Virginia and Maryland: Similar challenges, different messages

Is Virginia awash in money while Maryland is awash in red ink??

No.

The two states’ financial situations are remarkably similar. Both states had significant balances as they closed their fiscal years last June 30. Both states have balanced budgets in place through June 30, 2012.

However, both states used an array of temporary measures to achieve that balance. Their ongoing revenues do not cover the needs for public schools, colleges and universities, health programs, public safety operations, and the other services state governments provide.

As a result, both governors will face new revenue shortfalls when they write their proposed budgets next winter.

Virginia’s governor Bob McDonnell stated: “…We have ended the 2011 Fiscal Year with a surplus of over half a billion dollars. This is the second year in a row that we have posted a budget surplus.” He was bragging about the Commonwealth’s   unanticipated revenue plus unspent appropriations at a single point in time in the past.

Maryland has not yet announced its fiscal year-end surplus. However the state anticipated a $647 million balance when it approved this year’s budget in April. Since then, Maryland’s Comptroller has announced that revenues for the year were running $300 million over the previous official estimate. So the fiscal year-end balance is going to be about $950 million in surplus. In addition, Virginia has depleted most of its “Rainy Day” reserve fund, while Maryland’s still holds 5% of annual revenues.

Two days after McDonnell’s announcement, Maryland’s Governor Martin O’Malley told a convention of county officials, “While we do anticipate revenues to exceed what had been originally been forecast for FY12 and FY13, our projected budget fall for 2013 is approximately $1 billion.”

O’Malley is worried about the state’s financial stability into the future. (The improved revenue attainment might reduce Maryland’s shortfall, but there are also unanticipated costs in programs like Medical assistance and prison operations. So the best guess for Maryland’s shortfall remains around $1 billion.) This slideshow summarizes Maryland’s budget position.

Although Governor McDonnell isn’t talking about it, Virginia faces an analogous problem. Through fiscal 2013, the Old Dominion’s revenues are projected to fall $500 million short of funding even current operations.

This report from Virginia’s Commonwealth Institute documents the revenue shortfall looming in Richmond.

And current funding levels reflect four years of constant budget-cutting. In both states, services from schools, to roads, to medical coverage are already inadequate.

Both states have money in the bank today, but face serious shortfalls in the future. Maryland’s projected shortfall is larger, but so is its current surplus. The overall sizes of the two states’ budgets are roughly comparable: $15 billion in Virginia and $13 billion in Maryland.

Maryland Governor O’Malley has signaled that he will propose a “balanced approach” that includes spending cuts and revenue measures. That’s the proper course. If we continue to balance the budget with cuts alone, we’ll sacrifice the investments we have made in a skilled workforce, a great transportation system, and a high quality of life. Those are the things that give Maryland its competitive edge, and will sustain our ability to compete successfully in the future.

Governor O'Malley Signals a Balanced Approach to Balancing the Budget

Traditionally, Maryland governors use their speech at the annual Maryland Association of Counties (MACO) convention in Ocean City to unveil their key policy initiatives for the year. On Saturday, Governor O’Malley spoke to the assembled local officials about the budget situation facing Maryland. The Baltimore Sun’s coverage is here.

The Governor told the hard truth that extending Maryland’s “steady diet of cuts” will be unhealthy, and we now need a balanced approach to balancing the budget.

As detailed in our recent report, the $5 billion already cut from the budget is already hurting us in the present and harming Maryland’s economic future. Schools are increasing class sizes and eliminating programs. Staffing shortages are affecting security in prison and parole operations. There is a waiting list for child care assistance. The list goes on and on.

At the same time, the state faces a billion-dollar shortfall of revenue needed just to maintain services at this pruned-back level. Closing this gap with a cuts-only approach will hurt Maryland families now, and harm our economy for years to come.

Federal budget actions are likely to make the state’s financial situation more precarious. The congressional “super committee” is slated to issue its recommendations by November 23. Medicaid, the largest single item in Maryland’s state budget, is at risk. Medicaid covers nearly 550,000 low-income Marylanders. And 58% of them are children.

Medicaid costs are shared between the state and the federal government. One likely way the federal government will reduce its deficit is to foist more of the costs of Medicaid onto the states.

That would further increase Maryland’s shortfall in the future.

So, the Governor is ready to think about a balanced solution that includes revenues. We think that is the correct approach.

The Governor says he is not yet ready to talk about what specific revenue measures he will propose. The revenue package should be fair. It should not have a disproportionate impact on low-income residents. It should help Maryland towards a sustainable economic future.

Our recent report suggests some reforms that will add revenues in a fair and economically viable way. Modernizing the sales tax to include more services, reforming corporation taxes to eliminate tax dodging by big, multi-state companies, and making the income tax more progressive are all good options.

It’s time for Maryland to think about putting our state’s finances in sound condition and investing in our future prosperity.

Maryland's Giant Six-Percent-Off Sale

Maryland’s sales-tax-free week is almost here again. I call it “MARYLAND’S GIANT SIX-PERCENT-OFF SALE.” 

 

A law passed back in 2007 established August 14-20 of this year as a “sales-tax holiday” because legislators thought that by now the recession would be over and the state could afford the revenue loss. But tough economic times have lasted longer than anyone expected, to the point where state is really giving up money it doesn’t have.

For that week, there will be no state sales tax on clothing items under $100.

If the department stores advertised 6% off all clothes, it would not be a very exciting sale. But darn it, state Comptroller Peter Franchot and other politicians sure get excited about the tax-free week.

 You can see a good report from WMAR TV-2 here.   It includes about 20 seconds of an interview with me.

Anyway, it’s my job to be the wet blanket. This “tax holiday” is fun, but it’s a costly gimmick.

The holiday is estimated to cost the state treasury about $10 million in lost revenue. That’s enough money to provide 1,000 families with emergency housing assistance, or 5200 scholarships to state colleges. And it comes after the state made big cuts to education, healthcare, and other services to close a $1.5 billion revenue hole in the current budget.

 The tax free week is supposed to help Maryland families with back-to-school season expenses, and to promote Maryland retailers.

The economic research shows that stores don’t benefit much from sales tax holidays. They affect the timing of purchasers rather than the overall amount. Business might be up during a sales tax holiday, but it goes down other times as people simply shift their purchases to the tax-free days.

One Florida study showed that retailers raised prices during the tax holiday so they got 20 cents out of every dollar customers saved on taxes.  

More importantly, the sales tax holiday provides no relief to low-income Marylanders the other 51 weeks of the year while giving an unnecessary break to a millionaire who could easily afford the $4.80 tax on an $80 dress shirt. Low-income families have to spend most or all of what they make just getting by. With less disposable income than wealthier taxpayers they aren’t as able to shift the timing of their purchases to coincide with the sales tax holiday without throwing their finances out of kilter.

A better way to help families that struggle to stay afloat would be to have a tax system in Maryland that provides the revenue needed for services like education, health care and job training that help people make their own way over the long haul. It would make more sense to reinstate the recently expired upper bracket for the highest-income households in the state, and using the money to prevent  cuts to education, health services, and job training programs.

Maryland Millionaires Didn't Migrate

People decide to locate or stay in Maryland mainly because of their jobs, their families and their community ties. The cost of housing is also important. Tax rates are not a big factor. This applies to poor people, rich people, and middle-income people.

A new report from the Center on Budget and Policy Priorities examines the assertion of anti-tax groups that tax increases on very-high incomes drive millionaires to leave for other states.

That claim is false.

The study looked at the academic literature on migration and at specific data and research in Maryland, Oregon and New Jersey.

In each case no more than a trivial amount of migration can be tied to the tax increases. The study concludes: "...the effects of tax increases on migration are, at most, small. In other words: raising taxes won't spark a large wave of out-migration, and cutting taxes won't spark a large wave of in-migration.

For 2008 through 2010, Maryland imposed an extra 3/4 of 1% state tax rate on income over $1 million. (For a total state tax rate of 6.25% on income in that bracket). That policy provided $170 million during the three years to help balance the state's budget.

What WILL be harmful to Maryland's economy now, is deep cuts to education, the transportation infrastructure, heath services, job training, and the other public assets that taxes pay for. Maryland should re-instate the 3/4 of 1% extra tax on income over $1 million. The millionaires will continue to live here, and more will come to employ our well-educated workforce and take part in our great quality of life.

Passing off teacher pensions to local governments passes the buck but doesn’t solve anything

Maryland Senate President Thomas V. “Mike” Miller, Jr. advocates turning responsibility for funding teacher retirement costs over to local governments. The Benefit Sustainability Commission, chaired by former state House Speaker Caspar Taylor recommended transferring 50% of the cost of teachers’ pensions and social security to local Boards of Education – a $233 million cost shift. While this action would help the state’s financial situation “on paper,” in reality, it just throws the same problem to our counties and school systems.

The state has paid the cost of teacher retirement since the beginning of a pension system for teachers in the 1920’s. The amount now totals about $1 billion.

There are some sound policy reasons to consider local governments sharing in teacher retirement costs. The current 100% state funding for teacher pension benefits may help the state’s most affluent school systems afford the highest teacher salaries, to the detriment of less wealthy systems.

However, now is not the time to put additional burdens on local governments. School costs generally make up 40% to 60% of the expenses of Maryland counties. And local revenues are now in as serious trouble as the state government’s. 

Local governments rely heavily on property taxes. In a downturn, the property tax base takes longer before it declines than do the income and sales taxes – the mainstays of state revenues. As a result, the counties and Baltimore City governments are just now feeling the brunt of the revenue shortfall.

Merely shifting more cost from the state to the local level of government does nothing to relieve the problem. Already, the state has required local governments to pay for 90% of the cost of assessing property values for tax purposes and a share of the cost of educating children in state residential placements. Local governments are currently cutting services in public schools, community colleges, police and fire departments, recreation programs, trash removal, and their other services.

Making local officials add teacher retirement costs to their expenses will just shift the onus of solving the shortfall from state officials to local ones. The citizens pay taxes and depend on services from both state and local levels of government. Local governments will need to raise their taxes, cut more from school budgets, or cut more from other local services like police, road repair, and parks.

The Taylor Commission recommends phasing in the shift over Maryland ranks low among states in the share of public school dollars paid by the state. Maryland pays 42% of the overall cost of schools. The average state pays 48%. If Maryland decides to require local governments to share teacher retirement costs, then the state ought to increase its share of the direct costs of public schools. Maryland should not just offload its obligations onto its local governments, and worsen their financial problems.