Governor Releases $172 Million Supplemental Budget as Legislative Action Heats Up; Additional $32 Million for Cold Weather Effects

After a freezing winter, warmer weather has finally arrived and budget action heats up this week in Annapolis. On Tuesday, the Governor released a $172.2 million Supplemental Budget, with $162.7 million in net new spending, including $55 million for debt service, $32.4 million to deal with the effects of the extreme winter, and $32 million for the Maryland Children’s Health Program (MCHP). More than three-quarters of the Supplemental Budget is funded by state sources, with special funds, such as added money to the Annuity Bond Fund for debt service and $32.5 million in transferred money from the Strategic Energy Investment Fund, making up the majority of new funds. The Governor’s Supplemental Budget incorporates last month’s lowered state revenue projections from the Board of Revenue Estimates (BRE), adds new fund transfers, and relies on additional revenue sources, with $19.8 million in new General Fund revenue, including $10 million from Medicaid False Claims Collections, and $39 million in new federal funds, including $21.2 million in Medicaid funds and $13.8 million in planning grants for the state’s health exchange system.

Source: Department of Budget and Management;  Note: See “Summary: Supplemental Appropriations,” page 22.

Like a family saving for a new home or college, the Supplemental Budget does not spend all of this new money and sets a portion aside to increase the state’s cash balance. In addition, $9.7 million of new General Fund revenue goes to K-12 education aid to offset a shortfall in casino proceeds allocated to the Education Trust Fund. According to legislative analysts, net new spending items, accounting for cost savings and other changes, total $162.7 million. 

The $55 million in new money in the Annuity Bond Fund to pay for interest on the state’s debt, or debt service, is essentially a fund swap.  The legislature cut $55 million in related General Funds and now they are being replaced with these additional special funds, due to the anticipated increased premiums of bond sales.  Additional current-year funding to deal with the winter’s extreme cold includes $20.1 million for low-income energy assistance, $10 million to repair potholes, and $2.3 million for utilities at Jessup Correctional Institution (JCI).  MCHP receives $32 million for the current fiscal 2014 budget for higher enrollment and to provide a 5.8 percent provider rate increase in calendar 2014.

Source: Department of Legislative Services Note: MDCEP staff sorted the new spending items and changes on page 1 into above categories.

Additional supplemental spending includes $15.8 million for information technology improvements for the Maryland Health Benefit Exchange (MHBE); and $12.4 million for energy efficiency and renewable energy, with $11.1 million for various clean and renewable energy projects and an additional $1.3 million to install electric vehicle charging stations. In addition to the added money for utilities at JCI, $5 million in new current-year spending goes to overtime at Baltimore City Detention Center.  Morgan State University gets an additional $4 million; and Alternatives to Para-transit Services receives $2.7 million.

Other notable new spending items include $1.5 million for cybersecurity vulnerability assessments; $1.2 million in capital funds for homeownership programs (specifically energy efficiency and weatherization projects); $1 million for the Eastern Family Resource Center, which  provides comprehensive care to homeless residents of Baltimore County; $630,000 for improvements at racetrack facilities; $550,000 for community college scholarships; $200,000 for a homeless youth census demonstration project; $200,000 for the Parents and Children Together program, which promotes the development of young children with special needs and their families; $125,000 for Best Buddies, a program that promotes opportunities for Marylanders with intellectual or developmental disabilities; and $146,000 for job training at the Regional Skills Training Center for Excellence.

Source: Department of Legislative Services 

The House and Senate have both passed their own versions of the budget, based on the Governor’s original proposal. A Conference Committee is now hammering out the details of the final package, no doubt incorporating many elements of the supplemental budget, but we do not yet know what the final budget package will look like. Check back here for more information on any additional supplemental budgets, upcoming legislative budget actions, and the impact on valuable and proven services and programs. 

The EITC Cannot Fight Poverty Alone

The Earned Income Tax Credit (EITC) is a powerful tool for helping low-income working families, but to effectively raise Marylanders out of poverty and foster broad-based prosperity, it must work alongside other measures, including a boost in the minimum wage.

Recently, some policymakers in Maryland have portrayed  the EITC as some kind of super-policy that can fight poverty on its own, but  this is not the case.

The EITC – a federal tax credit that Maryland supplements with a state EITC -- makes low-wage work more viable for families by offsetting some of the taxes they pay and boosting their income. However, as the non-partisan Center on Budget and Policy Priorities pointed out this week, there are some things that the EITC cannot do, like helping people who are out of work or unable to work, or helping the poorest families that do not make enough to qualify for the credit.

In addition, because families reap the benefits of the EITC once a year when they file their taxes, it does not help them when they may need a boost the most, like when the monthly rent is due or they need to repair the car they use to get to work. More broadly, because the EITC is based on wages, it does not automatically expand to stabilize the economy during recessions, the way that other services, like nutrition assistance, do.

The EITC also does not provide workers with health insurance.

Because of these limitations, we need other policies to complement the EITC, including nutrition assistance, access to health insurance through programs such as Medicaid, and unemployment insurance to see individual workers through job losses and help the economy as a whole through downturns. And, of course, a robust minimum wage that keeps up with the cost of living and allows workers to support themselves and their families.

Maryland policymakers need to recognize the importance of making these programs and policies work together on behalf of working families. For instance, as they consider legislation that would make the state’s EITC more generous, state lawmakers also should finish the task of raising the minimum wage. That would build on the strides Maryland has made recently in improving access to health care by expanding Medicaid and working to implement the Affordable Care Act.

It’s fortunate that so many policymakers agree the EITC is an important and effective way to provide economic assistance to working families in Maryland. The current proposal to expand the state EITC enjoys bipartisan support in the General Assembly, and the EITC has also won praise from conservative lawmakers such as U.S. Rep. Paul Ryan. Unfortunately, some of this acclaim portrays the EITC as an alternative to other policies such as raising the minimum wage, rather than as a supplement to those things.

The EITC is an important policy, but we should not rely on it to do everything. There is no silver bullet capable of singlehandedly ending poverty. Instead we need lots of programs and ideas to peck away at it from every angle.

House of Cards or Race to the Bottom?

While the series ‘‘House of Cards’’ depicts politics as a deeply corrupt charade in which key players scheme and backstab behind the scenes to get their way, recent developments in Annapolis depict a simpler reality: lawmakers will give you money if you publicly threaten them. The Maryland Senate  voted overwhelmingly (45 – 1) to increase the amount of tax breaks available to film productions  in Maryland after the makers of “House of Cards” threatened to take their stage sets elsewhere. If the House knuckles under too, this would be the second time in as many years that Maryland has increased these subsidies in response to such threats. Lawmakers ought to get some backbone and consider a more stable and long-term approach to economic development in the state.

In 2011, the General Assembly enacted a system of tax credits that allows the Department of Business and Economic Development (DBED) to award a maximum of $7.5 million in credits each year to film productions. This system was scheduled to expire on June 30, 2014. But in last year’s legislative session, state lawmakers extended the sunset date through Fiscal Year 2016 and increased the amount of tax credits available for fiscal year 2014 to $25 million. They did so in an effort to keep “House of Cards” and another show filmed here, “Veep,” which threatened to move production to an unnamed other state with more generous tax credits.

Following last year’s extension, the tax credits were set to return to $7.5 million after FY 2014, but just last weekend, “House of Cards” star Kevin Spacey schmoozed with state lawmakers at a private event in Annapolis to woo the General Assembly into increasing the amount of film tax credits yet again, to $18.5 million in FY 2015 and $11 million in FY 2016. This charm offensive was complemented by a major threat: The show’s maker, California-based Media Rights Capital, refused to resume filming until Maryland ponied up higher tax credits.

(Click to enlarge)

Proponents argue that film tax credits are a good investment for Maryland because they generate more economic value than they cost as film companies hire local businesses and vendors. Others, such as the Maryland Film Office, contend that sustained investment in the film industry will attract other production firms to Maryland.

However, boosting the tax giveaways each year in response to threats from film companies is not a sound or sustainable policy. House of Cards spent just 53 days filming in Maryland in FY 2012 and 130 days filming in FY 2013. And no show, no matter how successful, lasts forever.

These threats themselves are evidence that states cannot count on the film industry as a long-term engine of economic development. Currently, 45 states and Puerto Rico offer film tax credits of some kind, and production companies will always be able to play states off against one another in this way. Maryland should make sound investments in its economy, but it should not do so in a race to the bottom with other states, fighting to see who can give the biggest tax breaks to film production companies. Besides, not all states are successful in their efforts to boost their economy via film tax credits.

Organizations as diverse as  the Center on Budget and Policy Priorities (CBPP), The Mercatus Center, the Tax Foundation, and Maryland’s own Department of Legislative Services argue that the primary beneficiaries of these tax credits are companies based outside of Maryland.  CBPP also points out that the best jobs often go to out-of-state residents.

The money spent on tax credits for film companies could be better spent on public services and investments in health, education, and transportation that would build a stronger, longer-lasting economic foundation for the state. Film tax credits actually remove funding from the state’s General Fund, the Higher Education Investment Fund and the Transportation Trust Fund, which will also result in less highway user revenues for local governments, as the Department of Legislative Services points out. DLS adds that only a portion of the tax credits  are recaptured in state and local revenues.

These industry-specific credits add up. Last week, we highlighted a report on how some Fortune 500 companies are able to avoid paying state taxes. One way they do so is clever accounting, but another is through targeted tax breaks like the film tax subsidy.

Maryland’s experience with “House of Cards” shows that it cannot win the film subsidy war. After coming into the state knowing the legal limit on film tax incentives and after receiving $31 million already, the show’s maker nonetheless threatened –in a letter to Governor O’Malley – to “break down our stage, sets and offices and set up in another state” unless Maryland increased its film tax credits. It makes sense for Maryland to invest in economic development, but the state should do so in an equitable way that plans for the long-term rather than responding to the annual threats of film production companies. 

Earned Income Tax Credit Legislation Would Improve an Already Effective Tool

Maryland’s General Assembly has a unique opportunity to help the working poor in a variety of ways this session—including by expanding the refundable portion of the state’s Earned Income Tax Credit.

On Wednesday, the Senate Budget and Taxation Committee heard testimony on a bill to expand Maryland’s Earned Income Tax Credit (EITC), which fights poverty while encouraging people to work more hours in low-wage jobs. If passed, the bill would increase Maryland’s refundable EITC to 28 percent from 25 percent of the federal EITC, giving an additional boost to 422,019 Maryland households and lifting more Marylanders out of poverty. A portion of Maryland’s EITC is refundable, meaning that if it exceeds the amount of taxes owed, the balance is returned to the taxpayer.

By providing a credit that increases as earnings increase up to a certain amount, the EITC encourages work. It is also an effective tool to decrease inequality and lift families out of poverty by leaving low-wage workers with more income to spend on food, clothing and other necessities.

To claim the federal EITC in tax year 2013, a taxpayer must have a modified federal adjusted gross (earned) income of less than $14,340 if the family has no dependent children, $37,870 with one dependent child, $43,038 with two dependent children, and $46,227 with three or more dependent children. The Center on Budget and Policy Priorities provides a useful tool to calculate the expected EITC for households of various sizes and income levels.

Maryland’s Refundable Earned Income Tax Credit amplifies the federal EITC. Maryland’s refundable EITC currently provides a credit for up to 25 percent of the federal EITC, which is $2,300 on average. Below, a chart from Maryland’s Department of Legislative Services illustrates the relationship between the state and federal EITC and earnings for a single parent with two children.

Source: Maryland Department of Legislative Services

The darkest colored area at the bottom represents Maryland’s refundable EITC. By increasing from 25 percent of the federal EITC to 28 percent, Maryland’s refundable credit will do more for working Marylanders. Given the average EITC amount and the number of households that benefit from the EITC, this expansion could result in an additional $19 million for working families in Maryland.

Further, because Maryland’s refundable EITC is tied to the federal credit, any expansion to the federal credit will only increase the power of Maryland’s  EITC. Earlier this week, we highlighted a promising proposal in President Obama’s budget that would expand the federal EITC to many more childless adults (very few of whom currently qualify). Taken together, these proposed expansions to the federal and state EITCs will provide needed assistance to Maryland’s workers.

The EITC gives low- and moderate-income workers the opportunity to catch up on bills and debts, and to begin accumulating savings. The increased income the EITC provides workers also benefits local economies as families quickly spend the funds on necessary household expenses. More broadly, studies have shown that the EITC helps move young adult men into the workforce and boosts their effective income, and may  improve marriage rates,  reduce crime, and reduce incarceration.

Finally, the EITC complements another important issue on the 2014 legislative agenda in Maryland – boosting the minimum wage. Workers earning the minimum wage would greatly benefit from  being able to keep more of their increased earnings due to an expanded EITC, and that would also help Maryland’s economy.

Senate's Budget Relies on Short Term Solutions at the Expense of Long-term Investment

While the recently passed Senate budget avoids large cuts to services, the Senate plan includes unwise and unnecessary spending cuts and other short-term budget-balancing maneuvers that will cause long-term financial problems for the state. The Senate ought to reconsider its approach by adopting proposals that would responsibly boost revenue and abandoning irresponsible tax cuts that largely benefit corporations and millionaires.

In addressing the recently released estimate expecting $238 million less revenue, the Senate relied on spending cuts to bring the budget into balance. In the face of this large reliance on spending cuts, state leaders should certainly not cut to the state corporate income tax or increase the estate tax exemption. These would put the state in even worse financial shape.  

Source: Senate Budget & Tax Committee 

While the Senate’s plan will balance the budget in the short term, it will cost Maryland in the future. While Governor O’Malley’s budget proposed to reduce pension investment by $100 per year, the Senate plan doubles this reduction. Recent pension reform increased employee contributions and cut benefits, in addition to cutting the state’s contribution for pension costs for local educators, like teachers, librarians and community college staff. The Senate’s decision to reduce pension investment came despite expert warnings about the damage caused such cuts. The State Treasurer and Comptroller, the Chair and Vice Chair of the State Retirement and Pension System, recently testified against further cuts to retirement fund reinvestment; and Treasurer Kopp pointed to the $1.8 billion long-term cost of a permanent cut. 

In addition, the Senate budget includes unwise cuts to assistance and supports for the state's working families that are sound investments and leverage additional funds. The Senate plan cuts $18.3 million in state funds for Medicaid, which are matched dollar-for-dollar by federal funds. These unwise cuts to funding intended to expand community-based care options and nursing home care could threaten access to care for Medicaid recipients.

The Senate plan also cuts $1 million for childcare subsidies, which leverage federal matching funds, and $900,000 from the Employment Advancement Right Now job-training program. Like the diversion of pension savings, these short-term, one-time cuts cost the state the opportunity to further shore up its long-term fiscal condition by creating a stronger workforce. 

In addition to the General Fund cuts, the Senate plan removes Special Funds that would have gone to fund Program Open Space and Land Preservation. 

 

Source: Senate Budget & Tax Committee 

Like the governor’s plan, the Senate includes the transfer of $69.1 million to the General Fund, as well as an additional $69.1 million cut to related Special Funds pay-as-you-go (PAYGO) capital funding. The Senate plan would replace these special funds in the Capital Budget with additional debt, above DLS-recommended levels. Increasing capital debt to balance the Operating Budget is not a sustainable budget-balancing tactic and limits financing options in the Capital Budget.

Legislative analysts have also pointed out that interest owed on state debt and pension costs are consuming a growing portion of the Operating Budget (page 19 at link). Like the diversion of pension savings and Medicaid and child care cuts, these short-term tactics hurt working families and cost the state the opportunity to further shore up its long-term fiscal condition.  

Source: Senate Budget & Tax Committee 

Fortunately, alternative options to these unwise cuts are available as the House passes its version of the Operating Budget and it moves to conference committee. Increasing tobacco taxes as proposed in the Healthy Maryland Initiative (HB443/SB589) would raise $110.8 million in FY 2015 General Fund revenue.  In addition, legislative analysts recommended large reductions to personnel expenses, including a phase-in of merit pay increases for state employees throughout the fiscal year, reducing the number of health insurance premium holidays, and other state personnel cost-containment not adopted by the Senate. These would allow the state to continue making critical investments in things like pensions and child care.

Check back here for more information on House budget actions and the impact on valuable and proven services and programs.