Tax-increase discussions under way

New revenue would fund priorities, close budget gap

General Assembly

February 27, 2007|By Laura Smitherman and Andrew A. Green | Laura Smitherman and Andrew A. Green,sun reporters

Maryland legislators have begun discussing tax measures that could fund priorities such as transportation projects and help fill impending budget gaps, including a proposal to extend the sales tax to haircuts, business consulting, tax preparation, shoe repairs and other services.

Although Gov. Martin O'Malley has said he wants to focus on streamlining government before considering any revenue measures, a House of Delegates committee will consider at a hearing today two bills to increase the sales tax to 5 1/2 percent or 6 percent, up from the current 5 percent, and to dedicate much of the new revenue to improving the state's mass transit system.

The committee is expected to take up a proposal to expand the services subject to the sales tax next month.

Legislative leaders say most of the tax increases are unlikely to pass this year, but that the debates will likely serve as a prelude to the budget battles expected next year.

The state has enough in cash reserves to get through this year's legislative session without having to make difficult decisions about cuts in services or tax increases.

"We want all of these things on the table because we're obligated to discuss the options," said Del. Sheila E. Hixson, a Montgomery County Democrat and chairwoman of the House Ways and Means Committee, which handles tax matters. "It is questionable whether there's the political will this year, but we'll be ready to roll."

The tax proposals come as lawmakers look for ways to expand health care coverage for the state's uninsured and to build roads and schools - all in the face of a $1.3 billion gap between projected revenues and spending beginning for the fiscal year that starts in July 2008.

Lawmakers also are considering measures that would raise taxes on tobacco, alcohol and gasoline, the last of which was floated last week by an O'Malley transition report.

House Speaker Michael E. Busch said the tax proposals would serve to begin the debate and educate lawmakers about the options, many of which have been kicked around Annapolis for years but faced opposition from Republican Gov. Robert L. Ehrlich Jr.

"It's good to have the debate and to see where there's support and where there's opposition, and what are our strengths and weaknesses compared to other states," Busch said. "But the governor is the one who's really in the position to lead the debate."

O'Malley spokesman Steve Kearney said that the governor's "priority right now is to get effective managers in place reviewing spending and getting government working again."

Senate President Thomas V. Mike Miller, a Democrat, has been more eager to consider new revenues this year, suggesting recently that the legislature could come back in a special session this summer to tackle the issue. But the Senate and House would likely be at an impasse from the beginning: Many senators say they will not consider tax increases unless the state legalizes slot machine gambling. Busch opposes the idea.

"In the Senate, there is a feeling that slots has to be a part of the package," said Sen. Ulysses Currie, the Prince George's Democrat who chairs the Budget and Taxation Committee. "Whether it's slots first or with some other form of revenue, we haven't yet made that decision, but we realize with a billion-and-a-half structural deficit, slots has to be part of the solution."

The most lucrative slots package considered by the legislature in recent years would have produced $686 million a year for the state, roughly half of what would be needed to close the structural deficit. A one-cent increase in the sales tax would produce roughly $700 million a year, according to the Department of Legislative Services.

The Maryland Chamber of Commerce has called on the General Assembly to tap economists and accountants to undertake a comprehensive study of the state's tax structure. Kathleen T. Snyder, the chamber's president, said that if Maryland's system is "out of whack" compared with other states, then the legislature could end up driving businesses away.

"We need to make sure we keep Maryland competitive," Snyder said. "We want to keep jobs in Maryland."

The proposal to broaden the services covered by the sales tax is a case in point. Business groups say companies that provide the newly taxed services could move to neighboring states that don't tax them. The services of public relations firms, for instance, would be taxed under one bill, though they are not taxed in Virginia and Pennsylvania.

"This provides a disincentive to transact business in Maryland, and it provides an incentive to leave," said James B. Astrachan, president of the Advertising Association of Baltimore. "To me, this is really more about where they can find that low-hanging fruit so they can tax this stuff and grab some money."

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