Maryland lawmakers don't face a budget problem as they prepare for January's legislative session. They have at least three of them: Revenue projections that have proven unreliable, mandated spending that grows every year whether it's affordable or not, and the economic uncertainty of a Trump presidency and a Republican Congress.
In the immediate term, Gov. Larry Hogan and the General Assembly need to cope with projected spending that exceeds projected revenues for the coming fiscal year by about $400 million. There is a bi-partisan consensus that the problem should be solved without resorting to tax increases, so we can expect some level of cuts to programs. That's not a pleasant task, but in the grand scheme of Maryland's budget — and of the fiscal holes lawmakers had to fill during the Great Recession — it could be worse. But things are expected to get worse quickly. The Department of Legislative Services predicts a return to $1 billion-plus structural deficits by 2021.
Moreover, Maryland's fiscal situation keeps turning out to be more dire than anticipated. Based on the estimates produced by the Comptroller's office, legislators believed they were leaving the state with a $400 million cash balance plus a $1 billion rainy day fund when they approved this year's budget. But since then, state officials have repeatedly revised revenue estimates downward, erasing hundreds of millions in projected tax collections and forcing Governor Hogan to make mid-year cuts through the Board of Public Works. This spring, legislators voted to require DLS, the Department of Budget and Management and the Comptroller's office to study the sources of volatility in Maryland's revenues, and they found the biggest culprit to be non-withholding income tax revenues, a category driven in large part by capital gains taxes paid by a small group of very wealthy Marylanders. In some recent years, the top one-tenth of 1 percent of filers were responsible for half of all capital gains tax revenue to the state. A graph of those revenues shows repeated spikes and drops from one year to the next.
The officials suggested capping the amount of those funds that can be estimated in the budget process to no more than their long-term average share of overall general fund revenues. Any excess funds could only go to increasing the state's rainy day fund, shoring up the pension system or paying for one-time capital expenses that would otherwise be funded through bond issues. The idea is that such a policy could prevent the state from banking on unrealistic revenue assumptions, even out the ups-and-downs of the economic cycle and reduce the state's levels of debt. It's worth seriously considering.
Mr. Hogan is expected to again pursue legislation to reduce the constraints on the budget created by spending mandates, and we agree that's a topic that needs attention, too — just not in the way the governor sought to address it last year. Then, his legislation went too far in giving himself and future governors power to override the General Assembly, relied on a mechanism that would not necessarily have achieved its goals, and treated all mandated spending as equally problematic. What's needed instead is a thoughtful, individualized review of the various mandates in the state budget, their costs and their benefits.
Such an effort might become even more necessary in light of Maryland's vulnerability to federal budget cuts. It's unclear what Mr. Trump's administration will mean for federal spending, but Maryland is liable to be disproportionately hurt by any cuts. It ranks second behind Virginia in the share of its gross domestic product that's attributable to federal contracts and wages. Maryland's economy flatlined in 2013 as a result of federal budget sequestration, and there's a risk that could happen again.
Even Mr. Trump's promise to increase defense spending is looking like less and less of a certain boon for defense contractors; his tweet this morning "The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th" can't have been comforting to Lockheed Martin, the lead contractor on the program, or Northrop Grumman, a major supplier for the next generation fighter plane. Both companies have a substantial presence in Maryland, and both saw their stock prices drop in the hours after Mr. Trump sent his tweet. That's not good news for the state's bottom line.
Meanwhile, Maryland's needs aren't shrinking. A commission studying Maryland education funding is expected to recommend a set of reforms with a big price tag, possibly including universal pre-K. Mr. Hogan is proposing new tax breaks for small businesses that offer paid sick leave, and Baltimore officials have already asked for help in coping with the potential costs of the city's settlement with the Justice Department over policing practices. Consequently, Mr. Hogan and leaders in the General Assembly need to take a long view as they prepare next year's spending plan. Stop-gap solutions aren't going to be enough.