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The Deficit Game

The Baltimore Sun

By now you've surely heard of Maryland's $1.5 billion "structural deficit," a giant pothole in the state budget that's spurring talk of big tax increases, spending cuts, slot machines and more.

Republicans and Democrats agree the deficit is no abstract menace, but a real problem that has to be solved. It has been brewing for years, spurred by a variety of factors, but mostly by an income-tax cut in late 1998, combined with a decision in 2002 to vastly increase spending on K-12 education.

Since then, the state has managed to avoid dealing with the problem because of some lucky windfalls from an overheated real estate market and liberal borrowing from savings, transportation funds and other pots of money.

But there's no loose change left in the sofa cushions of state. When Gov. Martin O'Malley submits a balanced budget this January - as the constitution requires him to do - it's going to reflect some painful choices.

He and legislators may swoop in to make those decisions in a lightning-fast special General Assembly session sometime this fall, or they may haggle over them for the entire 90-day regular session this spring.

But in the meantime, you can play along at home. The major options under consideration are listed below. Mix and match and decide: How would you come up with $1.5 billion?

INCREASING THE SALES TAX

$750 MILLION

THE PROPOSAL / / Increase Maryland's sales tax from 5 percent to 6 percent.

HOW MUCH WOULD IT RAISE? / / $750 million.

HOW DOES MARYLAND COMPARE? / / Tied with eight other states for the 13th-lowest rate in the country. Pennsylvania and West Virginia have rates of 6 percent. Virginia's rate is 5 percent (including local taxes) but the state also taxes food, which Maryland exempts, at a rate of 2.5 percent. West Virginia taxes food at 5 percent. Delaware has no sales tax.

ARGUMENTS FOR / / Maryland's rate is lower than most other states', including many of its neighbors, and a one-cent increase in the rate would eliminate half of the deficit.

ARGUMENTS AGAINST / / The tax is considered regressive because the poor tend to pay a higher percentage of their income in sales taxes than the rich do.

WHO SUPPORTS IT? / / Moderate Democrats in the General Assembly.

WHO OPPOSES IT? / / Liberal Democrats who want to enact more progressive taxes, business groups, Republicans who want to avoid tax increases entirely.

"It's especially onerous on people of limited income. It's a very regressive tax. It's very wrong here on the Eastern Shore, where we're neighbors to Delaware, which charges no sales tax. Our merchants are already losing because people are sliding across the line to purchase big-ticket items."

-- Sen. J. Lowell Stoltzfus, Republican, Somerset County.

EXPANDING THE SALES TAX

$650 MILLION

THE PROPOSAL / / Make services such as cable television, haircuts, shoe repair, tax preparation, dating services and sign painting subject to the sales tax.

HOW MUCH WOULD IT RAISE? / / $650 million.

HOW DOES MARYLAND COMPARE? / / Of the 168 service categories tracked by the Federation of Tax Administrators, Maryland taxes 39, about the middle of the pack nationally. Virginia taxes 18, Pennsylvania 55 and West Virginia 110. Although Delaware does not tax goods, it does tax most services -- 148 of 168 categories.

ARGUMENTS FOR / / Maryland's sales tax was designed for an industrial-era economy, not one driven by services, and as a result, sales tax growth has lagged behind growth in Maryland's economy.

ARGUMENTS AGAINST / / Picking which services to include could create winners and losers. Affected businesses could relocate to neighboring states where they are not taxed.

WHO SUPPORTS IT? / / Some moderate Democrats.

WHO OPPOSES IT? / / Trade groups such as the Maryland Association of Realtors.

"We don't think taxing the same dollar again and again makes sense. It's taxed when the service is provided, again as business income, and possibly again as personal income."

-- Bill Castelli, vice president of government affairs, Maryland Association of Realtors.

MAKING THE INCOME TAX MORE PROGRESSIVE

$350 TO $375 MILLION

THE PROPOSAL / / Increase Maryland's top rate of 4.75 percent for high earners and perhaps lower rates for middle- and lower-class taxpayers.

HOW MUCH WOULD IT RAISE? / / Increasing the rate to 6 percent for income over $150,000 a year for individuals or $225,000 a year for couples would raise $350 million to $375 million a year. Changes to reduce rates for lower-income workers would limit the fiscal impact to about $30 million a year.

HOW DOES MARYLAND COMPARE? / / With the top bracket kicking in at $3,000 in annual earnings, Maryland has one of the flattest income-tax structures in the nation, and the top rate of 4.75 percent is one of the lowest. However, the addition of county income-tax rates -- which few states levy -- makes the effective top rate one of the highest in the nation at about 7.75 percent. Delaware's top rate is 5.95 percent, Virginia's is 5.75 percent and West Virginia's is 6.50 percent. Including local rates, Pennsylvania's top bracket is about 3.6 percent.

ARGUMENTS FOR / / Top earners can afford to pay a larger portion of their income in taxes; the state's brackets haven't changed since 1967 and don't reflect the modern economy.

ARGUMENTS AGAINST / / The well-off already pay a disproportionate share of state taxes and shouldn't be punished for their success.

WHO SUPPORTS IT? / / Gov. Martin O'Malley, Comptroller Peter Franchot, liberal groups.

WHO OPPOSES IT? / / Republicans, conservative groups.

"The wealthiest Marylanders have received huge federal tax cuts from President George W. Bush. It's only fair they give back a small portion of that windfall so Maryland can invest in a better future of expanded health care, safer streets and better schools."

-- Sean Dobson, executive director, Progressive Maryland.

SHIFTING COSTS TO LOCAL GOVERNMENTS

$646 MILLION

THE PROPOSAL / / Make local governments responsible for half of teacher retirement costs, freeze education aid, reduce law enforcement grants and make other cuts.

HOW MUCH WOULD IT SAVE? / / $646 million

ARGUMENTS FOR / / Local governments are relatively flush with cash, so much so that many have cut their tax rates in recent years. Local governments effectively determine the size of teacher retirement benefits, so they should share in their cost.

ARGUMENTS AGAINST / / Cutting aid would just force local governments to raise taxes -- most likely the property tax, which puts a strain on homeowners living on fixed incomes.

WHO SUPPORTS IT? / / Senate President Thomas V. Mike Miller, House Speaker Michael E. Busch.

WHO OPPOSES IT? / / O'Malley, local leaders.

"Counties are going to have to come up with their fair share, that's all. Only three states in the union let counties have the income tax, and by giving them the income tax, we have one of the highest rates in the United States, and that hurts our ability to go back to a natural revenue source."

-- Miller, Democrat, Prince George's County.

CLOSING CORPORATE TAX LOOPHOLES

AS MUCH AS $100 MILLION

THE PROPOSAL / / Change tax filing laws to prevent companies from hiding profits in out-of-state subsidiaries, an idea called "combined reporting;" eliminate a provision that allows limited-liability companies to avoid transfer taxes when they sell property through "controling interest" legislation.

HOW MUCH WOULD IT RAISE? / / Difficult to estimate. Combined reporting could bring in as little as $19 million a year or as much as $100 million. Changing the transfer tax provision would provide about $14 million to the state, though the money would be dedicated to Program Open Space and wouldn't help fix the deficit. Local governments would get about $48 million a year.

HOW DOES MARYLAND COMPARE? / / About 20 states have enacted combined reporting, though few of them are in the East. West Virginia is Maryland's only neighbor with such a law.

ARGUMENTS FOR / / Nearly half of Maryland's largest companies didn't pay corporate income taxes last year, according to preliminary data from the comptroller's office. If individuals have to pay income or transfer taxes, so should profitable corporations.

ARGUMENTS AGAINST / / Combined reporting is complicated and would be a burden on business while not necessarily increasing state revenue significantly. Controling interest could increase the cost of housing.

WHO SUPPORTS IT? / / O'Malley, Franchot, liberal groups.

WHO OPPOSES IT? / / Republicans, the state Chamber of Commerce and other business groups.

"Combined reporting is very complicated and time-consuming and expensive to administer, for both the business and the state. Although there are a handful of states that use combined reporting, our competitor states do not. But the most important thing for the legislature and the govenror to understand is that because of the structure of companies doing business in Maryland, it may actually result in a revenue loss or very little gain for the state."

-- Karen Syrylo, analyst, Maryland Chamber of Commerce.

FREEZING SPENDING

ABOUT $700 MILLION

THE PROPOSAL / / Limit the rate of spending growth in next year's budget to 3.5 percent instead of the projected increase of 8.5 percent.

HOW MUCH WOULD IT SAVE? / / About $700 million.

HOW DOES MARYLAND COMPARE? / / Virginia expects general fund spending growth of 5.6 percent next year. West Virginia plans 3.8 percent growth and Pennsylvania, 2.6 percent. Delaware does not produce comparable estimates.

ARGUMENTS FOR / / Much of the state's financial problem is attributable to Democrats' decision in 2002 to pass a massive new school funding program without a funding source. Slowing down or freezing spending growth would give revenues time to catch up with expenditures without raising taxes.

ARGUMENTS AGAINST / / Much of the spending growth in the budget comes from automatic adjustments to compensate for inflation. Freezing spending would not only require backing away from the state's education funding commitment but would also result in reductions in health care and other services.

WHO SUPPORTS IT? / / Republican legislators.

WHO OPPOSES IT? / / O'Malley, Franchot, liberal groups, most Democratic lawmakers.

"We can cure the financial ills by 2011 if they just held spending to basically [inflation]. Our concern is we don't want to make Maryland uncompetitive. We don't want an additional financial hardship on Maryland's taxpaying families."

-- Sen. David R. Brinkley, minority leader, Frederick County.

LEGALIZING SLOT MACHINES

AS MUCH AS $800 MILLION

THE PROPOSAL / / Ideas for legalizing slots range from allowing limited operations at the tracks to building free-standing slots parlors with thousands of machines.

HOW MUCH WOULD IT RAISE? / / As much as $800 million a year, but it could take two years or more for the program to ramp up.

ARGUMENTS FOR / / Marylanders already spend millions in slots parlors in West Virginia, Pennsylvania and Delaware. Slots are a voluntary tax -- those who don't want to pay don't have to play.

ARGUMENTS AGAINST / / Slots spread corruption, crime and gambling addiction. Gambling is effectively a tax on the poor.

WHO SUPPORTS IT? / / Miller and many Senate Democrats, most Republicans, O'Malley to a degree, unions, business groups.

WHO OPPOSES IT? / / Busch and many House Democrats, some social conservatives, liberal groups.

"With the world moving aggressively toward a knowledge-based economy, slot-machine gambling represents a step in the wrong direction. Maryland's economic future needs to be tied to growing industries like the life sciences, information technology and health care that provide high-paying, environmentally sustainable careers."

-- Comptroller Peter Franchot, Democrat, Montgomery County.

andrew.green@baltsun.com

SALES TAX INCREASE

"IF YOU LOOK AT WHERE MARYLAND IS RELATIVE TO OTHER STATES, WE ARE BACK IN THE PACK, AND WITH THE EARNED INCOME TAX CREDIT, YOU CAN DO THIS ALSO WITHOUT SIGNIFICANTLY HURTING PEOPLE ON THE LOWER QUARTILE OF INCOME."

SEN. ULYSSES CURRIE, CHAIRMAN OF BUDGET AND TAXATION COMMITTEE, DEMOCRAT, PRINCE GEORGE'S COUNTY

SALES TAX EXPANSION

"THE PROBLEM WITH OUR SALES TAX IS THAT IT LAGS OUR ECONOMY. A LOT OF OUR CURRENT ECONOMY IS SERVICES, AND THE CURRENT SETUP DOESN'T TAX THAT. WE WILL STOP HAVING TO COME BACK AND CHANGE IT IF WE MAKE IT MORE REFLECTIVE OF THE ECONOMY."

DEL. MURRAY D. LEVY, DEMOCRAT, CHARLES COUNTY.

MORE PROGRESSIVE INCOME TAX

"THE TAX BURDEN FOR STATE AND LOCAL INDIVIDUAL INCOME ALREADY RANKS US PER PERSON AT NUMBER [TWO] IN THE ENTIRE UNITED STATES. WE CAN ILL AFFORD TO INCREASE THAT TAX BURDEN."

DEL. CHRISTOPHER SHANK, MINORITY WHIP, REPUBLICAN, WASHINGTON COUNTY

CLOSE CORPORATE LOOPHOLES

"BEFORE WE RAISE TAXES ON INDIVIDUALS, I THINK CORPORATIONS SHOULD PAY THEIR FAIR SHARE. ... COMBINED REPORTING IS THE MOST EFFECTIVE WAY TO CLOSE CORPORATE TAX LOOPHOLES. TWENTY-ONE OTHER STATES HAVE DONE IT, AND THEY FOUND IT TO BE EFFECTIVE."

-- SEN. PAUL G. PINSKY, DEMOCRAT, PRINCE GEORGE'S COUNTY.

FREEZE SPENDING

"EIGHTY PERCENT OF OUR STATE BUDGET IS PUBLIC EDUCATION, PUBLIC SAFETY AND HEALTH, SO WHILE IT MAY SOUND ATTRACTIVE TO FIX IT ALL WITH CUTS, THOSE CUTS WOULD AFFECT ALL THOSE THINGS WE ARE TRYING TO PROTECT."

-- GOV. MARTIN O'MALLEY, DEMOCRAT, BALTIMORE

SHIFT TO LOCAL GOVERNMENTS

"WE WOULD EITHER HAVE TO DRAMATICALLY CUT SERVICES OR LOOK TO OUR TAXPAYERS. THE ONLY OPTION IS THE PROPERTY TAX, AND THAT'S THE WORST SOLUTION OUT THERE."

-- JAN H. GARDNER, DEMOCRAT, PRESIDENT, FREDERICK COUNTY COMMISSIONERS

LEGALIZE SLOTS

"MARYLANDERS PLAYING SLOTS IN WEST VIRGINIA AND DELAWARE ARE CONTRIBUTING ROUGHLY $150 MILLION ANNUALLY TO THE COFFERS OF THOSE STATES, SUBSIDIZING THE HORSE RACING INDUSTRY, EDUCATION AND OTHER PRIORITIES."

-- LABOR, LICENSING AND REGULATION SECRETARY THOMAS E. PEREZ, DEMOCRAT, MONTGOMERY COUNTY.

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