No tax hike in Ehrlich budget

Gov. Robert L. Ehrlich Jr. unveiled yesterday a $23.8 billion state budget that calls for no increase in sales or income taxes and an unprecedented boost in public school funding but cuts other aid to Maryland jurisdictions, which some fear could lead to higher local taxes.

Faced with an $800 million gap between expected revenues and expenses, Ehrlich said he scoured state agencies to find money for education and health programs, which he labeled his top priorities.


The result, Ehrlich said, is a proposed $326 million increase for public schools, which staff members called the largest in state history. The education funding increase largely follows mandates established by the General Assembly two years ago but omits an important component that top lawmakers say they hope to restore.

The governor is proposing hundreds of millions of dollars more for Medicaid, drug treatment and the developmentally disabled, including the creation of a Cabinet-level office to serve people with disabilities. The operating budget would increase 9.5 percent. When federal funds, university tuition receipts and other sources of money are included, state spending would grow by 3.8 percent.


"We are very sensitive to people - people who need government," said Ehrlich, a Republican who campaigned on a theme of fiscal responsibility. "Conservatives believe government has a role."

Leading Democrats say Ehrlich has produced only a short-term fix that pushes fiscal problems into the future.

The education proposal, they say, does not meet the requirements contained in a landmark 2002 schools improvement program known as the Thornton Plan, because $48 million that would have gone to larger counties where education costs are higher has been omitted.

Legislative analysts have identified $115 million in cuts to counties in highway funds, land-buying programs, grants that replace tax breaks for utility companies and other areas, but David Bliden, executive director of the Maryland Association of Counties, said the impact was understated by nearly $100 million.

With cost-cutting falling on local governments, House Speaker Michael E. Busch predicted a fresh round of tax increases by local jurisdictions.

"Whether you get taxes raised at the county level or the state level, they are still taxes you have to pay," said Busch, an Anne Arundel Democrat.

Asked if local tax increases were forthcoming, Bliden said, "We can only look at recent history." Thirteen of Maryland's 24 local jurisdictions raised property or income taxes last year, he said, largely in response to state aid reductions.

Still, Ehrlich fulfilled his promises by submitting a balanced budget that does not increase sales or income tax rates. The General Assembly has until April 5 to make revisions to the spending plan and, under Maryland law, can cut but not add to the budget.


State budget secretary James C. "Chip" DiPaula Jr. termed the county cuts "relatively modest," and Lt. Gov. Michael S. Steele called the spending plan "honest."

"For those who want to be cynical, who want to be critical, you will have your moment," Steele said. "But this is an honest budget."

The governor has proposed filling the $800 million gap with about $470 million in one-time revenue sources and transfers, combined with $149 million in cuts and $180 million in new revenues.

While getting the state through another lean year, that mix does not solve a continuing fiscal problem caused by multiyear school funding mandates under the Thornton Plan and expected Medicaid growth.

"It's putting a Band-Aid on a festering wound," said Senate President Thomas V. Mike Miller, a Calvert County Democrat. "It's the best the governor can do without revenues."

Ehrlich is counting on the collection of $110 million in additional corporate income taxes from companies that had been shifting assets to shell corporations in Delaware to avoid paying in Maryland. The state comptroller has won recent court rulings saying the money is due.


Tom Hucker, executive director of Progressive Maryland, an umbrella group of labor unions, churches and other organizations, said studies show that corporate tax avoidance is a far bigger problem than the governor has conceded. Ehrlich vetoed a bill last year that would have closed tax loopholes for corporations.

"There's a lot more to go after," Hucker said. "There's $250 million out there."

The governor has also proposed charging some out-of-state residents who earn money in Maryland additional income tax. The new charge would fall on those who live in states without income taxes, and would raise $39 million.

Increases in fees charged by various agencies would contribute another $25 million.

The governor's budget does not include money from legalized slot machines. Ehrlich has said that future years of the Thornton plan are unaffordable without money from slots.

"For that reason, I will again propose a video lottery program which will generate more than $700 million every year," Ehrlich said in a cover letter that accompanied his proposal.


Miller has promised that the Senate would pass the governor's slots plan. But Busch, the governor's leading critic on slots, said yesterday that the House will not develop a gambling initiative of its own or try to pass a sales or income tax increase. He ruled out linking a tax increase to a gambling bill, as has been discussed in the past.

With the defeat of his slots plan a year ago, the governor had promised to balance future budgets with deep cuts. But Ehrlich's heavy reliance on one-time measures and some new revenues has softened the blow that many government watchers had been expecting.

"It appears that children's health care coverage has been held harmless," said Jann Jackson, executive director of Advocates for Children and Youth, which tracks education and other programs.

The spending on health programs, which includes Medicaid, would grow by 3.1 percent, from $5.87 billion to $6.06 billion, the largest area of the budget.

Despite dire warnings that Medicaid spending is spiraling out of control, state health secretary Nelson J. Sabatini identified just one area where eligibility was being reduced. Residents who use an insurance program known as Health Choice would no longer be eligible for a full six months of coverage if their finances improved. Estimated savings: $4 million.

The governor's budget includes a 1.6 percent cost of living increase for state employees.


Budget proposal

Education: 8.3 percent more funding, a record increase for grades K through 12.

Taxes: No general income or sales tax rate increase.

State employees: 1.6 percent pay raise, the first increase in nearly three years.

What's next

The General Assembly has until April 5 to pass a budget.