Balancing act good for state

The O'malley Budget Plan

October 03, 2007|By Lanny J. Davis

I'm a resident of Montgomery County, and under the O'Malley proposal to close the $1.7 billion structural budget deficit the state is facing, I am definitely going to end up paying higher taxes overall, even while some 83.5 percent of other Marylanders will end up paying less. So how can I claim that this plan is good for me, good for my county and good for Maryland?

First, I believe that most people in Montgomery County, as elsewhere, support the principle of progressive taxation. Yet Maryland's state income system has been ridiculously regressive for a long time. Since 1967, when the median income in the state was $7,933, Maryland has had a flat income tax rate for everyone earning more than $3,000 a year.

The governor has proposed a slight but meaningful movement toward a more progressive tax: a rate of 4.5 percent on the first $15,000 ($22,500 if married); 4.75 percent after that, up to a threshold of $150,000 ($200,000 if married); 6 percent after that, up to $500,000; and 6.5 percent for the highest earners. Currently, all income above $3,000 is taxed at 4.75 percent.

Some of Montgomery County's elected officials immediately opposed this income tax increase because, combined with Montgomery's local add-on income tax of 3.1 percent, it would give county residents a total of 9.7 percent in state and local income taxes.

But I think that after further reflection, Montgomery officials will understand that there are considerable benefits in the governor's package for Maryland's more affluent counties.

Two examples are clear. First, the governor proposes to reduce state property taxes by 2.8 cents per $100 of assessed value. This benefits wealthier counties such as Montgomery, which have higher property values. And Montgomery senior citizens and middle-income residents with largely fixed incomes need relief from the regressive property tax.

Second, despite its image of affluence, Montgomery and other suburban jurisdictions suffer from overcrowded roads and schools. So Mr. O'Malley has proposed a 1 percent increase in the state's corporate income tax, with the revenues (more than $100 million a year in the next four years) dedicated to transportation and education, including stabilizing college tuition after an increase of more than 50 percent in the last six years, and providing long-term security for the Thornton plan's multibillion-dollar education investment.

The increase in the sales tax from 5 percent to 6 percent still leaves Maryland about the same as West Virginia, Pennsylvania and Washington, D.C.

It is regressive, because rich and poor pay the same rate. But the governor has compensated for this by offering special tax relief for seniors and the working poor. And few could argue that the extension of the sales tax to tanning and massage services cannot be absorbed by those who use these services.

Even the controversial issue of revenues from slot machines has been delicately crafted in modest terms: a limited number of slots in limited parts of the state, but enough to generate hundreds of millions of dollars in tax revenues that will be used primarily for education.

Thus far as governor, Mr. O'Malley has mixed conservative and liberal approaches to close the $1.7 billion structural budget deficit. Conservatives should appreciate that Mr. O'Malley has significantly cut state spending, found $280 million in cuts and savings at the Board of Public Works, eliminated 147 government positions, and reduced the governor's staff budget by 11 percent. Liberals should like the increase in the tobacco tax by $1 a pack, dedicated to funding affordable health insurance for small businesses and the uninsured, and special tax relief for seniors and the working poor.

All parts of the state and all income groups benefit from different parts of this package. That is its genius.

The bottom line: The governor is required, under our state's constitution, to close a $1.7 billion structural deficit. He has chosen an artful and comprehensive balancing act of spreading the pain and benefits equitably.

Anybody have a better idea?

Lanny J. Davis served as a special counsel to President Bill Clinton from 1996 to 1998. His e-mail is ldavis@orrick.com.

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