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. 

 

Sales Tax Modernization for Maryland

Last week, the Center on Budget and Policy Priorities published a new report, "Four Steps to Moving State Sales Taxes Into the 21st Century," that urges states to modernize their sales taxes in order to broaden their tax bases and increase revenues. 

The Center suggests states adopt four general tactics to achieve this goal:
     1.   Tax more services. 
When the state established a sales tax in 1947, goods made up 60 percent of household receipts. Today, goods weigh far less in the share of total consumption; households spend almost 68 percent of their budgets on services, most of which are not subject to the 6 percent state sales tax. 

Source: Center on Budget and Policy Priorities

According to an earlier report by the Center, if Maryland taxed all household purchases of services other than health care, housing, education, legal, banking, public transit, insurance, and funeral services at the same rates they tax tangible goods, the total revenue yield could amount to more than $2 billion per year. 

In the 2012 session, Delegates Hixson and Gilchrist introduced HB1051, which would have expanded the definition of "taxable service" to include personal services such as motor vehicle maintenance and repairs, parking, barber or beauty services, tanning,saunas, and shoe repair. It would have also taxed several business-to-business services, such as  tax preparation, business brokerage, and personnel supply services. MBTPI generally supported the bill's goal of recalibrating the sales tax system to cover a broader range of services but advised that the bill be amended to exempt from taxation 

services that are principally purchased by businesses. However, this legislation did not make it out of committee, so new action in future sessions would be required to broaden the tax base in this way.

     2.   Tax tangible goods purchased online.

Online purchases make up a significant portion of Maryland consumer spending, and very few of these transactions are taxed. According to a study by the state Comptroller, "In 2010, Maryland lost an estimated $198.4 million in sales and use tax revenue from the sale of tangible goods by remote sellers, which represents about 5.4 percent of gross sales tax collections." 

Federal legislation has been introduced that would enable all states to require online retailers such as Amazon and Ebay to collect sales tax on online purchases. The bill known as the "Marketplace Fairness Act" passed the Senate in May but awaits an uphill battle in the Republican-controlled House. In the meantime, several states have passed their own legislation to reach this end, most notably New York with its so-called "Amazon law." Maryland's legislature has so far yielded to Congress to address the issue at the national level. Maryland's 2013 Transportation Bill dedicates some of the increase in sales tax that would result from a federal rule change to state transportation projects, but if Congress fails to pass new law, the state will raise its gas taxes further to meet its financial needs for these projects.

     3.   Tax digital downloads.

Maryland does not currently tax online downloads. The Comptroller's sales tax study estimated the foregone tax revenue from the sale of digital goods (such as online downloads of software, music, ebooks, and movies) amounts to roughly $5 million per year if these sales were taxed at a rate of 6 percent. The Governor proposed an initiative in the 2012 session that would have created a tax on these downloads, but it was rejected by the legislature. This could be an additional source of state revenue in the future. 

     4.   Eliminate the online hotel tax loophole.

Online travel agencies often do not collect the full value of hotel taxes owed to the state. A loophole allows these websites to apply the tax on the wholesale rate the travel firms pay the hotels rather than the higher retail rate that would be charged to a consumer who booked a room directly with the hotel. This difference amounts to at least $5 million foregone state revenue. No major legislation at the state level has been proposed to amend this practice.

Sales and use taxes are second only to the income tax as Maryland's largest sources of income and accounted for 28 percent of state revenue for fiscal year 2012. While sales taxes--like most consumption taxes-- tend to be regressive in nature, they are a more robust source of revenue for state governments than income taxes, declining less in periods of recession. 

Reforms that could enlarge and strengthen this key source of state dollars and bring sales tax into the 21st Century should be considered. However, the state should be sure to accompany any substantial broadening of the tax base with a robustly progressive income tax system and/or accompanying tax credits to help aid lower-income Marylanders who might be disproportionately affected by increases to their consumption tax burdens.

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.

The Week Ahead

Last week Neil blogged about the continued moderately good news coming out of the Board of Revenue Estimates, and the recommendation of the Spending Affordability Committee. However, as Neil points out Congressional action or inaction may still have a large effect on Maryland's budget.

The new General Assembly website has gone live. There are still a few glitches, but advocates should familiarize themselves with the new website now before the start of session 2013.
 
Monday, December 17th

• Alcoholic Beverages Article Review Committee meets to complete its review of material dealing with multiple licensing plans (Various Titles, Subtitle 14A of the Alcoholic Beverages Article) and miscellaneous provisions. 5pm in Judicial Training Room 3, 2009F Commerce Park Drive, Annapolis.
• Maryland Health Care Reform Coordinating Council meets. 10am in room 240, House Office Building, Annapolis.

Tuesday, December 18th

• House Health and Government Operations Committee reviews draft palliative care legislation. 10am in room 241, House Office Building, Annapolis.
• Joint Committee on Access to Mental Health Services is briefed on the effect of the Affordable Care Act on access to mental health services and the DHMH Behavioral Health Integration Report.

Wednesday, December 19th

• Board of Public Works meets. 10am in the Governor's Reception Room, State House, Annapolis.
• Workgroup on Access to Habilitative Services Benefits meets. 9:30-11:30am in the Maryland Insurance Administration Hearing Room, 22nd Floor of St. Paul Plaza, 200 St. Paul Place, Baltimore.
• General Provisions Article Review Committee reviews drafts of Title 4 "Public Information Act" and Title 5 "Maryland Public Ethics Law" changes. 3pm in room 241, House Office Building, Annapolis. 
• Maryland Nonprofits offers a webinar on Starting a Nonprofit: Planning and Preparation. This is a paid training, for more information or to register go to their events page.

Thursday, December 20th

• Maryland Health Care Commission meets. 1pm in conference room 100, Maryland Health Care Commission, 4160 Patterson Avenue, Baltimore.
• Board of Directors of the Maryland Health Insurance Plan (MHIP) holds a public session. Topics will include prescription drug utilization, MHIP Tier 4 prescription drug cost sharing alternatives; and a procurement update. The Board also holds a closed session about the MHIP Executive Director search. Participants can attend the meeting in person or by conference call Dial in: 888-603-9632 Participant passcode: 2184969. 9am in suite 630, 1 Calvert Plaza, 201 E. Baltimore Street, Baltimore. 

Friday, December 21st

• Bureau of Labor Statistics releases state employment data for November. Maryland's unemployment rate fell in October, to just 6.7 percent. 

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.

MD faces $600 million FY 2014 "structural" deficit, more if feds push US off "fiscal cliff"

As the Governor develops the budget for fiscal year 2014, Maryland is closer to a balanced budget picture at this point in the process than in any of in the last five years. Threats to the economy from the federal budget impasse could make things much worse, though.

The Department of Legislative Services (DLS) briefed the Spending Affordability Committee on Wednesday, forecasting Maryland's economy and issues facing the state in fiscal year (FY) 2014 (DLS's briefing handout).

MBTPI graph from Dep't of Legislative Services data

The highlights include:

Maryland's Economic Outlook

• Labor Market - 12 month payroll employment growth accelerated from June 2011 through February or March of this year. Data from the Current Employment Survey suggests employment grew much slower in the months following, but the trend was still positive. Look for our blog later today about the latest employment figures released this morning (hint: they're good news).
• Housing Market - Existing home sales have been up for the last five months, compared to 12 months prior. Prices for existing homes have been rising since February. Part of the explanation for improvement in the housing market may be that the inventory of homes on the market is down 25 percent compared to 2011.
• Consumer Market - So far this year new vehicle sales are up 10.8 percent while used car sales are essentially flat, compared to 2011. Vehicle prices are also up. Personal income growth has flattened over the first two quarters of 2012, to just under 4 percent.
• Economic Forecast - The Board of Revenue Estimates forecasts that from the current FY 2013 to FY 2015 rising employment (between 0.9 and 1.8 percent growth), personal income (between 3.3 and 6.1 percent growth), and wage and salary income (between 3.4 and 4.2 percent) will reflect the improving state economy.

The improving economy means that DLS projects state revenue growth in FY 2014 of 2.7 percent, to $15.3 billion.

DLS also presented a baseline current services budget (in other words, what the budget would look like if current programs were continued, including expected changes in caseloads, etc.).

One important change this year is that DLS has decided to report information about expenditures from the general funds and some of the state's special funds together. This is an important change, because legislators have increasingly relied on the creation of special funds to help meet revenue shortfalls, masking increases in general funds expenditures. As the inset table shows, including special funds increases the FY 2013 budget by $1.7 billion and the baseline FY 2014 budget by $1.3 billion. This also impacts how we interpret the budget's growth rate. General funds are projected to grow 8.2 percent in FY 2014. However, including the special funds with the general funds drops the annual growth rate of expenditures significantly, to just 4.8 percent.

All of this means that Maryland is likely to face a structural deficit in the FY 2014 budget of more than $600 million. While smaller than in previous years, this is still significant and will require careful work by the executive and legislative branches.

Finally, none of these numbers may mean much if the United States Congress fails to solve their own fiscal problems, specifically sequestration (mandatory across-the-board cuts to discretionary federal spending) and the expiration of various tax cuts and other revenue measures. If Congress fails to act, Maryland could lose $117.6 million in direct federal aid during federal fiscal 2013. Furthermore, Maryland stands to lose up to 60,000 jobs in calendar year 2014 and a further $635 million in lost revenue due to smaller state income and sales tax collections.

The Week Ahead

Last week we blogged about the new revenue estimates for Maryland, the annual briefing of the Joint Committee on Welfare Reform, new data from the Census Bureau, and the August state-level employment figures. Also last week, Governing Magazine highlighted our brief on expanded gambling.

Monday, September 24th

• Exchange Financing and Sustainability Advisory Committees of the Maryland Health Benefit Exchange Board meet. 2-4pm at the Maryland Health Care Commission, 4160 Patterson Avenue, Baltimore.
• Board of Directors of the Maryland Health Insurance Plan meet about messaging and a memorandum of understanding between MHIP and the Exchange. 3pm in suite 630, 1 Calvert Plaza, 201 E. Baltimore Street, Baltimore.

Tuesday, September 25th

• Transportation and the Environment Subcommittee of the House Appropriations Committee does a site visit to Thurgood Marshall International Airport, from 11am to 2pm.
• Public Health and Long Term Care Subcommittee of the House Health and Government Operations Committee meets to discuss HB 1090. 1pm in room 241, House Office Building, Annapolis.
• Maryland Life Sciences Advisory Board meets. 9am to 1pm, University of Maryland BioPark, 801 W. Baltimore Street, Baltimore.

Wednesday, September 26th

• Maryland Nonprofits offers Forming a Nonprofit: The Paperwork. This is a training program; for more information check out Maryland Nonprofits' events page. 

Thursday, September 27th

• Video Lottery Facility Location Commission meets to receive an update on legal proceedings and to consider an extension request from CBAC Gaming and the City of Baltimore. This meeting will be held via teleconference. Interested parties may attend the meeting from Room 111 of the Legislative Services Building. A portion of the meeting may be held in closed session. 11am in room 111, Legislative Services Building, 90 State Circle, Annapolis.
• Commission to Study Campaign Finance Law meets. 1pm in room 130, House Office Building, Annapolis.
• Maryland Health Care Reform Coordinating Council meets. 3-5pm in the Joint Hearing Room, Department of Legislative Services, 90 State Circle, Annapolis.
• Governor's Commission on Small Business holds a town hall meeting. 10am to 1pm in the Southern Maryland Higher Education Center, 44219 Airport Road, California, MD. 
• Bureau of Labor Statistics releases county-level employment data.
• Maryland Nonprofits offers Build Capacity with Dynamic Volunteer Engagement. This is a training program; for more information check out Maryland Nonprofits' events page. 

Friday, September 28th

• Maryland Advisory Committee on Manufacturing Competitiveness holds a board meeting. 10am to noon in the 17th floor conference room, World Trade Center, 401 E. Pratt Street, Baltimore.

New revenue estimates - more moderately good news

Photo: marylandreporter.com

Have you have been concentrating on the Orioles, Nats, Redskins and Ravens? Then you may not have noticed that it is also revenue season in Maryland.

Last week we reported that the state's actual revenue collections for the past fiscal year exceeded the official estimates by $230 million. This week the state's official revenue estimating Board revised its estimates for the current fiscal year, and issued the first estimate for the upcoming year: fiscal year 2014.

The current year's estimates improved by $181 million. We did not expect the full $230 million to carry forward into future years because some of it reflected temporary gains or timing changes.

The estimate for fiscal year 2014 is $15.3 billion, anticipating just modest 2.7% growth over the increased annual amount.

This continues the trend of moderately good news. These improved estimates certainly do not solve Maryland's budget shortfalls. And they certainly do not mean that the moderate tax increases on higher-earning households were unnecessary.

These revenue estimates will put the budget for next year within reasonable range of arithmetic balance. However, much of that balance would arise from spending down the surpluses from 2012 and 2013. That is not a sustainable plan.

The revenues for fiscal year 2014 will still be around $1/2 billion short of "structural balance," in which ongoing revenues are sufficient to meet ongoing expenditures.

In funding this remaining gap, the Governor and legislature should continue to protect funding for education, healthcare, and basic needs of the many households that still suffer in the weak national economy.

Revenue exceeds estimates

Today Maryland Comptroller Peter Franchot announced that revenues for state fiscal year 2012 - which ended June 30 - exceeded the official estimates by $230 million.


This is moderately good news for several reasons:

1. It demonstrates that the economic recovery - weak as it is - is beginning to improve household and corporate income.
2. It reduces the state's revenue shortfall for the upcoming year. 

The Comptroller issued a statement that emphasizes that the economy remains precarious and the recovery is adding jobs and revenue much more slowly than we would like. He is right. Still, the good revenue news suggests a glimmer of light at the end of the tunnel.

There are still two big risks to the economy (and therefore to Maryland's budget). Congress might enact abrupt federal budget cuts, which could send the national economy into a new recession. Or the European economy could deteriorate to the extent that the US economy suffers.

On the plus side, Maryland's state budget is balanced through June 2013. $672 million remains in the state's "Rainy Day" reserve fund. The three bond rating agencies have again upheld Maryland's exceptional Triple-A credit rating.

The budget will remain difficult, but as a result of the state's balanced approach to managing the budget and some level of economic recovery, there is hope for the future.

We will publish MBTPI's complete analysis of the fiscal year close-out shortly.