Weighing Budget

UM professor, adviser to comptrollers and governors, looks at Gov. Martin O'Malley's proposal to cut the state's deficit and finds it pretty good

Q&a -- Mahlon Straszheim

October 21, 2007|By MICHAEL HILL | MICHAEL HILL,SUN REPORTER

Mahlon Straszheim gives Gov. Martin O'Malley his due. At least he has proposed a plan to deal with the state's fiscal problem instead of just hoping it would go away.

"The state's budget deficit problem is real," said the economics professor. "This is not an imagined problem. We face very difficult actions if we are going to balance our books here."

In recent weeks, O'Malley rolled out a series of tax proposals designed to raise money to make up for the deficit caused mainly by the promises made to public schools in the Thornton legislation, promises that came without funding. The governor has called a special session of the state legislature to consider his ideas later this month.

Straszheim has been on the faculty of the University of Maryland, College Park since 1971, but he does not look at these issues from the ivory tower. For one, he is quite involved in Montgomery County, where he lives, advising the county executive and County Council on economic matters.

On the state level, Straszheim delivers reports on Maryland's economy to the comptroller's office. He has often testified before legislative committees and was an adviser to Democratic Govs. William Donald Schaefer and Parris N. Glendening.

"It is not easy to propose a tax increase that is equal to more than 10 percent of the general fund," he says of what O'Malley faces in making up a $1.5 billion structural deficit. "I would say that the governor gets a lot of credit for putting something on the table." Overall, what do you think of the O'Malley tax proposal?

When you have to raise taxes like this, it is a time when you can look at the whole state tax structure and try to make changes. But every time you change the structure of the tax code, you make a lot of political enemies. It is very difficult to reduce taxes in some areas and raise them in others.

The governor has not really made much of a change to the state tax structure. In that area, he has two main proposals on the table, one a very modest broadening of the sales tax base and then a major proposal on slot machines, an issue people have very strong opinions about. Do you think he should have gone further?

I think the most important structural issue is broadening the sales tax base, which is still designed for a manufacturing economy when we have moved to a service economy. Few services pay sales tax, but that is the engine that drives the economy today.

In principle, you want as broad a tax base as possible . That keeps the marginal rates down and reduces distortions in the economy caused by high or unequal tax rates. If you have a broad base, you can have low tax rates across a wide range of activities. That is one of the key principles of public finance. I think further broadening of the sales tax is one of the major issues that the state needs to think about. But didn't the governor propose doing just that?

As I say, only modestly, including tanning and massage service, physical fitness facilities and real estate property management. I would recommend going further. This is a difficult challenge because you want to focus on taxing consumer services and avoid taxing business services, which would run the risk of driving some businesses elsewhere.

I would try to include more consumer services in the sales tax, like automobile repairs, household repairs, appliance repairs, tax services, landscape service, personal care, things like hair and nail salons, amusement activities. But anything you propose to tax creates a lot of opposition.

One thing that broadening the base to include more services would do is lessen the regressive aspects of the sales tax, the fact that it now hits lower income people more than richer ones. It is higher-income taxpayers who are buying landscape services and things like that. What do you think of the proposal to raise the sales tax by 1 percentage point?

It is appropriate, not out of line with our neighbors. But I would prefer to see more revenue raised by broadening the tax base. Then perhaps we would not have to go down the slots road, which is a difficult one. You do not like the slots proposal?

Well, it is not very carefully spelled out. It is a little difficult to know just how many facilities are involved and so forth. But there are a lot of serious economic arguments that are not in slots' favor. Instant games and slots are the form of gambling that most disproportionately played by the lowest income households. It is a very regressive way to raise tax money.

It is also uncertain just how much money would be raised by taxing slots and video lottery games. The growth in lottery revenue nationwide has definitely slowed down. . And economic studies clearly show that people spend money on gambling at the expense of other items in their budget. States that started lotteries saw a reduction in the growth of their retail sales taxes.

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