Taxing Issues

The fiscal sky is supposed to be falling on the state of Maryland. But to John Willis, it's a case of been there, done that, with no serious damage to the sky or the ground.

The former secretary of state in the Parris N. Glendening administration says that the current fiscal crisis -- the so-called structural deficit that might require a special session of the General Assembly -- is nothing more than one of the many financial bumps on the road that the state always faces.


"For the last 40 years, all Maryland governors have done what they had to do," says Willis, a historian of Maryland politics who teaches at the University of Baltimore. "They took advantage of periods of economic growth and reined in their belts at times of economic stress.

"Generally, they have acted appropriately," he says. "The best measure of that is the fact that in the last 46 years, Maryland is one of only four states to have a AAA bond rating every year."


In other words, Willis says, if you want to know the real fiscal health of the state, don't ask the politicians or the press -- ask Wall Street, the people who give out the bond ratings.

That said, Willis and others think that the current appearance of a crisis can be used to make an overdue overhaul of the state's financial engine.

"The problem is that the tax code was set up for an economy that no longer exists, a tax code based on a manufacturing economy," Willis says. "We no longer have a manufacturing economy. The result is every time there is a downturn in the economic cycle, revenues do not keep pace with expenditures."

Johns Hopkins political scientist Matthew Crenson thinks that the pending fiscal problems are important in part because they are going to get people to take a look at the state's revenue system.

"The governor has been criticized for delaying action on the deficit, but I think politically it was a wise thing to do," he says. "He needs to get everybody in a crisis mode in order to elicit coherent action."

Mahlon Straszheim, an economist at the University of Maryland, College Park, agrees.

"It is always difficult to restructure the tax code, but the state budget deficit is really substantial now, so it seems like this is the time to take a look at some of these issues," says Straszheim, who served as an adviser to both Schaefer and Glendening administrations and conducts a quarterly assessment of Maryland's economy.

The structural deficit works like this: The books might be balanced today, but future spending commitments do not match revenue projections. It's as if your home budget is balanced, but you have just bought a new house and have a much larger mortgage payment coming up -- and your paycheck remains the same.


What Willis argues is that all these projections are just that -- projections.

"There are all sorts of budgets," he says. "There is the proposed budget, the approved budget and the actual budget. Then there are the so-called projected budgets."

What happens, Willis says, is that people make comparisons between two of those things that are really quite different, say actual vs. projected, to make some political point.

"Politicians exaggerate," he says. "Hyperbole on the campaign trail is commonplace, but the public gets confused. You really have to make sure that you are comparing apples to apples."

And much of the fiscal crisis talk is based on projected budgets, apples that hang from one of the shakiest branches on the state fiscal tree.

"If you are talking about next year, the projection is probably fairly accurate in terms of expected needs and expected revenues," Willis says. "But the further out you go, they are almost always wrong, sometimes by hugely significant margins."


The point is that there might be more revenue out there in a few years, or there might not. It is hard to say for sure. The money that will be needed -- the stuff at the core of projected deficit -- is, in large part, to pay for the education costs associated with the Thornton bill that mandated certain levels of spending.

And, one assumes, the O'Malley administration would like some additional funds to support such things as expanded health care for poor children, higher education and transportation projects.

What this budget crisis provides is a way for the state to find those additional funds by giving the tax code a significant overhaul.

One area that should be due for a look-see is the sales tax, which only applies to the purchase of goods, of services. "It could be put on a lot of household services, though I would avoid business services so as not to put a damper on businesses," Straszheim says.

Examples of services that could be taxed, in Straszheim's view, include landscaping work, fitness facilities, haircuts and the labor -- not just the parts -- when you get your car repaired.

"I would urge the state to really study where the sales tax should be applied, and not just add a penny to the rate," Straszheim says. He points out that a smaller tax applied broadly is almost always better than a higher tax applied narrowly. So Maryland, this argument goes, should widen the sales tax, not raise it.


One tax many think should be raised is that on gasoline, though that's a hot political issue. Willis thinks the politicians fret too much about it.

"Look, the price of gas just doubled and everybody is worried about the impact of a five-cent rise in the tax on it," he says. "They are afraid they would be voted out office. I think the public is smarter than that, that they will accept a reasonable rise in the tax on gas."

Straszheim agrees. "We have not raised the gas tax in something like 20 years," he says. "Nobody wants to do it politically, but the cost of failing to do that on the transportation infrastructure is stunning."

Willis says that if the General Assembly had bitten this bullet a few years ago, "we would be billions better off in terms of funding transportation projects."

And, he says, the current marketplace has shown that a five-cent rise would have had little injurious effect on small businesses, the usual argument against such a tax increase.

As Straszheim says, "The gas tax is really very small, and as a proportion of the total cost of driving, it is increasingly small."


A third area that deserves scrutiny is the state's income tax, which could raise more money if it was made more progressive, that is, if it taxed higher incomes more.

"We are a high-income-tax state, but it is also a very flat tax, which is unusual for a liberal state," Straszheim says. "You could change the progessivity moderately and presumably not impose a huge tax burden on anyone."

This is the tax scheme that gets the nod from Crenson because it is progressive, something that is not true of a sales tax, since you pay the same rate no matter how much money you make.

Presumably, however, if you are in a lower income bracket, you are spending more of your money on food, which is not subject to a sales tax, and probably no money on landscaping, which would be taxed if the sales tax were expanded to services. So there is a way to tailor the sales tax to make it include progressive elements.

"That would take some very careful work," Crenson says.

There is another tax that is sitting out there: on liquor, which has been unchanged for over 30 years. But few think the General Assembly or the O'Malley administration will take on that powerful political lobby, the same one that keeps mail-order wine out of your mailbox.


"It is extremely low," Straszheim says of the liquor tax. "So low it generates almost no revenues. But politically, that is probably about as difficult a tax to raise as any."

The tax that gets almost no support from these experts -- though it is almost guaranteed to get plenty of headlines whenever the General Assembly tackles this issue -- is the money that would come from legalized slot machines.

One reason for that is that the amount of revenue raised would probably not do much to solve the fiscal problem, particularly if much of it is designated for something like supporting the horse racing industry.

But there is another reason as well. "I don't support slots because it is a very regressive form of taxation," Straszheim says. "If you look at the jurisdictions that contribute the most to state gambling in the form of lottery revenue, and they are the poorest. That form of taxation poses a significant burden on those citizens."