Many States In The Red

Maryland In The Middle Among Shortfalls That Together Top $160 Billion

August 02, 2009|By Laura Smitherman | Laura Smitherman,laura.smitherman@baltsun.com

Maryland is not the only state struggling with its budget this year, one of the most difficult in history for state governments that have been contending with a collective shortfall of more than $160 billion - and counting.

The red ink is spilling across the country. California is laying off thousands of teachers. Pennsylvania hasn't been able to pay state employees because of a budget impasse. Delaware raised taxes on income, tobacco and businesses.

Unlike the federal government, nearly all states must balance their budgets - and they have been slashing spending, increasing taxes and raiding reserves to address deficits for the fiscal year that began July 1. A handful of states still haven't agreed on a spending plan; others, including Maryland, face new shortfalls that opened after budgets were set.

The size of Maryland's shortfall relative to its overall budget puts it in the middle of the national pack, according to a recent report by the Washington-based Center on Budget and Policy Priorities.

The shortfall - a $1.9 billion gap closed during the General Assembly session this winter plus an unexpected shortfall of $700 million - amounts to 19 percent of the total budget. That's less than half California's combined shortfall of 49 percent but larger than gaps in a number of states, such as West Virginia, and the District of Columbia, according to the center.

"Maryland's economy held up longer than a lot of the other major state economies," said Mahlon Straszheim, an economics professor at the University of Maryland and adviser to previous Democratic administrations in Annapolis. "But in the last year, Maryland's economy has lost jobs at pretty much the same rate as other states."

The waning economy caused state tax collections to drop 12 percent in during the first three months of this year compared with a year ago, the sharpest decline since at least the 1960s, according to the Nelson A. Rockefeller Institute of Government. And the decline worsened to 20 percent in more recent months, preliminary figures show.

Most state tax revenue sources are closely tied to the economy, rapidly rising in boom years and caving in recessions. States that have been hit particularly hard, including California, Arizona and Nevada, felt the brunt of the housing market decline - revenues from taxes levied on appliance sales to income taxes paid by bricklayers and mortgage brokers plummeted.

Then the financial market meltdown hit East Coast states such as New York and New Jersey. Now, even states like Alaska that benefit from oil taxes and royalties are suffering as crude prices have collapsed.

"The recession is affecting almost every single state regardless of the tax structure or industries in that state," said Lucy Dadayan, senior policy analyst at the Rockefeller Institute. "Many governors are reporting that they are having the worst time ever."

Governors have been left with politically unpopular options like cutting services and programs and raising taxes. Or they can drain reserve accounts and potentially jeopardize credit ratings that determine the terms of borrowing a state can obtain. Agencies recently reaffirmed Maryland's coveted AAA bond rating; the state has a sizable rainy day fund it hasn't tapped.

Spending nationwide is expected to contract this year, with proposed operating budgets shrinking 2.5 percent from a year ago, according to the National Association of State Budget Officers.

Maryland's proposed operating budget has been reduced to about $13.5 billion, a level not seen since fiscal 2006, according to the nonpartisan Department of Legislative Services. And Gov. Martin O'Malley has indicated plans to cut another $400 million to keep the budget in balance as revenues are expected to continue falling.

States also have proposed raising taxes and fees by $24 billion this fiscal year, NASBO reports. Several are raising income taxes, particularly for high-wage earners.

Maryland enacted $1.3 billion in tax increases two years ago, including a higher tax bracket for millionaires and increases in levies on sales and corporate income. O'Malley has insisted that the early move put Maryland on more solid financial footing going into this recession, but Republicans have said the taxes exacerbated the downturn and accuse the Democratic governor of failing to address over-spending.

When asked recently if more tax hikes are needed, O'Malley said: "I hope not. Every family is struggling just as every level of government is struggling." For their part, legislative leaders have said the General Assembly is not willing to raise taxes when they reconvene in 2010, an election year.

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