Plug the state's revenue leak

Tax increases must be considered to solve Md.'s budget problems

November 12, 2009|By Neil L. Bergsman

Maryland's ability to provide education, health services, community safety and help for the most vulnerable is in danger.

Recent economic statistics suggest the national recession is at an end. This is certainly good news. But when it comes to Maryland and other states meeting the growing demand for public services, it's not as good as you might think.

In the last four recessions, it took three to six years for Maryland state revenues to return to their peak. And this recession has been worse than the average. State tax revenues are now nowhere near the level needed to maintain services for Maryland residents. In other words, the state's budget is still in trouble and will be for a while. Revenues do not support current spending at a time when struggling families need those services more than ever.

Cuts in spending have already played a major role in balancing this year's budget. Examples from cuts made in August by the Board of Public Works included reductions in assistance to 14,000 developmentally disabled persons and their families; less aid to local health departments (the agencies that respond to swine flu threats); and $7.5 million less in cancer research funding to the University of Maryland and the Johns Hopkins University.

It's not hard to see that relying too heavily on cuts will be counterproductive to meeting today's needs and positioning the state for future growth. And, after each round of spending cuts, the range of available options narrows. The next layer will only be worse, with another $300 million in cuts to the current budget expected this month. Then the state must address a projected $2 billion budget gap for fiscal 2011, which begins July 1.

Too many spending cuts will damage an already fragile economy. Every dollar state government spends goes back into the economy in the form of salaries, payments for purchases and contracts or various assistance programs. The layoff of state workers hurts the owners and employees of businesses where the workers shop. Government spending is economic stimulus; pulling it back too far can make a recession worse and delay recovery.

For these reasons, Maryland needs to meet this crisis with a balanced approach that includes revenues, not just cuts.

That is what most states are doing. Since Jan. 1, 35 states have raised taxes. And it was not an either-or proposition; each of these states also cut spending considerably. Most states have employed a combination of steps that also involves drawing down reserve funds, maximizing the use of federal dollars and raising taxes. State spending cuts can actually do more harm to the economy than tax increases.

Raising taxes in a recession is common. During the recession of the early 1990s, 44 states raised taxes significantly. In the 2001 recession, 30 states did so. Then, as now, tax increases came in states led by Democrats and Republicans alike.

Maryland has within its reach some reasonable revenue options that would help preserve public investments in education, health, safety and a good quality of life for all Marylanders.

A recent report by the Maryland Budget and Tax Policy Institute suggests up to $1.7 billion in revenue options for fiscal 2011 alone. They include continuing the existing .75 percent additionial tax on income over $1 million past its Dec. 31, 2010 expiration; adopting "combined reporting" of corporate taxes to recapture taxes now legally avoided by multistate corporations; and increasing alcoholic beverages and motor fuel tax rates for the first time in decades.

In the long term, Maryland needs to modernize its sales tax to include consumer services. Maryland's 6 percent sales tax applies principally to purchases of tangible goods. Only a few services are subject to the state sales tax. According to the Federation of Tax Administrators, Maryland taxes 39 of the 168 services included in the federation's survey.

When Maryland's sales tax was enacted in 1947, households spent more per year on goods than services. Services are much more important now. Our outdated sales tax system costs the state hundreds of millions of dollars.

The governor and legislature should put these options on the table. It is important to educate young people, provide health services, keep communities safe, maintain our transportation network and help families escape poverty. To keep doing those things, Maryland needs a balanced approach to balancing the budget.

Neil L. Bergsman is director of the Maryland Budget & Tax Policy Institute. His e-mail is mbpti@mdnonprofit.org.

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