Md. tax reform gains ground

The Baltimore Sun

Momentum is building in Annapolis for a comprehensive overhaul of Maryland's revenue structure -- possibly including increases to some taxes and cuts to others -- as a way to boost state revenue and solve the state's long-term budget problems.

Legislative leaders met yesterday with Gov.-elect Martin O'Malley in Annapolis to discuss an agenda for the coming year, and top Democrats in the General Assembly indicated beforehand that they believe the tax structure -- essentially unchanged since the 1960s despite attempts at reform -- needs to be altered to reflect shifts in the state's economy.

O'Malley indicated that he does not intend to call for higher taxes in the legislative session that begins in January. But he left open the possibility of some additional taxes or tax-law changes the following year.

"I don't anticipate putting in any new revenue measures this year, but I'm keeping an open mind," O'Malley said on his way into a two-hour meeting with House and Senate leaders in an Annapolis hotel, which participants said did not lead to any decisions on the budget or other major state issues.

But many of the Democrats in attendance said O'Malley gave them a sense that he will deeply engage legislators in policy discussions and will be willing to compromise on questions that have long eluded consensus in Annapolis -- possibly including tax issues that have been discussed for decades as the foundation of the state's economy has shifted from industry and manufacturing to services.

O'Malley said revenues and surplus funds from previous years are sufficient to make meeting the state's balanced budget requirement possible this year without changes to the tax code. But he added that the long-term picture is worse, with billions in projected deficits later in his term. At the same time, a state law requiring more public school spending is entering its final stages, and health care costs continue to balloon.

"We've got to make a lot of tough choices," he said.

The restructuring could include increasing the state's current 5 percent sales tax rate; expanding the sales tax to cover services; making the income tax more progressive so that higher-income Marylanders pay higher rates; and increasing the gas tax to pay for more roads and mass transit. Slot machine gambling is also sure to be discussed.

O'Malley's comments appear to put him on the same page as House Speaker Michael E. Busch, who said he wants to wait a year before making major changes to the tax code to allow a study of the state's economy, government revenues and spending needs.

Busch said that if Maryland wants first-class mass transit, university and K-12 education systems, leaders will need to have a frank discussion about how to pay for them. That kind of review is long overdue, he said.

"That's something they avoided in the last administration, but I think it's something we'll have to take a look at over the next 12 months," Busch said.

But others suggested that changes could come faster. Senate President Thomas V. Mike Miller said the General Assembly's budget analysts are sufficiently versed in the details of state finances to move more quickly, and some of O'Malley's aides have similar expertise.

"We know what needs to be done. The question is whether there is the political will," Miller said.

O'Malley campaign promises such as boosting school construction funding and freezing college tuition will require more money, and the taxpayers will have to contribute, Miller said. The Senate president added that any changes would be made to minimize the burden on lower- and middle-class taxpayers.

"We really haven't done anything since the 1960s when we put in a progressive income tax," Miller said. "If this governor has a vision, and I think he does, it's going to mean looking at the entire revenue structure."

Most politicians believe voters mete out punishment if taxes are increased. But that's not always the case.

Virginia, which faced major budget problems earlier this decade, undertook a comprehensive overhaul of its tax structure under then-Gov. Mark Warner, who succeeded in pushing a package of changes -- including increases to some taxes -- through that state's Republican legislature.

Maryland has also considered systematic changes to the tax code over the years only to see the ideas fail.

In 1990, a blue ribbon commission headed by Montgomery County attorney R. Robert Linowes proposed a package of tax increases and cuts that would have given state and local governments a net increase of more than $800 million in annual revenue. The package failed. In subsequent years, the state adopted a form of one of the key spending recommendations -- higher funding for K-12 education -- but not a means to pay for it.

That decision -- along with a cut in income tax rates in the late 1990s -- led projected spending to significantly outpace revenues during the early years of Gov. Robert L. Ehrlich Jr.'s administration. A spike in tax collections in the last two years, along with increases to some taxes and fees, produced surpluses.

But with state fiscal analysts predicting surpluses giving way to $1 billion-plus annual deficits later in O'Malley's term, the Linowes commission report is cropping up again.

Del. Sheila E. Hixson, a Montgomery County Democrat and chairman of the House Ways and Means Committee, which considers tax measures, said she plans to review it to use as a model for tax restructuring.

Hixson introduced a bill last year calling for a study of Maryland's tax structure, which passed in the House but failed in the Senate. She said she'll try again and expects to succeed this time.

"We are definitely going to be doing that," she said. "The state of Virginia did it and they did a good job. It's time for the state of Maryland to look at what we have and what we need."

Ehrlich held the line on increases to the income and sales tax rates during his term as governor, as he promised in his 2002 campaign. However, he did approve an increase to the property tax and increases in various fees.

When he leaves office, Republicans will have far less power to hold the line if Democrats seek major tax increases, but they will still try, said Sen. David Brinkley, the Frederick County Republican who was selected by his colleagues yesterday as the Senate Minority Leader.

"Maryland is dealing with an antiquated tax system, but at the same time, there seems to be a sense that we have a laundry list of promises we need to fulfill," Brinkley said.

Some Democratic leaders also said they are skeptical about the plausibility of any tax overhaul that amounts to an increase in what citizens pay. Sen. Ulysses Currie, a Prince George's Democrat who chairs the Senate Budget and Taxation Committee, said he doesn't think the public will stand for a tax increase.

"There's no appetite for it," Currie said. "We've got to look first at spending before we take a look at revenues."

Despite the projections of fiscal doom and gloom, Democrats who attended yesterday's meeting said they feel relatively little anxiety about the pending budget problems because they feel confident they will be able to cooperate with O'Malley on a solution in a way that their often contentious relationship with Ehrlich didn't allow.

"It's just a totally different tone," said Sen. P.J. Hogan, a Montgomery County Democrat who is vice-chairman of the Budget and Taxation Committee. "We may not always agree on everything ... but there's just a real willingness to work together and compromise when we have to."

andy.green@baltsun.com

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