A silver lining to Md.'s economy

Our view: Tax revenues have stabilized, but lawmakers are still looking to make cuts -- let's hope they're the right ones

March 14, 2010

When the current fiscal year ends in June, Maryland's tax collections will likely have dropped 5.2 percent from the previous year, the worst showing on record. Personal income in 2009 is expected to show the lowest growth rate since 1954; unemployment is at its highest level since 1983 and is expected to get worse; and solid economic growth is not expected until 2012 at the least.

Believe it or not, that counts as good news, at least in a relative sense.

The figures released Wednesday by the Board of Revenue Estimates are about the same as they were in the group's last report, in December, and that one was largely unchanged from September. None of the reports was rosy, but they did at least signal an end to a period in which Maryland's tax collections appeared to have dropped off a cliff. In fact, most of the write-down in expectations for the current fiscal year, 2010, can be attributed to the ill economic consequences of the major snowstorms of December and February, which resulted in lower-than-expected sales tax collections and lottery sales. The board optimistically assumes those events won't recur in fiscal 2011 and, thus, has left its estimates for that year steady.

The report comes at a key point in the General Assembly's consideration of Gov. Martin O'Malley's proposed fiscal 2011 budget. The Senate, which has the first crack at the governor's plan this year, is due to start making decisions about cuts next week. During the last two years, the legislature has sought to make extra reductions in order to guard against further deterioration in state finances -- only to see the crumbling of tax receipts exceed the most pessimistic estimates, leaving Governor O'Malley with the task of pushing hundreds of millions of dollars in spending cuts through the Board of Public Works. It would be tempting for legislators to see the stabilization of the state's finances in the last few months, look ahead to the fall election, and conclude that they can take it easy this year.

Still, even if the immediate pressure is off, lawmakers are all too aware of the state's massive long-term fiscal problems. Members of the Budget and Taxation Committee in the Senate say they are taking the long-term fiscal situation seriously and are considering significant cuts, in the neighborhood of $500 million. But the size of the cuts to the budget for the coming fiscal year matters less than what kind of cuts they are. One-time cuts may be the worst option. They provide a larger cushion of cash at a time when the stabilizing revenue picture makes that less necessary, leaving it available to once again paper over the chronic gaps between our spending commitments and projected revenues next year or the year after that.

The problem legislators should focus on is that mandatory spending formulas, pensions and post-retirement health benefits for state workers are all expected to increase spending far faster than tax revenues rebound, and the expiration of federal stimulus funds next year will leave a large hole in the budget. Adjusting those formulas in Maryland's long-term budget projections won't be popular, but it would provide a more honest assessment of what we can afford. Legislators don't have to solve all those problems at once, but the sooner they start laying the groundwork for long-term solutions, the less drastic will be the measures they'll eventually have to take.

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