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O'Malley presents his fiscal proposal

The Baltimore Sun

Marylanders would pay more in sales taxes and higher titling tax when they buy cars, and corporations and smokers would pay more under Gov. Martin O'Malley's plan to fix a budget shortfall he now estimates at $1.7 billion.

But those increases would be coupled with a cut in the property tax and reductions in the income tax rate for most Marylanders, though top earners would pay more, according to legislators O'Malley briefed yesterday.

Despite his plans to add hundreds of millions in new spending to build new roads, protect the Chesapeake Bay, expand access to health care and hold down college tuition - a total package of $2 billion or more - the governor said most people would wind up paying less. He offered no figures to support that claim.

Speaking to reporters later, O'Malley said he will call a special session of the legislature to consider his plan. He said he anticipates a weeklong session, no later than early November.

"This plan allows us to protect important investments in our schools, to protect our quality of life as Marylanders and also to get our fiscal house in order, in a way that also at the end of the day would have 83 percent of us paying less in taxes, rather than more," O'Malley said on WBAL-TV.

Neither the governor nor his aides would explain how that could be achieved while still closing the budget shortfall.

Yesterday's presentation to lawmakers offered the most detailed view yet of what is likely to be the defining initiative of O'Malley's administration.

The delegates and senators - all Democrats - emerged with favorable reviews but with a sense that O'Malley's big gamble is not a sure thing. Republicans immediately panned it as a big-government grab at taxpayers' wallets, and Democrats are split over some of the tax proposals and over O'Malley's proposal to legalize slot machine gambling.

"People are solidly in one camp or another on that issue," said House Speaker Michael E. Busch, who helped block slots over the last five years. "How much political will does he have to drive that through?"

Key elements

The governor gave the legislators nothing in writing and has not publicly offered any details of his plan. But based on interviews with those in the meeting, here are some key elements of his proposal:

An increase in the sales tax from 5 percent to 6 percent, a change that analysts estimate would generate about $750 million next year. O'Malley will also propose some expansion of the tax to cover services, but lawmakers said that was not a major component of the plan.

Increased income tax rates for top earners, coupled with rate reductions for low- and middle-income families. Currently, all taxpayers qualify for the top bracket of 4.75 percent. Local income taxes add roughly another 3 percentage points.

Legalized slot machine gambling, which O'Malley estimated would generate $500 million to $600 million a year in revenue for the state.

An increase in the corporate income tax rate from 7 percent to 8 percent. The proceeds would be split between transportation projects and higher education. O'Malley made college tuition affordability a centerpiece of his campaign last year.

Higher titling taxes on cars to fund transportation improvements. The current rate is 5 percent. This increase and the new corporate tax revenue, along with other measures, would provide about $400 million more a year for roads and mass transit, according to lawmakers.

No immediate increase to the gas tax, though future increases could be tied to inflation.

A $1-a-pack increase in cigarette taxes, a doubling of the current rate. O'Malley said the money would provide an initial funding source for expanded health care coverage.

A reduction in the state's portion of the property tax, from 11.2 cents per $100 in assessed value to 8.4 cents per $100.

Corporate tax compliance measures. O'Malley has supported "combined reporting," a tax law mechanism designed to prevent large companies from hiding profits in other states. However, businesses oppose that idea, and the governor said he is considering other options.

A less certain element of his plans is a "green fund" to pay for Chesapeake Bay cleanup. O'Malley has said he supports such a program, but those in the meeting said it was not clear whether it will be included in the governor's fiscal package. A similar plan considered this year would have been funded through new development fees, but O'Malley has not committed to that approach.

The governor laid out his ideas in a PowerPoint presentation in Government House over scrambled eggs, bacon, sausage and, for the health-conscious, bran muffins and fruit. Lawmakers said he ran the show himself and appeared intimately familiar with the details.

However, legislators said some important elements were left vague. O'Malley did not give a detailed plan for a slots program, saying only that he would like a compromise between the expansive plans favored by the Senate and a more restrictive one that barely passed the House of Delegates three years ago.

That's likely easier said than done. Former Gov. Robert L. Ehrlich Jr. tried and failed to pass slots four times, largely because of opposition in the House. Mistrust between the leaders of the two chambers complicated the task for Ehrlich, and those who have discussed the issue with O'Malley say it has vexed him as well.

O'Malley has an advantage over Ehrlich, a Republican, in that the General Assembly is run by fellow Democrats.

"Is it going to be something everybody likes? Of course not," Del. Adrienne A. Jones, the speaker pro tempore and a Baltimore County Democrat, said of the package. "Is it something the majority of people are going to like? I think so."

Senate President Thomas V. Mike Miller has remained optimistic that he can muster support for O'Malley's plan, and he has pushed for a special legislative session this fall to enact it.

"We'll get it done," Miller said.

Uncertain reception

Busch, however, has been much less certain. With 141 members - a quarter of them new this year - it is impossible to predict how O'Malley's proposals will play in the House until the delegates are all forced in one room together, House leaders say.

"It's a very rational approach, but certain areas are going to be more labor-intensive with the General Assembly," said Del. Sheila E. Hixson, the Montgomery County Democrat who chairs the Ways and Means Committee. "Now if we go into hearings on this, briefings and such, we'll see where the problems lie."

Politically, O'Malley could face criticism from all sides. Business groups have balked at previous attempts to raise the corporate tax rate. Higher titling taxes could raise the ire of auto dealers, and the tobacco industry will oppose a boost in the cigarette tax.

"It's so unfair that every time someone is looking for money they just try to hit up the users of tobacco," said Bruce C. Bereano, the lobbyist for the Maryland Association of Candy and Tobacco Wholesalers. "Enough is enough."

Religious groups and others are already gearing up for a slots fight, and Republican lawmakers are firm in their opposition to tax increases of any kind.

"It's not needed," said Sen. David R. Brinkley, the minority leader from Frederick County. "If we keep our [spending] increases to the cost of living, we'll be out of this in 2011, but there's an insatiable appetite to spend people's money."

Even liberals, who have been advocating higher taxes to support environmental initiatives and health care expansion, might oppose major elements of the plan.

"I appreciate the governor's initiative and his effort and his work on this, but I have to tell you, frankly, I'm a little disappointed," said Sen. Paul G. Pinsky, a Prince George's Democrat who leads a bloc of liberal senators seeking what they call progressive budget solutions.

"I haven't seen the specifics, and I'm sure they're still fluid, but essentially this relies on the sales tax, which is a flat tax that hurts working, middle-income people much more disproportionately than those who are upper income," Pinsky said. "And if you add to that slots, which again is a tax on the poor, it raises concerns for me as to whether this is the most progressive solution."

But the governor's plan is also chockablock with elements designed to appeal to various interests. A large coalition of health care advocates has been backing the tobacco tax to expand Medicaid for a year. Environmentalists renewed their push for the green fund this week, and business groups have long urged the state to invest more in transportation.

"With regard to the corporate tax piece, we're not doing cartwheels for higher taxes, but the governor is correct that transportation and higher education are crucial to the economy," said Ron Wineholt, the government affairs director of the Maryland Chamber of Commerce, who reserved judgment on the total package.

The plan would also include money for higher education and for counties where the cost of K-12 education is higher, a previously unfunded program known as the Geographic Cost of Education Index, or GCEI.

"One of the things he mentioned is that slots will certainly take care of the GCEI and also help with the deficit," said Del. Talmadge Branch, the majority whip from Baltimore. "I thought the fact that he's looking at reducing the property tax as well as the income tax rate for some Marylanders, that was a good piece."

Some details of the governor's plan should become clearer tomorrow. O'Malley has scheduled a "kitchen table talk" at a home in the Anneslie neighborhood of Baltimore County - resurrecting a staple of his 2006 campaign to begin selling his ideas to the public.

His aides are mindful of the example set by former Virginia Gov. Mark Warner, a Democrat who shepherded a multibillion-dollar tax package through a Republican-controlled legislature in 2004. He spent months advocating for his plan in appearances around the state.

O'Malley said he will publicly roll out details of a new element every day or two for the next week.

"Any one of the individual components of this plan is not going to be something that everyone embraces," O'Malley said on WBAL. "But at the end of the day, when we see that we are going to continue to make progress on our schools, on transportation and public safety, and 83 percent of us will pay less, I think people will agree that it is fair, it is balanced, and it is forward-moving."

O'Malley's plan

Major elements of Gov. Martin O'Malley's fiscal plan include:

An increase in the sales tax rate from 5 percent to 6 percent

Income tax cuts for most Marylanders, but increases for high earners

Slot machine gambling

A 2.8-cent reduction in the state property tax rate

An increase in the corporate sales tax from 7 percent to 8 percent to pay for roads, mass transit and higher education

Higher titling fees for cars

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