Tax collections meet expectations for year

The Baltimore Sun

Maryland's tax collections are coming in on target this year, according to newly released state figures, but Board of Revenue Estimates members cautioned that the economic picture remains uncertain.

The latest estimates are in line with those that state lawmakers used as the basis for tax increases and recommended cuts in future spending they enacted during last month's special session, meaning that barring an economic slowdown or huge new spending programs, the state will not likely return to the days of projected deficits anytime soon.

"Revenues have really come in basically where we thought we were," said Budget Secretary T. Eloise Foster, one of the board's three members.

For several years, fiscal leaders have worked to cope with a projected "structural deficit" of as much as $1.7 billion in Maryland's budget -- that is, a persistent imbalance between spending and revenues that was not the product of economic forces. Most of the problem was caused by a 1998 income tax cut and a 2002 decision to increase school funding, experts agree.

In last month's special session, the General Assembly approved tax increases to help close that gap. Gov. Martin O'Malley had already made some budget cuts, and the legislature requested that he make more in January to curb future spending growth.

Comptroller Peter Franchot argued against the session, saying it would be better to wait for this month's revenue estimates to make sure that a slowing economy would not leave the state in a bigger hole than budget than analysts expected.

Yesterday's numbers show that didn't happen. Nonetheless, Franchot, who sits on the board, said state leaders should not get too comfortable.

The softening housing market and other uncertainty in the economy mean that Maryland's financial troubles might not be over, he said.

"Proceed with an abundance of caution in the months ahead," Franchot said.

The revenue estimates adopted by the board yesterday predict that tax revenues, excluding the increases that go into effect in January, will grow by about 2.2 percent. Baseline revenue growth in fiscal year 2009 -- which begins July 1 -- will be stronger, about 5.2 percent, the estimates predict.

Revenue growth is predicted to be higher because of the tax increases that the legislature passed, primarily an increase in the sales tax from 5 percent to 6 percent. That increase and others, such as a $1-a-pack increase in the cigarette tax and changes to the individual and corporate income tax, will increase general fund revenues in the second half of fiscal year 2008 by $403 million and fiscal year 2009 general fund revenues by $846 million.

In addition, a portion of the new tax revenue, the equivalent of about $400 million a year, will go into a separate fund dedicated to transportation funding.

The board's estimates attempt to take into account the effect of higher tax rates on the economy, but members of the board said their impact cannot be precisely known.

If not for the increase in the sales tax rate, collections of that levy would have been relatively flat, with growth of about 3.9 percent in fiscal year 2008 and 4.4 percent in fiscal year 2009, said David Roose, director of the Bureau of Revenue Estimates. From fiscal 2004 to 2006, sales tax revenues grew on average by 7.5 percent a year. Roose said the slowdown is largely related to a drop in construction-related sales.

Growth in individual income tax revenue also has slowed significantly in recent years. Collections of that tax increased by more than 8 percent in fiscal year 2006 and by 5.1 percent in the fiscal year that ended June 30.

Not counting changes enacted in the special session -- which are expected to have a relatively modest effect on total collections -- individual income tax revenue is expected to grow by 4.7 percent this fiscal year and rebound to 6.1 percent next year.

The slowing housing sector was the greatest source of concern for the board. Roose said Maryland was hit harder than other states because it had prospered from the housing bubble more than most.

But Treasurer Nancy K. Kopp, the third member of the board, said the influx of military jobs from a national base realignment could help solidify that sector.

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