Md. revenue falls short

Gov.-elect Martin O'Malley is set to inherit the only state government where all major taxes are failing to meet projections, according to a national report released today that provides an unwelcome surprise to an incoming administration seeking to make good on campaign promises.

The report from the National Conference of State Legislatures dovetails with recent state predictions of $1 billion deficits for the foreseeable future, a far cry from the surpluses Maryland experienced in the past two years.


The NCSL survey of the states found that most are still in strong fiscal shape, with taxes meeting or exceeding expectations nearly everywhere. Only three states -- Maryland, Michigan and Tennessee -- reported revenues below forecasts for this fiscal year.

Maryland was the only one in which personal income, corporate income and sales taxes all dipped below forecasts, leaving a $70 million hole in the state's $29 billion budget.


Making matters worse, Maryland is also one of 14 states where expenditures are expected to be higher than predicted -- an additional $58 million bite out of the bottom line from cost overruns in the prison system, juvenile services, foster care, Medicaid and other programs.

"There'll be tough decisions to be made," O'Malley spokesman Steve Kearney said.

O'Malley, who also inherited severe budget problems when he took over as Baltimore mayor in 1999, has made light of the problem, joking in a recent speech that one way to tell when an election is over is that all the newspaper headlines that were heralding budget surpluses now warn of deficits as far as the eye can see.

The NCSL report doesn't mean that Maryland's economy or tax growth is actually worse than that in other states, just that it is performing poorly compared to state officials' expectations. The state government's spending plans are based on those assumptions.

They can also have political ramifications. Comptroller-elect Peter Franchot promised in his campaign against Comptroller William Donald Schaefer to rethink the way the state produces budget estimates.

Revenue projections also played a role in Gov. Robert L. Ehrlich Jr.'s ability to claim that he turned state finances around, a key part of his re-election campaign.

States tend to be conservative in their estimates of revenues and generous in their predictions of spending, said Roy T. Meyers, a former Congressional Budget Office analyst and now a political science professor at the University of Maryland, Baltimore County. The idea is to err on the side of caution.

The exception to that rule -- the time when state officials might want to make finances look better than they are -- is in election years, Meyers said. Then, changing minor assumptions can make the budget picture look much better than it is, he said.


"That makes one think about the Board of Revenue Estimates and their assumptions," Meyers said.

A spokesman for Schaefer, who sits on the Board of Revenue Estimates, said the revenues are as expected.

"I don't really understand what they're talking about," Schaefer spokesman Michael Golden said. "This is not an exact science, but we're always pretty close to the actual figures when all is said and done, and there's no indication it's going to be different this time."

Warren Deschenaux, the legislature's chief fiscal analyst, said he thinks Maryland may look worse in the NCSL report than it actually is because the Board of Revenue Estimates boosted its predictions in the middle of the year, when the economy looked better. The economy slowed, but no more so than analysts originally predicted, Deschenaux said.

"The sky hasn't fallen yet," he said. "In fact, it's falling at roughly the rate we predicted."

Economist Anirban Basu, who heads the Baltimore-based Sage Policy Group, said part of the problem might be the widespread belief that Maryland's economy is recession-proof. The large number of government jobs here tend be insulated from changes in the business cycle, and the state's highly educated work force and knowledge-based economy has also generally kept it in better shape than states that have been hurt by the outsourcing of industrial jobs.


Maryland's economy has slowed, Basu said. Job growth has lagged, and the state has been on the leading edge of the drop-off in the real estate market, he said. Those effects may have been more severe than state officials imagined, Basu said.

"Maryland is vulnerable to the business cycle just like any other state, maybe slightly less, but sometimes we don't take that into account in setting our expectations for economic performance," he said.

Tax collections are generally not growing as fast as the economy, state budget analysts have concluded. Sales tax collections, in particular, have lagged behind.

Del. Murray D. Levy, a Charles County Democrat who is one of the Assembly's budget experts, said part of the problem is that Maryland's basic tax structure hasn't changed as its economy has evolved. Services are exempt from the sales tax, for example, but the economy is growing steadily more dependent on the service industry, Levy said.

Maryland could solve some of these problems by raising some taxes and lowering others to make revenue track more closely with the economy, but the process would be politically difficult because some people would inevitably come out winners and others losers, Levy said.

Franchot says he will beef up the revenue forecasting office, which he said has been off by as much as $1 billion in recent years.


"On the one hand, you appropriate money that turns out not to be there, and you have to cut dollars, or you are told money will not be there, so you make cuts in programs and then the money appears too late to be allocated," Franchot said. "The point is, these programs affect real people, so you want the figures to be as correct as possible."