Recommended Cuts Threaten Maryland’s Prosperity; Alternatives Needed

As a flurry of recommended cuts by state fiscal analysts come down like quickly falling snow it’s becoming ever more important for lawmakers to avoid the temptation of tax cuts and preserve essential services when they develop the state’s spending plan for the coming fiscal year.

In particular, two proposals being talked about – cutting the corporate income tax and reducing the number of wealthy heirs that would pay estate tax – should be taken off the table. Supporters claim these measures would help the state’s economy. Instead they shoot the state’s prospects in the foot by taking away millions of dollars needed for schools, transportation and other investments that create jobs and promote prosperity. Those two tax cuts alone would cost the state over $100 million next year and more than $400 million after five years.

These proposals are especially troubling in light of reports warning that upcoming official revenue estimates might be lower than expected.

In response to those reports and their own analysis, the Department of Legislative Services now is suggesting more than $325 million in cuts from the budget Governor O’Malley proposed for the fiscal year that starts July 1. That’s an increase of about $225 million since early last week. The suggested cuts target both public services and benefits for state police, health care workers, and other public employees.

The DLS recommendations include reductions in Medicaid provider rate increases, which could threaten access to medical care for low-income Marylanders. That would be a big step backward, which highlights the need for the state to take a balanced approach to the budget – one that includes revenue instead of a cuts-only approach that threatens economic recovery.

State lawmakers should consider the full range of available revenue options.  One sensible way would be to end the ability of large, multi-state corporations to shift income made in Maryland to other states as a way to avoid taxes. Called combined reporting, this reform has been adopted in 23 states and the District of Columbia and makes it so big businesses can’t use subsidiaries to shift profits, harming local businesses and the state. Another option is to increase the cigarette tax.

So where exactly are the recommended cuts? DLS’s detailed Fiscal Year (FY) 2015 budget briefings  include $113 million in reductions in personnel and Administration expenses in state agencies and $106.7 million in cuts to Medicaid and other health spending.

Proposed cuts in public employee pay come on top of Governor O’Malley’s proposed permanent $100 million cut in funding for their pension systems, partially stepping back from a 2011 promise of additional funding for state employee pensions. 

Source: Department of Legislative Services; MDCEP staff broke out cuts by function. (Click to Enlarge)

As more cuts are recommended and new revenue projects are made by the state we will continue to blog about the impact on prosperity in Maryland and what the state should do to stay on track. Stay tuned. 

Proposal Would Improve Use of Local Law Enforcement Resources

The federal government’s increasing reliance on state and local enforcement of immigration policies is costing Maryland money that could be better spent in other ways.

As a new report from MDCEP explains, this is especially a problem with what are known as immigration detainers -- the practice of state and local police holding people for longer than otherwise required. Today, the Maryland Senate’s Judicial Proceedings Committee is holding a hearing on legislation (SB 554/HB 29) to limit the costly enforcement of immigration detainers in Maryland.

Immigration detainers are triggered when someone is arrested for what often is a traffic offense or other misdemeanor. Fingerprints obtained by local police are sent to a database maintained by the federal government. If an administrator at the Department of Homeland Security suspects the individual may be in violation of federal immigration law, they can issue a request that a local agency hold the individual for up to 48 hours (plus weekends and holidays) past the time they would otherwise be eligible for release, until Immigration and Customs Enforcement comes to pick him or her up. The result may be the deportation of someone arrested for something as little as a traffic violation, potentially breaking apart a family.

Compliance with immigration detainers is voluntary; local law enforcement cannot be compelled to honor them. Still, most local jurisdictions in Maryland automatically enforce every immigration detainer request they receive. Only Talbot County puts a limit on the practice, refusing to enforce detention requests against violators of traffic laws.

The cost of this detention is borne by state and local jurisdiction, and it adds up. Our report estimates that immigration detainers cost Maryland at least $1 million between 2010 and 2013.

The downside goes beyond the dollar cost to state and local government. There are social and economic costs too.  Those being detained miss work, lose pay, and are deprived of seeing their families.  A Colorado study found that state lost millions of dollars in tax revenue and economic activity by granting federal immigration detainer requests.

Blanket compliance with immigration detainers is also counterproductive for law enforcement because it diminishes the ability of police to work effectively in their community. For example, Latinos are less willing to cooperate with law enforcement in criminal investigations due to fears of racial profiling or jeopardizing the immigration status of themselves or their family, a University of Illinois study found.  

Most people held under immigration detainers are charged with low-level crimes. The ACLU of Maryland found that 77 percent of all immigration detainers are issued for individuals accused of traffic offenses and other misdemeanors; only 15 percent target suspected felons. Worse, more than 40 percent of those deported from Maryland had no prior criminal record, compared with 20 percent nationwide.

In light of the need to invest in such improvements to law enforcement, treatment, and public services more generally, Maryland cannot afford to spend money needlessly. Local law enforcement officials in Maryland should reevaluate their role in enforcing federal policies they are not required to enforce. State policymakers can follow the lead of lawmakers in Connecticut and California by enacting the Law Enforcement Trust Act, establishing narrower parameters for how local law enforcement responds to federal immigration detainers.

Finally, our report documents the difficulty of determining the true cost of immigration detainers because so little data is kept or made available on their enforcement. The Trust Act would also require local facilities to collect and release data on their enforcement of immigration, which will better inform decisions regarding the use of state and local resources in federal immigration enforcement and better account for the costs associated with it.

These reforms will help to provide a better understanding of the extent to which immigration detainers are enforced and their true cost, as well as reduce this practice. Maryland cannot afford to bear the significant social and economic costs of federal immigration enforcement at the expense of valuable members of its communities. 

Major US Corporations Not Paying their Fair Share in Federal Taxes

Maryland residents filling out their tax forms and paying their monthly utility bills might be surprised to find out that one of the companies that 526,000 of them write checks to has been dodging its fair share.

The utility company actually has received more money from the federal government than it paid in taxes over the past five years -- for an effective tax rate of negative 33 percent – according to a new report.

Pepco is far from alone. It is one of 26 Fortune 500 companies, including Boeing, General Electric, Priceline.com, and Verizon, that paid no taxes at all in the last five years, despite combined profits of $170 billion, according to research by the Institute for Taxation and Economic Policy and Citizens for Tax Justice. Their study of  288 highly profitable companies and found that one third paid a tax rate of less than 10 percent between 2008 and 2012. The average effective tax rate of all 288 companies analyzed in the study was 19.4 percent, barely more than half the statutory federal corporate income tax of 35 percent.

Source: Citizens for Tax Justice and the Institute for Taxation and Economic Policy

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The Maryland General Assembly is considering closing loopholes in the state’s corporate income tax; Congress should do the same.  The “Tax Dodgers” report proposes steps lawmakers can take to close these loopholes, emphasizing the need to  require companies to disclose in which states they pay taxes, and how much.  This will both assist Congress in holding companies accountable for their fair share of federal taxes and  help states close their own tax loopholes.

This is not simply a matter of playing by the rules. Like individuals and families, businesses benefit from what taxes pay for, like an educated and healthy workforce, reliable transportation systems to move their products, and the expectation of a clean air and water.  The point is not to demonize companies, but to make sure they pay their fair share for the public services and investments that help them prosper.

Putting the Issue to Rest – Why Automatic Minimum Wage Increases Make Sense

Raising Maryland’s minimum wage to $10.10 an hour is vital to the state’s economic prospects, but – as legislation proposed in Annapolis shows – that’s only half the battle.

In addition to raising the hourly wage rate, HB 295/SB 331 would require the state to annually increase the minimum wage based on the growth in the Consumer Price Index, a measure of inflation. This would address an important problem: the purchasing power of the wage decreases over time as prices increase, and periodic increases at unpredictable intervals adopted by the legislature tend to lag far behind the need. The legislation now being considered in Annapolis would not only raise the wage to catch up to  the price increases of recent years, but provide a way for the minimum wage to keep up with increasing costs in future years as well, without requiring additional legislative action.

Doing so makes sense. Given how important the minimum wage is,  it’s crucial that it  keep up with the cost of necessities. Today, 10 states have this automatic provision. In addition to being fairer to low-wage workers, this also makes the minimum wage consistent with programs intended to help low-income families maintain basic living standards.  For example, Social Security beneficiaries receive periodic Cost of Living Adjustments (COLAs) based on inflation. 

Sources: Minimum wage data: Maryland Department of Labor, Licensing, and Regulation, "History of Minimum Wage in Maryland," February 22, 2010, https://www.dllr.state.md.us/labor/wages/minwagehistory.shtml; Inflation data: Bureau of Labor Statistics CPI inflation calculator, http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2014

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Worse still, these periodic increases in the minimum wage do not necessarily respond adequately to increasing prices. As the chart above shows, sometimes lawmakers increase the minimum wage to a value less than what the wage would be had it automatically kept up with inflation. Tying the minimum wage to inflation  would make sure that not only is the minimum wage increased regularly and predictably, but also at an amount that matches the increase in prices.

This helps not only working men and women, but businesses too. First, indexing the minimum wage would give employers more certainty about labor costs. Second, it would help the low-wage customers of businesses better able to afford what the business makes or sells.

Tying automatic minimum wage increases to inflation would take the politics out of what ought to be an economic issue instead. Then, policymakers could focus more on other important issues crucial to Maryland residents’ economic well-being, like access to affordable health coverage, high housing costs, and student loan debt. While raising the minimum wage is a necessary start, additional policies are needed to address poverty and inequality.

Halfway Through Budget Hearings: Recommended Cuts Total $101 Million So Far

With the General Assembly’s budget committees about halfway through their hearings, the biggest challenge facing lawmakers is how to continue investing in services that Marylanders rely on every day.

As the committees debate and amend the budget proposal, they are guided, in part, by the Department of Legislative Services’ (DLS) in-depth budget analysis. Last month DLS cautioned that the governor’s budget—while balanced—does not leave enough of a cushion at the end of the year to account for unexpected expenses during the year. Subsequently, as the committees work through each agency’s budget, DLS offers a menu of recommended cuts for each agency. While the legislature cannot add new money to the governor’s budget proposal, they can cut spending in some areas and transfer those funds to other priorities elsewhere in the budget. 

DLS is recommending several good solutions, including:

• Replacing $30 million allocated for debt service reduction with proceeds from anticipated sales of bond premiums.  
• Reducing various personnel and administrative costs in state agencies by $27.2 million, mostly through eliminating vacant positions or through technical adjustments, like turnover rates and cost-of-living adjustments. 
• Cutting $17.6 million from the Department of Agriculture, since this amount was already paid for by the Chesapeake and Atlantic Coastal Bays 2010 Trust Fund.

Unfortunately, not all of DLS’s recommendations were so good. In fact, some of the agency’s recommended reductions would cut money from important state programs and services, including: 

• $14.4 million cut to economic development efforts, which includes $8.9 million for the Maryland Economic Development Assistance Authority and Fund (MEDAAF), $2 million for a biotechnology tax credit, $1 million for a cyber-security tax credit, and $2.5 million in tourism development grants. 
• Cuts to investments that support Maryland's working families, which include a $3.6 million for job training through Employment Advancement Right Now (EARN), $2 million for child care assistance, $500,000 grant for the Maryland Food Bank, and a $100,000 grant for Roberta's House. 
• $3 million cut to foster care
• $799,000 cut to agricultural land preservation through the Tobacco Transition Program
• $125,000 cut to the Department of Aging's Maryland Access Point

Lawmakers should think twice before cutting any of these programs, and should instead focus their efforts on other parts of the budget.

Next month the Board of Revenue Estimates (BRE) will release updated forecasts of state revenue for Fiscal Years 2014 and 2015.  Any increases from the December forecast will provide additional flexibility and funding as the General Assembly moves towards passing their final budget plan in April. 

As the budget committees continue their work, check back here for updates.

Closing Corporate Loophole Would Make MD’s Taxes More Fair and Generate Needed Revenue

By closing a loophole in the way corporations report their earnings, Maryland can make its tax system fairer and generate needed revenue for schools, public safety and other services.

The Senate Budget and Taxation Committee will take up legislation today that would close the door to a range of currently legal accounting tactics businesses use to avoid paying taxes to the state. The Maryland Center on Economic Policy will join others in testifying in support of the Business Relief and Tax Fairness Act (HB 1298/SB 395).

The legislation  would treat a parent company and its subsidiaries as one corporation for state income tax purposes, a concept known as ‘‘combined reporting.’’

Combined reporting provides a more complete and accurate accounting of the profits corporations earn from their activities in Maryland. For example, under current law, a company can  establish a subsidiary in a state with a lower tax rate and shift its earnings there on paper by purchasing goods from the subsidiary at artificially high prices. The legislation would end this tax avoidance tactic.

Combined reporting also helps put smaller, locally-owned corporations with no presence outside of Maryland on a more equal tax footing with larger companies that operate in many states. This level playing field helps protect local jobs.

By stemming the flow of profits earned here to other states, combined reporting will also have the benefit of raising  revenue for education and other public services that bolster Maryland families, businesses and our economy. The Department of Legislative Services estimates that Maryland would collect tens of millions of dollars in additional revenue annually.

Maryland faces serious and well-documented needs in education, healthcare, public safety , environmental quality, and many other areas. But the state doesn’t have adequate resources to meet those needs, threatening further damaging cuts . The additional revenue from combined reporting is  crucial to preventing those cuts.

Combined Reporting WOULD BRING NEEDED REVENUE TO MARYLAND 

Source: Maryland Department of Legislative Services

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Combined reporting is well-established around the country. Twenty-three of the 45 states with corporate income and similar business taxes and the District of Columbia use combined reporting. Because it is so common, most large corporations that would be subject to a Maryland combined reporting law already have experience using it elsewhere. Maryland will not be breaking any new ground with this proposal.

States with Combined Reporting
Alaska	Kansas	New Mexico
Arizona	Maine	New York
California	Massachusetts	North Dakota
Colorado	Michigan	Ohio
District of Columbia	Minnesota	Utah
Hawaii	Montana	Vermont
Idaho	Nebraska	West Virginia
Illinois	New Hampshire	Wisconsin

Though corporate accounting practices may seem obscure, they have major implications for whether Maryland is able to collect enough revenue to fund  the public services and investments that support Maryland residents and business. By implementing combined reporting, Maryland would create a more fair, effective, and productive corporate tax system. 

House Hearing Today on Minimum Wage Bill that Will Benefit MD’s Workers and Economy

Later today, the House Economic Matters Committee will hold a hearing on legislation that would incrementally raise the minimum wage in Maryland to $10.10 per hour by 2016. The bill would also increase the tipped minimum wage from 50 percent to 70 percent of the full minimum wage. Doing so would provide an immediate benefit to hundreds of thousands of workers in Maryland and their families, as well as benefit Maryland’s economy overall.

As Maryland continues its slow recovery from the Great Recession, an increase in the minimum wage is needed to help workers’ earnings keep pace with a rising cost of living amid declining wages. This is particularly true for Maryland residents in the lowest 20 percent income bracket, where wages have declined by $1.24 per hour since 2009, according to a recent study by the Economic Policy Institute.

But the same study shows that raising the minimum wage would have a widely-shared, real impact on the earnings of Maryland workers. Because this legislation would raise the minimum wage incrementally over a three year period, these benefits would accrue progressively each year. In the first year of enactment, when the minimum wage in increased to $8.20, 257,000 workers would benefit either because their wage is directly increased or because employers are also likely to increase the wages of those making just above the minimum. In 2015, when the minimum increases to $9.15 per hour, 311,000 workers would benefit, while 455,000 workers would bring home higher paychecks when the minimum wage is increased to $10.10 per hour in 2016. In total, Maryland workers would receive $721 million in additional wages over the phase in period.

NUMBER OF MARYLAND WORKERS AFFECTED BY INCREASING THE MINIMUM WAGE TO $10.10 BY 2016

In thousands

Source: Economic Policy Institute

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Further, the EPI study indicates that these benefits would go to a wide variety of working Marylanders. Far from the stereotype that most minimum wage workers are teenagers looking to make a little extra money, 86.7 percent of workers that would benefit from a minimum wage increase in Maryland are at least 20 years old, and 56 percent work full time. The average age of affected workers in Maryland is 33, while teenagers comprise only 13 percent of the workers who would see a raise. Nearly a quarter (23.2 percent) of Marylanders that earn the minimum wage are parents, and 58 percent are women. As a result of an increase in the state minimum wage, 210,000 children would benefit from at least one parent’s increased earnings.

While some might argue that increasing the minimum wage will lead to job losses as businesses cut back on employees and hours to make up for the need to pay workers more, evidence suggests that this is not the case.  Broad reviews of economic research on the relationship between the minimum wage and employment show that increasing the minimum wage either has no impact on employment, or a very small affect on employment that is eclipsed by the positive impact on workers and the economy that occurs when wages increase.

In this regard, increasing the minimum wage not only directly increases the earning of workers whose income is at or near the minimum wage, but will provide a needed boost to Maryland’s economy more broadly. Because low-wage workers are more likely to spend their increased earning on basic necessities, those who will benefit from an increase in the minimum wage are also likely to channel these benefits to the broader economy as well. This is supported by a recent study by the Federal Reserve Bank of Chicago, which shows that when the minimum wage is increased, households with at least one worker making the minimum wage increase their yearly spending.  This also means that these workers will spend their increased earnings locally. Increased wages would generate more than $456 million in new economic activity and would create or support 1,600 new jobs in Maryland as businesses expand to meet increased consumer demand, according to the Economic Policy Institute.

We have previously discussed how an increasing number of policy makers are joining the overwhelming sentiment among Maryland residents and the country as a whole that favors raising the minimum wage. State lawmakers should take advantage of the opportunity to increase the earning power of working Marylanders and benefit the state’s economy.