Balancing act

Our view : $200 million state shortfall is no disaster - at least not yet

July 13, 2008

Maryland tax revenues are proving to be less than expected, particularly from the distressed housing and retail sectors, a clear indicator that the local economy is not immune from the national downturn. According to the latest estimate, tax collections for the fiscal year that began July 1 are likely to fall about $200 million short of projections.

That's discouraging but hardly the same as the budgetary crisis Gov. Martin O'Malley faced just a year ago. Other states are suffering far worse. Nationwide, state tax receipts fell 5.3 percent in the first quarter of this year. In California, Gov. Arnold Schwarzenegger is facing a $17 billion shortfall.

Not only have Maryland's economic troubles proved relatively mild compared with other states, at least so far, but the budgetary outlook has been helped substantially by last year's tax package.

By adding a penny to the sales tax, raising the income tax for the state's wealthiest and taking a few other steps, Mr. O'Malley and the General Assembly not only averted a potential $1.7 billion budget shortfall but also had enough to spend more on transportation projects and health care for the uninsured.

Decisions that seemed painful last fall are now paying off. A $200 million drop in revenues is manageable because lawmakers set aside more than that in the state budget's cash balance account.

But that is the short-term view. In fiscal 2010 (the budget year that begins nearly one year from now), the gap could widen to $500 million. And after that, the state's budget health may depend on whether voters approve this fall's slots referendum - or find an alternative source of new revenue.

In either case, fiscal prudence is in order. The best way to manage a cyclical economic downturn is to trim spending, the sooner the better.

Mr. O'Malley and the Board of Public Works took some modest steps in this direction late last month. More needs to be done. Local governments would be wise to follow suit. They aren't immune from the economic downturn, either - or from possible offsetting cuts in state aid.

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