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Agreement reached on plan to increase taxes

Gov. Martin O'Malley and legislative leaders announced Wednesday an agreement to raise taxes on 16 percent of the state's earners and reverse a series of so-called "Doomsday" cuts the General Assembly enacted last month when a budget deal collapsed.

Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch, both Democrats, said they have lined up the votes to approve the plan, including the super-majority needed in the Senate to break any Republican filibuster attempt.

O'Malley called the special session, starting Monday, to stave off about $512 million in cuts that became the de facto law when legislators failed to complete work on the budget before the regular General Assembly session ended April 9. Those cuts would have fallen heavily on education, health programs and state employees and slashed state aid to Baltimore, Prince George's and Montgomery counties — the three strongest Democratic jurisdictions.

"To leave the budget as it stands right now would damage the very forward motion that all of us working together are trying so hard to achieve for our state," O'Malley said at a news conference with Busch and Miller at the State House. "A cuts-only approach would help no one and it could hurt all of us."

The budget fiasco was an embarrassment to Democratic leaders, who failed to protect their interests despite controlling both chambers. And it reflected poorly on O'Malley, who is thought to have national ambitions. By the same token, the state's minority Republican Party has delighted in using the mess as an example of poor governing.

House Minority Leader Anthony J. O'Donnell said Wednesday that the Democratic plan to raise taxes is "outrageous."

"They are going to come in and kick the citizens of Maryland again when they can hardly put gas in their cars and put food on their tables," said O'Donnell, of Calvert County.

He predicted many of the votes needed to pass the plan will come late, with little public debate during a brief session. "Most criminals want to perpetrate their crimes very quickly and quietly without scrutiny," he said.

The agreement reached by the governor and legislative leaders essentially resurrects a deal crafted by the Senate and House in the waning hours of the regular legislative session.

Under the plan, individuals who make more than $100,000 in adjusted gross income, and couples who earn more than $150,000, would pay higher rates and get a smaller break in personal exemptions. Rate increases on those high-earning Marylanders would range from one-quarter to three-quarters of a percentage point.

According to state Budget Secretary T. Eloise Foster, the income tax package would add about $247 million to the state's revenues next year.

During the annual General Assembly session, the Senate had wanted a broader-based increase that would have affected more Marylanders and raised more money. Negotiations between the two chambers turned into a form of budget brinkmanship — complicated by the emergence of casino gambling as a hot issue in the last days of the session. In the end, the House prevailed in its insistence that the impact of tax increases be limited to high earners.

The agreement came too late to win final passage before midnight, however.

After the session, Miller and Senate negotiators — still fuming over what they regarded as the House's intransigence — talked about reopening negotiations on the tax increase before holding a special session. But Busch pointed to the signed agreement the two sides reached the final night and insisted that it be honored.

"Some days you're the bear, some days the bear eats you. I got et," Miller said. He said the House "just didn't have the votes" for a larger tax package.

The problem with the House package, Miller said, is that it doesn't address the remaining $500 million gap between projected spending and revenues — the so-called structural deficit. He said the legislature would have to deal with the gap again next year.

As expected, the agreement to be debated in the special session does not deal with Miller's proposal to expand casino gambling in Maryland. The Senate president wants to allow a sixth casino in the state, to be built at National Harbor in Prince George's County, and to allow table games at all of the state's casinos.

O'Malley said yesterday that he has asked Miller and Busch to appoint members of their chambers to a work group on gambling. It would be charged with looking into such issues as market saturation and tax rates for casinos, and would report back in time for a possible second special session in late summer.

But Miller conceded that it is not certain the group would reach a consensus. Without such accord, he does not expect a second session.

While the budget agreement leaves the tax plan essentially as it was on the last night of the session, some other provisions have been eliminated. Stripped from the plan are some of the so-called "ornaments" — extra goodies added in the final hours of the session to secure votes from large counties.

Baltimore will not see the $100 million increase in bonding authority for school construction — a change sought by city delegates in return for voting for expanded gambling.

Likewise, Montgomery County will lose $10 million toward local bus service that was added that night. The Prince George's County delegation will not achieve changes to a wealth formula that costs them millions of dollars in state aid each year. O'Malley said he plans to address that issue in his budget next year.

The agreement actually leaves the state budget with more of a surplus fund balance — $204 million — than the $155 million in the agreement left on the table at the end of the session. Foster said much of that is the result of about $80 million in unexpected prescription drug benefit refunds the state expects to receive under President Obama's Affordable Care Act. But she acknowledged that those gains could dry up if the Supreme Court strikes down the health law.

Under the accord, the state will account for more than half of the restored spending by shifting part of the costs of teacher pensions to the counties over a four-year phase-in period — another measure that was lost in the chaos of the session's final night. O'Malley said he prefers the term "pension sharing" to a shift.

Overall, the budget represents a 2.6 percent increase from the previous year. O'Malley pointed to the increase as the third-lowest growth rate in two decades. Republicans describe it as a $700 million spending increase and insist that no tax increase is necessary.

But localities that were facing the prospect of having to make severe budget cuts because of a loss of state aid welcomed the agreement.

Ryan O'Doherty, a spokesman for Mayor Stephanie Rawlings-Blake, hailed the result as "good news for Baltimore."

Prince George's County Executive Rushern Baker "commended" the governor for his leadership in hammering out a deal.

Montgomery County Executive Isiah Leggett said the budget deal would be good from a statewide perspective, even if his locality takes some hits. "It does not mean we are happy with this," he said.

Advocates for groups that would have felt the impact of the cuts also expressed relief.

Patrick J. Hogan, who heads government relations for the University System of Maryland, said eliminating the "Doomsday scenario" would be "very good for the students and USM in general."

The university system would have seen a roughly $50 million hit and estimated that tuition would rise between 10 percent and 12 percent. Under the new plan, the system will still have about $10 million less than it had anticipated. The tuition increase would likely be closer to 3 percent, Hogan said.

In addition to big programs with strong constituencies behind them, the agreement preserves one relatively small program dear to the hearts of many lawmakers. Legislative scholarships, a long-standing prerogative of senators and delegates, were among the cuts. Under the agreement, they will be restored to the budget.

The new agreement also raises the tax on small cigars and smokeless tobacco. The Maryland Citizens Health Initiative, an advocacy group, had sought the change to discourage young people from using them as an alternative to more heavily taxed cigarettes.

"This is going to be a great public health victory of the people of Maryland," said Vincent DeMarco, president of the health initiative. "Thousands fewer young people in Maryland will use these deadly products."

michael.dresser@baltsun.com

annie.linskey@baltsun.com

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