A tough budget

Our view: O'Malley's spending proposal will be tough to pass, but it moves the state toward fiscal sustainability without unduly burdening the poor

January 18, 2012

Gov. Martin O'Malley today submitted what is likely to be among the most controversial budget proposals in his two terms in office. Faced with a $1 billion gap between projected spending and revenues, and committed to a goal of finding real solutions to Maryland's persistent budget woes, Mr. O'Malley is now reaching for the hard-to-do ideas, many of which have been kicking around Annapolis for years but have gone nowhere because they were politically unpalatable. He is finally proposing a shift of teacher pension costs to local governments and addressing the loss of sales tax revenue to e-commerce. He is going after tax credits for niche industries, and he is cutting $200 million from state support for Medicaid. He relies less on fund transfers and other gimmicks than he ever has.

The governor's proposed budget isn't perfect — it's hard to imagine how it could be under the circumstances — but it does two important things. It moves the state significantly closer to an ongoing sustainability, and it does so in a way that, on the whole, avoids balancing the budget on the backs of the poor.

The governor already appears to have a fight on his hands over his proposal to shift teacher pension costs to the counties. As it stands, the state picks up the entire cost of teacher pensions, while local governments handle their Social Security costs. Mr. O'Malley proposes splitting both items 50-50, which effectively transfers $240 million in expenses to local governments. County executives are, understandably, upset about this, arguing that the proposal amounts to no more than shifting the onus for solving the state's problems onto them. But there's a good policy rationale for Mr. O'Malley's move, and he has structured his proposal in a way that significantly mitigates the impact on local government — particularly in jurisdictions that are least able to cope with the costs.

Local governments determine teacher salaries, which in turn determine the cost of the pensions their teachers will eventually receive. The net result of this is that the state winds up paying the most to support pensions in the counties that spend the most on teacher salaries — which also tend to be the jurisdictions that have the highest levels of income, or property tax bases, or both. It makes more sense for local governments to be forced to factor retirement benefits into the cost of their decisions on teacher salaries, and the governor's proposal begins to do that.

There are two main problems with an abrupt shift of these costs to the locals, and Mr. O'Malley seeks to address both. The first is that transferring costs from one level of government to another doesn't inherently solve anything — after all, the taxpayers are ultimately on the hook either way — and the second is that some local governments, Baltimore City's in particular, are more strapped than others.

Mr. O'Malley is pairing his cost shift with a proposal to limit personal exemptions and deductions for about the top 20 percent of Maryland income tax filers, and because local governments share in state income tax receipts, that will cushion the blow. The governor is also proposing to finally close a loophole that has allowed limited liability corporations to avoid transfer taxes when selling properties (a long-time priority of local governments) and is waiving a requirement that local governments help to replenish the state's income tax reserve fund, which was raided in previous state budget-balancing efforts. Because some of the state's poorer jurisdictions would still be harmed by the shift, Mr. O'Malley is also proposing to increase disparity grants.

That makes the whole plan budget-neutral for Baltimore City. Baltimore County would take the largest hit of any jurisdiction in the state at $2.8 million — sure to be unwelcome in Towson, but hardly catastrophic.

And what about Montgomery County, where Executive Isiah Leggett pronounced the plan a "non-starter"? It comes out $18 million ahead.

Mr. O'Malley made a ruckus on the day the General Assembly session started by musing that if he had his druthers, the state would just raise the sales tax from 6 percent to 7 percent and call it a day. That's odd, because his actual tax proposal is much better. The sales tax is regressive, but this plan makes the income tax more progressive. The governor would phase out exemptions for individuals earning more than $100,000 a year and couples earning more than $150,000, and would limit deductions for individuals earning more than $150,000 and couples earning more than $200,000. That would raise about $182 million. The actual impact on any given family depends on a variety of factors, but those at the lower end of the scale would wind up paying about $50 more per person per year.

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