Sauerbrey tax plan: dueling predictions CAMPAIGN 1994--THE RACE FOR GOVERNOR

THE BALTIMORE SUN

There are a great many Maryland voters who like Ellen Sauerbrey's promise to cut personal income taxes by 24 percent.

Some believe she could do it, and it would fatten their paychecks. Others figure she'd get some of what she wants, and at least slow down the growth of state government.

But would the tax cuts have the impact the Republican gubernatorial candidate wants? Would they stimulate the economy and make Maryland more attractive to development?

While some economists and the Maryland Chamber of Commerce answer with an emphatic yes, other analysts interviewed by The Sun warn that proposals like Mrs. Sauerbrey's could have the opposite effect.

They note that no other state in recent years has completed tax cuts of that magnitude. States that have tried more modest cuts, moreover, have not been able to avoid reduced services or financial gimmickry.

They say such cuts inevitably put pressure on local governments to reduce services or raise taxes.

Slimmer government may be what voters want but, these analysts predict, reduced services or higher property taxes could make it harder -- not easier -- to attract new business activity and jobs.

In defense of its proposal, the Sauerbrey campaign has pointed to a paper by the conservative Cato Institute in Washington, which urged a 25 percent income tax cut and a one-year spending freeze as part of its "Prescription for Economic Revival in Maryland."

"State income taxes are highly destructive to new business and job creation," the study says. "Maryland can attract new enterprises and employment opportunities by reducing its income tax rates."

The Cato report cites "dramatic" economic resurgence in

Massachusetts and Michigan after tax and budget cuts. But other analysts say that there is no conclusive evidence from Massachusetts, Michigan or elsewhere that the cuts produce growth.

"No one can say that these cuts lead to growth in the economy," said Dr. Henry Raimondo, professor of public policy at Rutgers University's Eagleton Institute of Politics. "Some would argue they have no effect -- a tax giveaway with no tangible growth realized."

How ugly is Maryland's tax "profile?" It depends on how you look at it. The Cato Institute calls Maryland's tax burden "crushing." State personal income taxes paid per person totaled $592 in 1992, placing Maryland 7th in the nation.

Marylanders earn more than most Americans, however, and when figured per $1,000 of earnings, Maryland's income tax burden ranks 14th.

Other Maryland taxes, particularly corporate taxes, are actually below national averages. And when all taxes paid per capita in Maryland are considered, Maryland ranked 19th in 1992. That's lower than Pennsylvania and just $37 a year -- less than 3 percent -- more than the national average.

The Maryland Chamber of Commerce, however, believes Maryland's tax profile sticks out unattractively when compared with other states. In fact, Maryland's real estate recordation and transfer taxes are the nation's second-highest.

Not everyone agrees that state income tax comparisons are very important to businesses looking for a place to locate or expand.

Syracuse University economist Michael Wasylenko said, "Wage rates, unionization, the productivity of the labor force, how it is educated, and land prices are going to drive [decisions] more than tax issues, especially personal tax issues."

"I don't think Maryland's income taxes are particularly high, and I don't think a cut will do very much for you," he said.

Dr. Wasylenko argued in the National Tax Journal this year that differences in taxes and spending among the states have played a declining role in economic development since 1983 as markets have grown more global.

Analysts say there are no models in other states for cuts of the magnitude Mrs. Sauerbrey is proposing.

Although Delaware enacted large tax cuts beginning in 1979, analyzing the growth that followed is complicated by 1982 state banking deregulation that attracted out-of-state bank operations and sparked a building boom.

There may eventually be a model in New Jersey, where Gov. Christine Todd Whitman has cut income taxes 5 percent this year and another 10 percent beginning Jan. 1. Mrs. Whitman credits her cuts for spurring New Jersey's current growth. But others say it's too soon for that to be true, noting this year's installment will save a family earning $50,000 just $51 this year.

Governor Whitman points to Massachusetts and Michigan as her models, but their cases are not closely comparable. GOP Gov. William Weld in Massachusetts inherited a 4.8 percent income tax cut passed under his predecessor; he has won spending cuts and smaller tax cuts of his own. Michigan's Gov. John Engler has focused on spending restraint to avoid tax increases.

Do cuts lead to growth?

Have their efforts spurred their states' economies? The Cato Institute says yes. Others say that's not so clear.

"If you look at Massachusetts and Michigan and New Jersey, it is hard to argue unambiguously that these cuts have helped the economy," said Dr. Raimondo. "Massachusetts has recovered and slid back. Michigan is still in trouble."

Raymond G. Torto, director of the John McCormack Institute, a public policy research center at the University of Massachusetts, confirmed that his state's economy has been stronger. After lagging behind the national economy in the early 1990s, employment grew in the first half of 1994 at twice the national rate. But he called it a fallacy to attribute that growth to the tax cuts just because one followed the other.

"I don't think there is any relationship between the two," he said. He credits the growth largely to the cancellation of a planned new business tax that would have have hurt specific industries, and to federal spending on highway construction and harbor cleanup in Boston.

Does the economy benefit more if consumers, rather than government, spend the same dollars?

Cato Institute fiscal analyst Dean Stansel said tax money too often "goes into a rather large black hole of red tape. Consumers make better decisions than government as to where to put their money."

Consumer spending goes into the private sector, "and it's used for productive purposes rather than the redistribution of income," he said.

"I have a few problems with that outlook," said Claire Cohen, vice chairman and specialist in state credit ratings for Fitch Investor's Services, a bond rating house in New York. "It assumes that money paid in taxes goes into a deep hole. The truth is, money paid in taxes recirculates as well, as do welfare payments, or anything else government spends money on."

If elected, could Ms. Sauerbrey make her cuts without reducing state services?

Not likely, most analysts agree. Even the Cato Institute report predicts "tough choices, and in some cases painful cuts" for Maryland.

Mr. Larkin, at Standard & Poors, said you can save money with "belt-tightening" and more efficient government. But "efficiency will not get you a 24 percent tax cut. There is not that much fat in state budgets."

The real question is whether voters are willing to accept the reduced services such tax cuts imply.

Massachusetts has seen a 12 percent reduction in the state work force, thousands of lost child-care and senior home-care slots and less money for corrections, higher education and local government.

Despite all that, Governor Weld remains "wildly popular," said Jim Braude, director of the labor-supported Tax Equity Alliance for Massachusetts. "But for anybody to suggest that tax cutting has been consequence-free, that certainly isn't true."

Pressure to pay for tax cuts or to preserve state services sometimes leads states to try budget gimmickry -- one-time savings or the delay of financial obligations, Mr. Larkin said. Such maneuvers elsewhere have caused the credit markets to reduce state bond ratings, adding to the cost of future borrowing.

Governor Whitman this year gained a five-year, $5 billion savings by putting off some state contributions to employee pensions until after 2010. The maneuver has not affected New Jersey's AA+ bond rating, but any more like it might.

Mrs. Sauerbrey has said she wants to avoid tampering with the pension system. Maryland is one of only five states with a top AAA rating from the major rating agencies.

The bond markets prefer to see straightforward spending cuts. But analysts caution that skimping on some things might hurt the state's search for new business and jobs.

"If you have a poor quality of roads or other infrastructure important to corporations, you will not be successful, in my view, in your bid to attract firms," said Dr. Henry A. Coleman, professor of public policy and director of the Center for Government Services at Rutgers.

Higher education is especially important to business, and it has been vulnerable to cuts in other states.

"It means middle-class families pay more to go to a state university, or you drive some faculty away. UMass [the University of Massachusetts] has suffered quite a bit," said Dr. Raimondo.

Mrs. Sauerbrey has said she would cut the state's income tax revenues without affecting the local "piggyback tax" revenues, although her campaign is vague about how that would be accomplished. The piggyback tax is figured as a percentage of the state's take.

She also promised not to cut direct aid to local governments during her first year in office but made no similar pledge to prevent local aid reductions beyond that period.

Local consequences

Economists and political scientists say that state tax and spending cuts elsewhere have almost always led to local service cutbacks or property tax increases.

In Massachusetts, Governor Weld and his mostly Democratic legislature cut local aid by $250 million in his first year and allowed only small increases since, leaving cities and towns short by about $1 billion, according to Geoffrey C. Beckwith, executive director of the Massachusetts Municipal Association.

As a consequence, he said, "there are fewer police officers and firefighters on the street. There were real declines in school spending. They cut library hours, some closed libraries, and summer recreation and local parks suffered." Bond ratings of many towns have declined while the state's rating has improved.

Local governments often respond by raising property taxes, and that, too, can discourage growth.

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