This week, the focus in Annapolis will be on the state's 2013 budget and the compromise struck by the Senate's Budget and Taxation Committee over education spending. Teachers, school boards, county executives and other local government leaders would be wise to rally behind the plan that takes many of the sharp edges off what Gov.Martin O'Malley had initially proposed.
But here's the rub: Much of the compromise is made possible because senators were willing to raise Maryland's income tax rates much more broadly than the governor sought and to use that money to cushion the blow of deficit-reduction on local school systems. While Mr. O'Malley wanted to lower income tax exemptions in a manner that would raise taxes for only the top 20 percent of earners, the Senate would reach into more pockets in order to raise more revenue — in the neighborhood of $300 million annually.
Might the General Assembly be able to close a $1 billion deficit, shift a portion of the cost of teacher pensions to local government, fully fund public education and hold Baltimore and the 23 county's fully responsible for school spending in the future without so broad an increase in state income tax rates? That remains to be seen.
Certainly, there is much to like in the Senate's approach. After years of debate, local governments would finally finance a share of teacher pensions, but the burden would be phased in over four years (at one-quarter of the cost added each year) and only cover the so-called "normal cost" of retirement — that is, the actuarial cost of a current employee for that year's service. That's a bit less than either Senate President Thomas V. Mike Miller had wanted or Governor O'Malley had proposed. The state would remain responsible for fully-funding accrued liabilities — a much larger cost but one that should gradually diminish over the next several decades.
Yet Baltimore and the counties are net beneficiaries, too, at least for the first several years. The budget would raise local aid sufficiently to cover the pension cost. That "found" money should do wonders for jurisdictions anticipating a struggle to balance their next year's budgets.
It would also strengthen the state's "maintenance of effort" law to ensure that local governments fully fund K-12 schools in future years. Those jurisdictions that fail to do so could have a portion of their income tax revenue diverted to their school system by the state. That's not likely to please local leaders, but the Senate plan would offer them more opportunities to have that requirement temporarily waived if circumstances warranted it.
A strengthened maintenance of effort law was a high priority for school advocates, and local governments were vociferously opposed to the pension shift because of their own budget shortfalls. The Senate proposal elegantly offers both sides victory and extracts concessions. The only question is, are taxpayers treated as respectfully?
The pension shift saves the state hundreds of millions of dollars in the long run. And the alternative of forcing pension costs on local governments without new revenue directed their way might have translated into local property tax increases — a less progressive form of taxation — or cuts to vital services including classroom spending.
The Senate tax plan also deserves credit for asking more from higher earners. Marylanders earning $200,000 and filing jointly would pay no more than 5 percent (not counting the local piggyback) while those earning more than $500,000 would pay as much as 5.75 percent. The proposal also offers a slight increase in the earned income tax credit for low-wage workers.
Nor does the plan depend solely on spending cuts and income taxes to balance the budget. It also raises an assortment of taxes and fees from some appropriate sources — increasing the cost of cigars and other tobacco products, applying the sales tax to certain Internet sellers, and closing a loophole in the mortgage recordation tax, to name a few.
Senator Miller is unlikely to find a lot of tax-averse Republican votes for this budget plan, but those senators who want Maryland schools to remain among the best in the nation should find much to like. Even teachers opposed to the pension shift will have to acknowledge its merits as the proposal protects their future benefits without taking more money out of their pockets.
The only fly in the ointment is whether all this might be accomplished with less sacrifice from taxpayers, and that's no trivial matter. We cannot escape the fear that senators are seeking to raise more money than is truly necessary to make their plan work. We look forward to a robust debate on that point on the Senate floor this week and again when the measure lands in the House of Delegates.