Taxing Issues

If past is prologue, Maryland's current tax crisis will likely be solved. But a projected $1.5 billion shortfall may set the stage for a needed general reform of the state's tax laws

May 13, 2007|By Michael Hill | Michael Hill,Sun reporter

The fiscal sky is supposed to be falling on the state of Maryland. But to John Willis, it's a case of been there, done that, with no serious damage to the sky or the ground.

The former secretary of state in the Parris N. Glendening administration says that the current fiscal crisis -- the so-called structural deficit that might require a special session of the General Assembly -- is nothing more than one of the many financial bumps on the road that the state always faces.

"For the last 40 years, all Maryland governors have done what they had to do," says Willis, a historian of Maryland politics who teaches at the University of Baltimore. "They took advantage of periods of economic growth and reined in their belts at times of economic stress.

"Generally, they have acted appropriately," he says. "The best measure of that is the fact that in the last 46 years, Maryland is one of only four states to have a AAA bond rating every year."

In other words, Willis says, if you want to know the real fiscal health of the state, don't ask the politicians or the press -- ask Wall Street, the people who give out the bond ratings.

That said, Willis and others think that the current appearance of a crisis can be used to make an overdue overhaul of the state's financial engine.

"The problem is that the tax code was set up for an economy that no longer exists, a tax code based on a manufacturing economy," Willis says. "We no longer have a manufacturing economy. The result is every time there is a downturn in the economic cycle, revenues do not keep pace with expenditures."

Johns Hopkins political scientist Matthew Crenson thinks that the pending fiscal problems are important in part because they are going to get people to take a look at the state's revenue system.

"The governor has been criticized for delaying action on the deficit, but I think politically it was a wise thing to do," he says. "He needs to get everybody in a crisis mode in order to elicit coherent action."

Mahlon Straszheim, an economist at the University of Maryland, College Park, agrees.

"It is always difficult to restructure the tax code, but the state budget deficit is really substantial now, so it seems like this is the time to take a look at some of these issues," says Straszheim, who served as an adviser to both Schaefer and Glendening administrations and conducts a quarterly assessment of Maryland's economy.

The structural deficit works like this: The books might be balanced today, but future spending commitments do not match revenue projections. It's as if your home budget is balanced, but you have just bought a new house and have a much larger mortgage payment coming up -- and your paycheck remains the same.

What Willis argues is that all these projections are just that -- projections.

"There are all sorts of budgets," he says. "There is the proposed budget, the approved budget and the actual budget. Then there are the so-called projected budgets."

What happens, Willis says, is that people make comparisons between two of those things that are really quite different, say actual vs. projected, to make some political point.

"Politicians exaggerate," he says. "Hyperbole on the campaign trail is commonplace, but the public gets confused. You really have to make sure that you are comparing apples to apples."

And much of the fiscal crisis talk is based on projected budgets, apples that hang from one of the shakiest branches on the state fiscal tree.

"If you are talking about next year, the projection is probably fairly accurate in terms of expected needs and expected revenues," Willis says. "But the further out you go, they are almost always wrong, sometimes by hugely significant margins."

The point is that there might be more revenue out there in a few years, or there might not. It is hard to say for sure. The money that will be needed -- the stuff at the core of projected deficit -- is, in large part, to pay for the education costs associated with the Thornton bill that mandated certain levels of spending.

And, one assumes, the O'Malley administration would like some additional funds to support such things as expanded health care for poor children, higher education and transportation projects.

What this budget crisis provides is a way for the state to find those additional funds by giving the tax code a significant overhaul.

One area that should be due for a look-see is the sales tax, which only applies to the purchase of goods, of services. "It could be put on a lot of household services, though I would avoid business services so as not to put a damper on businesses," Straszheim says.

Examples of services that could be taxed, in Straszheim's view, include landscaping work, fitness facilities, haircuts and the labor -- not just the parts -- when you get your car repaired.

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