The Big Bad Wolf of Transportation

In our previous blog posts on the budget situation, we used the story of Little Red Riding Hood to illustrate the budget situation. Because Maryland has managed its finances responsibly through the Great Recession and its aftermath, and because the nation and the state are experiencing an economic recovery (albeit a slow, fitful, and uneven recovery), this year’s budget situation is much less challenging than the previous five or six budgets.

It’s like Little Red Riding Hood delivering her basket of goodies to Grandmother’s house. It ought to be an easy, straightforward task. However, there are Big Bad Wolves in the woods, and if Little Red happens to encounter one of them, the trip will suddenly become dangerous.

On January 16, Governor O’Malley delivered his budget and it was indeed less difficult and complicated than previous budgets. There is a comfortable ending balance, an increase in the State Reserve Fund, no large, highly visible cuts, and no significant tax increases.



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However, we cautioned about three “Big Bad Wolves” lurking in the woods. The first wolf was the federal fiscal cliff.

Today, we meet the second Big Bad Wolf: Transportation Finance.



Maryland has a system for funding transportation that relies on dedicated revenue. The revenue sources include transportation-related revenues like gas taxes and vehicle titling and registration fees, as well as a share of the corporation income tax. The gas tax is the largest of these sources. It has not increased since it was set at 23-1/2 cents per gallon in 1992. William Donald Schaefer was the governor.

Since the tax is a flat number of cents per gallon, the amount or revenue does not adjust for inflation. The price of gas in 1992 was $1.09 per gallon.

Soon, the revenue will be insufficient to cover any new highway or transit projects at all. It will only cover operating costs and routine maintenance.

Increasing the gas tax would be the most straightforward way to finance the state’s transportation needs. However, legislative leaders are wary of supporting a gas tax increase. It is perceived as being wildly unpopular with voters.

So … here is where the Big Bad Wolf of Transportation comes in. One way to increase transportation funds without raising gas taxes would be to use general fund revenue sources to finance transportation. And this could endanger adequate funding for education, healthcare, public safety functions, and the other important services that rely on those sources. Governor O’Malley keeps talking about a sales tax increase to solve the transportation problem. Virginia Governor Robert MacDonald has proposed a transportation finance package in that state that involves both increasing the sales tax and diverting a share of existing sales tax revenues for transportation needs.

• To avoid being attacked by this Big Bad Wolf, Maryland should fund its transportation needs with a gradual, phased-in gas tax increase.
• To reduce the economic effect as well as the "regressive" effect on low-income Maryland workers, the gas tax increase should be accompanied by a small increase in Maryland’s Earned Income Tax Credit.
• Finally, the revenue should be used to a balanced transportation program, including significant transit, pedestrian and bicycle improvements.

O'Malley's budget released

Governor O'Malley released his budget today. Highlights include:

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• The budget totals $37.3 billion, a 4.3% increase.
• The significant increases are in:
• Health ($406 million - mainly federal funds for Medicaid),
• Transportation ($269 million,  but this could change markedly as the legislature considers a transportation finance package),
• K-12 Education ($183 million, all in increased aid to public school systems),
• Universities and colleges ($144 million, of which $90 million is state funding and $54 million is from the institution's own revenue sources).
• $450 million of the increase is in the appropriation  to the State Reserve Fund. The Governor is proposing increasing the "Rainy Day" account in the reserve fund from 5% (where it has remained throughout the recession and its aftermath) to 6%. This is to provide a cushion against possible federal budget cuts.
• The proposed budget does not provide any new revenue for the state's transportation fund. The legislature is expected to consider a separate transportation funding initiative this session.
• At the Governor's budget briefing, state budget Secretary Eloise Foster summarized $325 million in cuts from current services "baseline" funding levels. The cuts are concentrated in Medicaid (with some related to additional federal funding in the Affordable Care Act), and a 2.5% limit in rate increases for health and human service providers, and deferring some payments to a reserve fund for local government income tax revenues.

The General Assembly will now take up the governor's budget. Our knowledgeable readers will remember that the legislature is only allowed to cut the budget in most cases.

Stay tuned for MBTPI's more detailed analysis of the proposed FY 2014 budget in the coming weeks.

At start of session, Governor signals a balanced approach to balancing the budget

Governor O’Malley signaled his intention to adopt a balanced approach to balancing the budget this morning at the annual Annapolis Summit hosted by the Marc Steiner Show and the Baltimore Business Journal.  In addition to supporting raising the gas tax and flush tax, he indicated his support for raising the sales tax by one percentage point as his preferred solution to the structural deficit in the state’s operating budget. His comments are a good indication of what his budget will include, but we still have to wait until next Wednesday for the complete package.

After years of job-killing cuts, the Governor’s sales tax proposal is a good way to begin a conversation about rebalancing the budget.  The legislature can improve on it. A sales tax increase will have a disproportionately negative effect on lower income families. This is because low-income and working families need to spend a larger share of their incomes on taxable goods compared with more affluent households. Increases in gas taxes and the “flush tax” to help Bay water quality will also hit low-income and working families the hardest. These increases should be paired with increased refundable tax credits for low and moderate income earners.

Unfortunately, increasing the sales tax will not be sufficient to protect the vital services that Marylanders depend on and that this state needs to prosper into the future.  The legislature and the governor need to also look at developing other new revenues sources, including closing loopholes for multi-state corporations, reinstating the millionaire’s tax, and modernizing the sales tax to include services.

Happy session!