis were afraid that the governor and General Assembly would have to cut $100 million or more out of the current fiscal year's budget and to slash O'Malley's plan for fiscal 2008, which begins in July.

But it looks like that figure was just a freak accident of accounting, not a trend.

Because of a quirk in the calendar, many businesses had one fewer payday in the period of July-December 2006 than they did during the same period in 2005, said Warren Deschenaux, the General Assembly's chief fiscal analyst. That seems to have made the December numbers look much worse than they actually were, he said.

"It would have been very ugly" if that number had represented a trend, Deschenaux said. "We avoided ugly and can just settle for average."

"Average" isn't without its perils either. The state always assumes that a disproportionate amount of income tax will be paid in April -- the month returns must be filed -- so the revenue estimates made later in the year could still cause problems for the state budget.

Del. Murray D. Levy, a Charles County Democrat who serves on the Appropriations Committee, said the state needs a string of months like January to keep up with the spending needs of this year's budget. Despite the latest numbers, breaking even for the year is still the best-case scenario, he said.

"It's much better to be up than to be down, but [the income tax] can swing wildly," Levy said. "The first five months were low, and this month was very big, and it righted the ship partially, but not totally."

andy.green@baltsun.com

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