Gov. Martin O'Malley acknowledged the obvious on Saturday when he told local officials at the annual Maryland Association of Counties summer conference that tax increases may be a part of the solution to the state's projected $1 billion budget shortfall next year. Tax revenues are picking up, but not fast enough to make up for the effects of the recession, and the likelihood of federal budget cuts could make the state's fiscal problems worse. We have reached the point at which some additional revenues may be necessary to protect the public infrastructure and services on which our collective prosperity is based.
Maryland often gets criticized as being a high-tax state, but that depends on whom you ask. A simple analysis of the amount of state and local taxes Maryland collects as a percentage of personal income yielded the state a ranking of 37th in 2008, according to the Tax Policy Center, a combined effort of the Urban Institute and Brookings Institution. When other revenues such as fees are thrown in, Maryland's ranking drops to 49th.
Those who call Maryland a high-tax state rely instead on the analyses of the Tax Foundation, which uses a complex method for calculating taxes not based on where they are collected but on where they are ultimately paid. Thus, Alaska, which collects billions in oil and gas taxes from corporations but little in taxes from its actual citizens, ranks as having by far the lowest tax burden, according to the Tax Foundation — but by far the highest tax collections as a percentage of personal income, according to the Tax Policy Center.
Both measures have value, but since the Tax Foundation's rankings reflect policy decisions made in other states, they aren't much good as a basis for Maryland's lawmakers to decide whether to raise or lower taxes. The more straightforward measure used by the Tax Policy Center and others shows that Maryland's tax revenues are, proportionately, lower than those of all of our neighboring states except for Virginia. Modest tax increases would not make us instantly uncompetitive.
The question, though, is how much and what kinds of taxes the state might raise. Mr. O'Malley has given no indication of what he has in mind, saying such a discussion would be premature before the federal government makes decisions about budget cuts this fall. That's reasonable, but there are some areas that are clearly worth discussion. Maryland's gas tax has not been raised in nearly 20 years, and it no longer provides adequate revenue to support our transportation needs. It is a tax that business groups have generally supported because spending on roads, bridges and mass transit not only puts people to work but also improves the efficiency of our economy.
Another idea that Mr. O'Malley should consider this time is broadening the base of Maryland's sales tax. Maryland taxes almost no services, even though they are an increasingly important part of the economy. The governor attempted to tax a handful of services in 2007, but the effort failed amid intense lobbying efforts from the specific industries that were targeted. The key is a more comprehensive approach that protects low-income families from taxes on things like health care and exempts most business-to-business services to avoid a distorting effect on the price of goods. The liberal-leaning Maryland Budget and Tax Policy Institute has calculated that such an approach could yield an additional $2 billion a year. That means Maryland could solve its budget problems and lower its sales tax rate if it broadened the tax base sufficiently.
Mr. O'Malley's tax increases of 2007 were designed to correct some of the state's previous bad fiscal decisions — a 1998 income tax cut without accompanying spending cuts, and a 2002 increase in school funding without offsetting cuts or tax increases. But he has dealt with the recession almost entirely through spending cuts and temporary measures. There is a limit to how far that strategy can be carried without doing greater harm to the state than further tax increases would, and we are rapidly reaching that point.