What happened to Maryland's budget deficit?

For the first time in six years, Maryland enters a legislative session without an immediate budget crisis. The latest projections show that Maryland's revenues will be sufficient to cover "baseline" expenditures, through the next fiscal year: that is until June 30, 2014.

Over the past several years at this point in the budget cycle, Maryland faced projected shortfalls in the one to two billion dollar range. The shortfalls were resolved each year through a combination of budget cuts, transfers from special funds to the general funds, and revenue increases (including taxes, fees, and expanded gambling).

So why is this year different?

Part of the difference is the continuing economic recovery. The recovery is weak and sporadic. Maryland has not yet recovered all of the jobs its lost in the recession. Nevertheless, the recovery has been sufficient to halt the annual decline of state revenues and also to generate some modest growth.

Another part of what makes this year different is good luck. For example, the dynamics of the national credit market have helped the state receive "premium" payments from investors when it sells bonds, and this reduces the growth in payments for annual debt service.

Let's give credit where credit is due: the improved outlook for Maryland's general fund is also due to good planning and management on the part of state officials. In 2010 the legislature set a goal of resolving the state's structural deficit over three years (the "structural deficit" is the ongoing gap between revenues received and expenditures incurred, excluding one-time and temporary effects).

The Governor signed on to the legislature's plan. The state made some difficult decisions to hold back expenditure growth and raise revenues, including raising taxes on upper-income households, alcohol, and cigarettes. And it worked.

In a week, the Governor will submit his proposed budget for the legislature's consideration. We expect it to have some significant cuts and some modest initiatives, but nothing too dramatic.

A word of warning though: there are three threats that could mess up Maryland's finances before the legislative session concludes in April.

• Congress' next actions to reduce the federal deficit.
• Maryland's response to the need to fund its transportation program.
• The remaining "structural deficit."

We'll discuss each of these threats in upcoming blogs.

PLEASE ACT NOW - THE FISCAL CLIFF IS DANGEROUS!

This is a repost of a blog by Henry Bogdan, Managing Director of Public Policy and Public Affairs for Maryland Nonprofits and our own Neil Bergsman. At the end there is more information about our fiscal cliff conference call next Thursday.

The "fiscal" or as we're calling it, the "human cliff" poses a real threat for our nonprofits and our clients. It is not just a matter of protecting the deduction for charitable contributions.

The “fiscal cliff” refers to a series of tax increases and budget cuts that take effect around the first of the year, unless Congress acts to avoid them. Maryland Nonprofits is asking you to contact your member of Congress and urge them to REACH A RESPONSIBLE COMPROMISE AGREEMENT:

• INCLUDING A BALANCED PACKAGE OF TAX RATE INCREASES ON HIGH EARNERS AND MODERATE SPENDING REDUCTIONS
• AVOIDING CUTS TO PROGRAMS THAT WOULD THREATEN THE MOST VULNERABLE AMERICANS
• PRESERVING AN EFFECTIVE INCENTIVE FOR CHARITABLE CONTRIBUTIONS
  

The fiscal cliff will trigger automatic federal budget cuts of $109 billion each year, half to defense and half to “discretionary domestic spending.” Across the board this would be an 8.2% cut to hundreds of programs that relate to nonprofits’ missions in the discretionary domestic category: from nutrition, to substance abuse treatment, to job training, and the arts.  That automatic budget-cutting process is called “sequestration.” The sequestration cuts are estimated to mean a loss of over $117 million in Maryland’s state budget alone for the next year.  
At about the same time, tax reductions for people at all income levels adopted over the last 11 years would expire all at once with major impacts on the economy. Together with sequestration these are referred to as the “fiscal cliff”.
If nothing is agreed upon in Washington, there is a strong chance of renewed recession in addition to major spending cuts.  The State Department of Legislative Services recently estimated a potential combined negative impact on Maryland’s fiscal 2014 personal income and sales tax revenues (which make up about 80% of the state’s general funds) ranging from $337 to $635 million.  Together with the sequestration cuts listed above, this could reach over 5% of the state’s total general fund budget.
Much more likely is a gradual or phased package of negotiated tax changes combined with new revenue and significant new cuts in future spending.  For domestic programs, this will be in addition to cuts over the next ten years already adopted in the Budget Control Act of 2011. Failure to raise major new federal revenue, as the President is proposing by eliminating most of the Bush-era tax cuts for the wealthiest 2% of taxpayers, will magnify the size of additional spending cuts required. Domestic program funding through the states, Medicaid, Head Start, Title 1 Education, Women and Children’s Health, for example, are all at risk. Further, any cuts absorbed by states will likely mean reductions in additional areas as they try to re-adjust priorities at their level.   
WHAT CAN YOU DO?
 
Cuts are coming – even without the “cliff” the Budget Control Act has already put reduced spending caps on discretionary domestic spending, and rapidly growing costs of veterans’ benefits will compete with everything else in that category.  Nonprofits must be advocates for raising federal revenue – as much and as fairly as possible. 

1. Support the President’s tax proposal – it is the best chance to protect the most services for people and communities we serve!
2. Oppose ‘flat dollar caps’ on tax deductions – these are being proposed as an alternative to the President’s plan for tax rate actions and a modest limit on the percentage value of deductions for top earners.  Caps won’t raise as much revenue, so many more cuts must occur, and will have major negative consequences for charitable giving and many state tax systems that benefit from federal deductibility.  More information... 
   

HOW CAN YOU DO THIS?

1. Craft a message (you can use this sample format and vary the details for your audience) that: 
1. describes the people (children, families, communities, etc.) that your nonprofit serves or advocates for, and the importance of their needs; 
2. summarizes how cuts in the government-supported services they use and need will impact them and the community; and 
3. supports the President’s tax and revenue plan to help protect those services. 
2. Communicate this message (by phone, letter, email, meetings) to your member(s) of Congress (use http://mdelect.net/ to find your representatives and their contact information). 
3. Communicate to the public through social media, letters to editor, other local media, etc., to raise the profile of the issue. Communicate the same message to your state legislators and state officials (and local officials if they are involved in the services or funding). They will decide whether or how to make up for federal cuts, and how to cut or re-allocate their own resources. 
4. Reach out through your networks, coalitions, or state associations of providers or advocates, to reach more of the state’s delegation in congress (and more of the media and the public). 
5. Keep up with developments and keep your message current and fresh – follow the Maryland Budget and Tax Policy Institute’s updates at www.marylandpolicy.org 
6. Involve your board, staff, volunteers, supporters and clients in the steps above. 
7. AND Join us for a “fiscal cliff” information conference call at noon on Thursday, Dec. 13 at 1-866-740-1260, passcode 7636737.

Maryland bucking the trend

Nationally, many states are pursuing a strategy of public disinvestment in order for conservative politicians to demonstrate their opposition to taxes. Some states, like Michigan, New Jersey, Indiana, and Tennessee, are enacting rash and irresponsible tax cuts.    Other states are attempting to go much farther

Some state legislators are proposing to eliminate whole taxes, cutting state revenues by 30 or 40 or 50 percent. Georgia, Kansas and Oklahoma have considered proposals to abolish their state income taxes. North Dakota voters defeated a proposal to eliminate their property taxes only after voters rejected it in referendum.

Governing Magazine’s Penelope Lemov recently interviewed the (progressive) Center on Budget and Policy Priorities’ Nick Johnson and the (conservative) Tax Foundation’s Joe Henchman about this trend. (Disclosure: the Center on Budget and Policy priorities is a major national coalition partner with the Maryland Budget and Tax Policy Institute).

Johnson and Henchman both pointed out that the cuts needed to offset such large revenue reductions can be very harmful to a state.

Henchman: “Depending on what you cut, you will have an economic effect. If you cut education, that might make your state less competitive. There are trade-offs.”

Johnson: “A state could end up with much higher sales taxes and excise taxes, much higher local taxes and larger class sizes, fewer teachers, libraries and cops on the street, and less availability of health care. It's magical economic thinking -- this idea that there's a free lunch to be had.”

So, there’s broad agreement that our taxes do pay for something valuable.

In contrast to the national tax-cut fever, Maryland’s legislature used a balanced approach to balancing the budget this year, including fair and moderate tax increases. It preserved funding for the functions important to our state’s economy and quality of life. Our elected representatives did the obvious and responsible thing.  Yet in doing so, they were bucking the national trend.

 At the same time, we have further evidence to disprove one of the common bogeyman of the anti-tax brigade.  Jeffrey Thompson at UMASS’ Political Economy Research Institute has compiled a very thorough, balanced and readable survey of the research on the economic effects of state taxes on high income taxpayers. The result? “Modest tax increases on high-income households are unlikely to make substantial changes in their work effort or entrepreneurship or make them more likely to leave the state.” There may be more tax-sheltering behavior, particularly among the top 1/10 of 1 percent.

Professor Thompson concludes “The benefits of sustaining appropriate levels of funding on K-12 and public higher education, public safety, and transportation should be weighed against these consequences – as opposed to unsubstantiated fears that the rich will flee a state en masse or shut down their businesses.”

In Maryland, our leaders made these responsible choices. We need to maintain our support for education and our other shared public assets so we have a strong future with growing prosperity that’s broadly shared.

Senate Budget and Tax Committee Revenue Plan is Moderate and Progressive

The Senate Budget and Taxation Committee has wrapped up its work on the budget, and will recommend a balanced package of cuts and revenues to the full Senate.

Legislative staff is busy at work summarizing the committee recommendations. But we do have some key details of the revenue package.

The main revenue boost comes from adjustments to individual income tax rates. The tax rates on most income under $100,000 will increase by 0.15% to 0.20% (that is, 1/5 of 1% or less). Rates on taxable income over $100,000 will increase by 0.25% (1/4 of 1%). For single filers the full 0.25% increase starts at $75,000 of income.

The Institute on Taxation and Economic Policy estimates that taxpayers in the middle fifth of Marylanders (average income $55,000) will have a tax increase of $43 a year. Even for the top earners, the tax increases are 0.15% of income at most, after you figure in their federal deduction for state income taxes paid.

Revenue and Distributional Effects of Potential Rate/Bracket and EITC Changes

All Marylanders, 2012 income levels
(revised 3/14/12)*

2012 Income Group	Lowest 20%	Second 20%	Middle 20%	Fourth 20%	Next 15%	Next 4%	Top 1%
Income	Less Than	$24,000 –	$44,000 –	$69,000 –	$113,000 –	$222,000 –	$500,000 –
Range	$24,000	$44,000	$69,000	$113,000	$222,000	$500,000	Or More
Average Income in Group	$ 13,000	$ 33,000	$ 55,000	$ 89,000	$ 152,000	$ 319,000	$ 1,597,000
State tax impact of rate and tax credit changes (distributional figures do not include federal tax cuts from the deduction for state taxes paid)
Average Tax Change	–2	+13	+43	+77	+176	+492	+2,692
Combined state/federal impact (distributional figures include the impact of the federal deduction for state income tax paid)
Tax Change as % of Total Income	–0.01%	0.04%	0.07%	0.07%	0.09%	0.15%	0.13%
Average Tax Change	–2	+13	+39	+66	+138	+467	+2,006

Source: Institute for Taxation and Economic Policy

There were also some smaller tax increases: on cigars, on-line sales, and telecommunication companies, for example.

To offset the effect of tax increases and service cuts on working parents, the Committee recommended increasing the state’s refundable earned income tax credit.

These fair and modest increases allowed the Senate Budget and Taxation Committee to avoid catastrophic “Doomsday” cuts to local schools, college affordability, access to healthcare, local police, and more.

It also allows the state to moderate a shift of teacher retirement costs to local government budgets, and phase in the shift over four years, instead of imposing it all at once.

Now, it’s up to the full Senate to approve the plan. At the same time, the House of Delegates must devise its own budget and revenue package.

The Budget and Taxation Committee’s recommendations preserve funding that is important to Maryland’s families today and to our future prosperity. The full Senate should approve the plan, and the House should seek to make “fine tuning” improvements, not wholesale changes.

*Note: The chart was revised to reflect that the Senate committee plan calles for the 5 percent expansion of the refundable earned income tax credit to be phased in over five years. The chart now reflects the first 1 percent which would take effect for tax year 2012.

Spending Affordability Committee recommends a path to structural balance

Last week, the Maryland General Assembly’s Spending Affordability Committee issued its final report.  The committee’s major function is to issue a recommendation for how much the budget for the coming year should be allowed to increase. The recommendation is not binding – either on the governor or the legislature.

However, the legislature generally uses the spending affordability recommendation as a policy target. If the governor’s proposed budget exceeds the recommendation, the legislature will usually cut it back.

This year, the committee’s major recommendation is that the 2013 budget should “reduce the estimated structural deficit for that year by at least 50%.”

The “structural deficit” is a measure of the state’s fiscal sustainability.  Every year the state is required to balance its budget. During the recession and its aftermath, it has  done so by depending on temporary measures to stay in the black, such as drawing down funds that have built up in the state’s accounts. This can get us through a rough year or two or four, but it means we always have a new budget problem the next year.

The committee estimates the structural deficit at $1.1 billion, so the recommendation requires $550 million in ongoing budget balancing actions –revenue increases or more budget cuts. By cutting the structural deficit in half, the committee aims to restore the state’s financial health without abrupt disruptions to education, health care, and other state-funded functions.The recommendation is sensible and responsible and the governor should seek to meet it.

However, in doing so, the Governor should use a balanced approach. Maryland has already cut $2 billion from annual spending for education, health care, transportation, public safety, and other important services since 2007.

Source: Spending Affordability Committee, October 2011

Further cuts are going to throw more Marylanders out of work; damage the services we need now from our state counties and schools; and withdraw the investments we need to secure Maryland’s prosperous future. It’s time to turn to some reasonable and fair revenue options.

Unemployment falls, but still twice the rate in 2007

Maryland’s unemployment rate continued to fall in November, according to data released today by the Bureau of Labor Statistics.  After rising to 7.4 percent in September, the state unemployment rate fell to 7.2 percent in October and 6.9 percent in November.

While this is good news, the state’s jobs crisis is far from over.  There are still 134,000 fewer Marylanders working today than when employment peaked in February 2008.

As the governor prepares his budget and the legislature readies for the 2012 session, it is imperative that they craft a budget that focuses on creating jobs for Marylanders through increases in targeted spending funded by new revenue streams.  The Capital Debt Affordability Committee had the right idea yesterday, when they recommended issuing an additional $150 million in state bonds to fund needed infrastructure investments now rather than later, creating construction jobs and taking advantage of low borrowing rates.  Maryland can’t afford more job-killing budget cuts.