Latest Projections are Strong Argument against Tax Cuts

Yesterday’s significantly lower projections by the Board of Revenue Estimates mean proposed reductions in Maryland’s estate tax and corporate income tax ought to be abandoned by legislators. Maryland can’t afford the cost and still do everything needed to build a strong economic future for the state.

According to yesterday's press release from the Comptroller's Office, the BRE decreased expected revenue collections for the current state fiscal year and the next one by $237.8 million, mostly as a result of lower projections for the personal income and sales taxes. Since the Governor's proposed budget is balanced using BRE's December estimates, this latest revenue write-down creates a gap that must be closed before the legislature can pass a balanced budget next month.

 Source: Board of Revenue Estimates (click to enlarge)

 Source: Board of Revenue Estimates (click to enlarge)

It would make sense for legislators looking at yesterday’s numbers to reject proposals to slash revenues further by cutting the corporate income tax or estate tax. Yet measures to do both are still receiving serious consideration. These proposed tax cuts would save the very wealthy and large, profitable corporations money at the expense of average Marylanders. The state would have to make up the difference by reducing its commitment to invest in schools, transportation, hospitals, safe communities, and the other building blocks of economic growth and job creation.

Instead of these money-losing proposals, Maryland needs to find ways to increase revenue and restore support for important services that have stagnated or fallen behind as Maryland families continue to struggle.

Sensible options are available that would avoid damaging cuts to crucial services for vulnerable Marylanders, like Medicaid and child care subsidies, and threaten economic recovery. These three proposals would provide $247.5 million:

• Increase tobacco taxes as proposed in the Healthy Maryland Initiative (HB 443/SB 589), raising $110.8 million in General Fund revenue in the coming fiscal year. 
• Reduce $106.7 million in state funds for personnel and administrative expenses in state agencies as recommended by Department of Legislative Services. 
• Reduce the General Fund allowance for Debt Service by $30 million due to anticipated proceeds from sales of bond premiums, also recommended by DLS.  

(click to enlarge)

While the personnel and administrative cuts include cost-containment choices within state agencies, state employees would still receive a full-year one percent general salary increase, several health insurance premium holidays, and merit pay increases that become effective throughout the year. HB 443/SB 589 includes a requirement that the Governor use at least $21 million of the new revenue to fund tobacco use prevention and cessation programs starting in the 2016 fiscal year.

Click here for a spreadsheet from the Comptroller's Office with the new revenue estimates and check back here for updates as the legislature continues to work to pass the budget.  

MD unemployment rate drops

Maryland's unemployment rate fell to 6.4 percent (PDF) in November, according to data released today by the Bureau of Labor Statistics, after stalling at 6.7 percent for the previous two months. This is the lowest unemployment rate Maryland has seen in almost five years.

The state unemployment rate fell in November because the number of employed Marylanders rose by just over 8,800 workers. The number of jobs in Maryland (these are two different measures-some jobs may be held by nonresidents, while some Marylanders may work outside the state) also went up, by roughly the same amount.

While this is welcome news, Maryland's economy still has a long way to go as it slowly recovers from the Great Recession. And the slow recovery is likely to continue: the Board of Revenue Estimates projected recently that job growth will continue to be sluggish in 2014 (PDF), at just 1.5 percent.

Maryland lawmakers will have the opportunity to take action in 2014 on a number of issues that could help working families, whether it's promoting job creation directly, providing supports to help while workers are between jobs, or investing in the things that make our state great (like our natural environment, our schools and hospitals, or the infrastructure that connects us. We'll be watching to see what they do. 

Spending Affordability Committee Recommends Modest Budget Increase, Deficit Reduction

Yesterday, Maryland state lawmakers responsible for advising the Governor and General Assembly on spending levels for the state budget recommended that next year’s spending increase no more than 4 percent, from $37 billion to $38.5 billion. This relatively small budget increase is necessary to support inevitable growth in state spending to meet the needs of residents who, like the state itself, are still recovering from the Great Recession.

Revenue Down in Short Term, Projected Up in Long Term

The Spending Affordability Committee’s decision comes amid decreased revenue projections for the current fiscal year, but increased expectations for fiscal year 2015. The December Board of Revenue Estimates forecast that revenues for the current fiscal year will be $101.1 million less than expected, largely due to an economy that is still growing recovering from the Great Recession and hampered further by federal budget sequestration that kicked in at the beginning of 2013 and resulted in less revenue coming into Maryland, as well as the federal budget shutdown in October and general environment of uncertainty regarding federal spending. However, the December revenue estimates expect the state’s economy to grow and expect that revenue for FY 2015 will be $143.7 million more than initially forecast in September. This includes expectations for improved income and sales tax revenue that will result from the opening of the Amazon distribution center in Baltimore. The recent federal budget deal should reinforce these expectations by removing uncertainty and relieving sequestration cuts.

(Click to enlarge)

Source: Maryland Board of Revenue Estimates

Modest but Necessary Budget Growth

Warren Deschenaux, director of the office of policy analysis in the Department of Legislative Services characterized the projected FY 2015 $361 million structural deficit as “a small hole, certainly compared to what we have seen in the past." As such, while taking action to reduce the state’s budget deficit is imperative, state lawmakers would be wise to do so in a way that does not drastically affect the ability of state programs to meet residents’ needs, and allow the budget to grow during crises as needed. In general, state spending on programs can be expected to increase from year to year as the population grows and particularly in times such as these when needs remain high. During times of normal economic growth, these increases in spending are more than covered by economic growth that leads to rising wages and revenue for the state. This is typically the case for Maryland. However, the 2008 recession caused Maryland lawmakers to reduce spending to respond to the 2008 recession and subsequent slow recovery (some of which was offset by new federal funds in the Recovery Act).

(Click to enlarge)

Source: December 2013 Spending Affordability Committee Report; 90 Day Reports for the 2011, 2012, and 2013 Legislative Sessions

Usually, the Spending Affordability Committee recommends a percentage growth goal for the governor’s budget. However, between FY 2011 and 2013, the committee instead proposed targets to reduce the structural deficit. (The Spending Affordability Committee’s recommendation for 2010 was 0 percent budget growth.) This year, the Spending Affordability Committee returned to form and recommended an increase of no more than 4 percent. This responds to the need to allow spending to rise to meet the needs of state programs while also reducing the structural budget deficit by $125 million. This recommendation is also in line with the expected growth of the Maryland economy during this time. Revenue grew by 4.4 percent between FY 2012 and 2013. Currently, the Department of Legislative Services forecasts FY 2014 revenue to be 2.4 percent more than FY 2013. Not increasing state spending at all, as initially proposed by some lawmakers during yesterday’s Spending Affordability decision meeting, would amount to a cut in support for state programs.

Investment Income Growth Outpacing Earnings

Notably, while the economy is still struggling to recover from the Great Recession, some forms of income have grown faster than others. According to the Board of Revenue Estimates, capital gains income grew by 50 percent in 2012 and by 20 percent in 2013, outpacing the growth of income from wages.

Debt Increase Limited

In November, we discussed the Spending Affordability Committee briefing on Maryland’s Capital Budget, in which the Department of Legislative Services advised lawmakers not to increase Maryland’s borrowing authority by $75 million per year for the next five years, as requested by the O’Malley administration and approved by the Capital Debt Affordability Commission, out of concerns about the increasing costs of debt servicing for the state budget. The committee decided to recommend increasing borrowing authority by $75 million for only one year, out of concerns for the need to fund Maryland’s plans to clean up the Chesapeake Bay without diverting money from other transportation projects or unrelated parts of the state budget. It will be up to the next governor and legislature to decide whether to pursue additional debt authorization or to fund Bay cleanup through some other means.

Though the Spending Affordability Committee’s recommendations are not binding, the Governor and the General Assembly usually take action in line with its advice. Governor O’Malley will release his budget no later than January 15th.  

MD revenue projections down $61.9 million

Yesterday, the Board of Revenue Estimates released its latest figures for Fiscal Year 2014. The Board now projects General Fund and Budget Restoration Fund revenues of $15.4 billion. While this is less than the previous projection, revenues are still expected to rise 3 percent from FY 2013.

Looking closer, the revisions are quite different depending the source of the income. The personal income tax estimate has been revised upward by $114 million, but corporate income taxes are now projected to be $67 million lower. Sales and use tax, state lottery receipts, and a variety of other revenue sources are also projected to perform below previously anticipated levels.

The reason for these downward revisions continues to be the stubbornly lackluster economic recovery, and the fiscal uncertainty emanating from Congress. That's why Maryland must continue to take the initiative by raising the funds necessary to keep investing in what makes our state great (education, health care, innovation, a strong safety net), regardless of what happens at the federal level.

The Week Ahead - Pro Football Kickoff Edition

Pro football fans in Maryland are geared up for the start of the season. The Baltimore Ravens begin their regular season Thursday. Washington's NFL Team plays its first regulation game of 2013 next Monday.  

Last week we blogged on Maryland’s close-out report for fiscal year 2013. Even though revenues fell $62 million short of estimates, the state ended its year on June 30 with $1.2 billion in the bank. We also blogged on the unprecedented levels of long-term unemployment – with 89,000 Marylanders unable to find work for 27 weeks or more last year.

Coming Up September 3-6

September 4: At 10 am in Annapolis, the Board of Public Works meets.

At 1 pm in Annapolis Maryland's judicial partners will brief the Special Commission of Security in State and Local Corrections Facilities on local court and detention center interaction; the impact of case docketing on detention centers; and security at bail and pretrial hearings

September 5: At 1 pm in Annapolis, the Maryland Health Care Reform Coordinating Council will recap the 2013 Legislative Session, and get an update on Maryland health benefit exchange activities, and the state innovations model planning grant. 

September 6: The US Bureau of Labor Statistics releases national employment and unemployment data for August. 

 

Revenue Board Slightly Reduces Estimates

The Board of Revenue Estimates has revised the official estimate of state revenues downward by $115 million. The $115 consists of $77 million in the current year (1/2 of 1 percent) and $38 million in the upcoming fiscal year 2014 (1/4 of 1 percent). The decrease comes mostly from sales tax proceeds, with smaller reductions attributed to corporation and individual income tax. Even with this revision, revenues would grow 4.9 percent this year and 2.4 percent next year.

Comptroller Peter Franchot, the chair of the Board of Revenue Estimates, attributed the reduction to:

• Reduced consumer expenditures related to the 2 percent increase in federal payroll taxes that took effect January 1 (a part of the “fiscal cliff” provisions that was allowed to take effect).
• The economic ‘de-multiplier’ (my phrase, not Comptroller Franchot's) effects of anticipated federal budget cuts on Maryland’s economy.

This estimate revision arrives just as the legislature is completing its hearings on agency budgets and beginning to make its budget decisions.

In constructing the proposed budget, Governor O’Malley allowed for a cushion of over $1 billion.  He did this precisely because the resolution of the federal government’s budget was uncertain and that federal actions could affect state revenues and programs.

The legislature should not over-react to this modest reduction in revenue growth. The state budget remains balanced through June 2014 with a comfortable margin. Inflicting state budget cuts on top of federal cuts will not help our economy.

More moderately good news

On Thursday, two of the last pieces of the 2014 budget puzzle fell into place.

The state Board of Revenue Estimates published the December revenue estimates. This is the number that the Governor will base his balanced plan on. The estimate adds $161 million to the previous estimates, from September. The bulk of the increase is in the corporation income tax. The full report is here.

Also the legislative spending affordability made its final recommendation to the Governor. The new revenue estimates would fully cover the cost of the state’s “current services” budget through June 2014. However, the budget is not sustainable into the future. It depends on spending down the fund balance accrued through past revenue gains.

The Spending Affordability Committee recommended that the Governor resolve $200 million of the structural imbalance in his proposed budget. The remaining structural deficit of $183 million is judged to be “within normal budget management tolerances.” The full report is here.

Of course the wild card in the state’s budget remains the federal “fiscal cliff.” If Congress does not reach an agreement on the federal budget, then automatic tax increases and program cuts will take effect. If they do (and if they are allowed to remain in effect for more than a few weeks), then Maryland will lose considerable direct federal aid. More seriously, the federal actions would trigger a new economic downturn, which would reduce state revenues and send Maryland back into a new budget crisis.