The Deficit Game

The state needs to find $1.5 billion to balance its budget. Which of these choices would you favor?

August 26, 2007|By Andrew A. Green | Andrew A. Green,Sun Reporter

By now you've surely heard of Maryland's $1.5 billion "structural deficit," a giant pothole in the state budget that's spurring talk of big tax increases, spending cuts, slot machines and more.

Republicans and Democrats agree the deficit is no abstract menace, but a real problem that has to be solved. It has been brewing for years, spurred by a variety of factors, but mostly by an income-tax cut in late 1998, combined with a decision in 2002 to vastly increase spending on K-12 education.

Since then, the state has managed to avoid dealing with the problem because of some lucky windfalls from an overheated real estate market and liberal borrowing from savings, transportation funds and other pots of money.

But there's no loose change left in the sofa cushions of state. When Gov. Martin O'Malley submits a balanced budget this January - as the constitution requires him to do - it's going to reflect some painful choices.

He and legislators may swoop in to make those decisions in a lightning-fast special General Assembly session sometime this fall, or they may haggle over them for the entire 90-day regular session this spring.

But in the meantime, you can play along at home. The major options under consideration are listed below. Mix and match and decide: How would you come up with $1.5 billion?

INCREASING THE SALES TAX

$750 MILLION

THE PROPOSAL / / Increase Maryland's sales tax from 5 percent to 6 percent.

HOW MUCH WOULD IT RAISE? / / $750 million.

HOW DOES MARYLAND COMPARE? / / Tied with eight other states for the 13th-lowest rate in the country. Pennsylvania and West Virginia have rates of 6 percent. Virginia's rate is 5 percent (including local taxes) but the state also taxes food, which Maryland exempts, at a rate of 2.5 percent. West Virginia taxes food at 5 percent. Delaware has no sales tax.

ARGUMENTS FOR / / Maryland's rate is lower than most other states', including many of its neighbors, and a one-cent increase in the rate would eliminate half of the deficit.

ARGUMENTS AGAINST / / The tax is considered regressive because the poor tend to pay a higher percentage of their income in sales taxes than the rich do.

WHO SUPPORTS IT? / / Moderate Democrats in the General Assembly.

WHO OPPOSES IT? / / Liberal Democrats who want to enact more progressive taxes, business groups, Republicans who want to avoid tax increases entirely.

"It's especially onerous on people of limited income. It's a very regressive tax. It's very wrong here on the Eastern Shore, where we're neighbors to Delaware, which charges no sales tax. Our merchants are already losing because people are sliding across the line to purchase big-ticket items."

-- Sen. J. Lowell Stoltzfus, Republican, Somerset County.

EXPANDING THE SALES TAX

$650 MILLION

THE PROPOSAL / / Make services such as cable television, haircuts, shoe repair, tax preparation, dating services and sign painting subject to the sales tax.

HOW MUCH WOULD IT RAISE? / / $650 million.

HOW DOES MARYLAND COMPARE? / / Of the 168 service categories tracked by the Federation of Tax Administrators, Maryland taxes 39, about the middle of the pack nationally. Virginia taxes 18, Pennsylvania 55 and West Virginia 110. Although Delaware does not tax goods, it does tax most services -- 148 of 168 categories.

ARGUMENTS FOR / / Maryland's sales tax was designed for an industrial-era economy, not one driven by services, and as a result, sales tax growth has lagged behind growth in Maryland's economy.

ARGUMENTS AGAINST / / Picking which services to include could create winners and losers. Affected businesses could relocate to neighboring states where they are not taxed.

WHO SUPPORTS IT? / / Some moderate Democrats.

WHO OPPOSES IT? / / Trade groups such as the Maryland Association of Realtors.

"We don't think taxing the same dollar again and again makes sense. It's taxed when the service is provided, again as business income, and possibly again as personal income."

-- Bill Castelli, vice president of government affairs, Maryland Association of Realtors.

MAKING THE INCOME TAX MORE PROGRESSIVE

$350 TO $375 MILLION

THE PROPOSAL / / Increase Maryland's top rate of 4.75 percent for high earners and perhaps lower rates for middle- and lower-class taxpayers.

HOW MUCH WOULD IT RAISE? / / Increasing the rate to 6 percent for income over $150,000 a year for individuals or $225,000 a year for couples would raise $350 million to $375 million a year. Changes to reduce rates for lower-income workers would limit the fiscal impact to about $30 million a year.

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