Economic pinch hits Maryland tax coffers

The Baltimore Sun

A sluggish economy and housing market continued to undercut nearly every source of tax revenue for the state over the past year, with collections falling $73.5 million short of expectations, setting the stage for tighter budgets in the coming years.

The declines demonstrate how inextricably tied state government is to the overall economy. A dent in consumer spending, weakened by the economic malaise and household budgets strapped by higher gas and food prices, led to a sales-tax shortfall. A sinking stock market cut into individual income tax payments. And fewer home sales meant courts collected fewer fees for recording deeds.

"That's painful," said state Sen. David R. Brinkley, the Republican leader and a member of the budget committee. "But when Maryland's families are feeling the pinch, no one should be surprised that the government's revenues are going to fall short."

The latest budget news came out of the comptroller's office, which yesterday released a report on the final accounting for fiscal 2008, which ended June 30.

The governor and General Assembly are required to enact a balanced budget every year based on revenue projections, so last year's shortfall will come out of the current general fund surplus and will affect next year's spending plans.

Gov. Martin O'Malley, a Democrat, has been wrestling with budgetary problems since he came into office last year.

The governor convened a special legislative session last fall during which the General Assembly raised taxes by $1.3 billion and reduced spending by hundreds of millions of dollars. Other cuts since he took office have brought the total to almost $2 billion, according to the administration. The legislature also forwarded a plan for legalizing slot machines, which goes before voters for approval in November, to help balance the budget in the future.

But as the state was implementing the budget-balancing package, the economy was stung by the subprime mortgage debacle and credit meltdown. The resulting lag in state revenue now means tax and fee collections for the current fiscal year and fiscal 2010 could be $1 billion less than expected, according to the nonpartisan Department of Legislative Services.

That leaves O'Malley with a more difficult task when he begins this fall to craft a budget for fiscal 2010. He is required to present that plan to the General Assembly when it convenes in January. More definitive revenue forecasts for the current and next fiscal years are expected in September and will be updated again in December.

Warren G. Deschenaux, the legislature's chief fiscal analyst, said the governor may want to implement spending cuts even sooner by going through the Board of Public Works to roll back state agency budgets. That's because the state generally maintains a balance in the $15 billion general fund, and the $73.5 million shortfall from fiscal 2008 would cut into the current surplus of $237 million.

O'Malley spokesman Shaun Adamec said the governor has been willing to make spending reductions in the past and will work with the General Assembly if further cuts are needed.

In the meantime, he said, the worsening budget picture underscores the need for voters to approve the slots referendum.

"These numbers just illustrate the economic circumstances we're in and the importance of that new stream of revenue that the slots will offer," Adamec said.

Even if slots are approved, the state does not expect to see significant revenue from them for several years.

And while O'Malley and other state leaders have said that Maryland will weather the national slowdown better than most states, many state officials are girding for a worsening economy and continuing budget battles.

"It is safe to say that in the current economic climate, we're in for more bad news," Comptroller Peter Franchot said in a statement. He has been a frequent critic of the tax increases and the proposed slots plan. "We need to get serious about the financial mess we find ourselves in."

According to the final accounting of fiscal 2008, income and sales taxes - which make up roughly 80 percent of the state's revenue - fell about $130 million short of projections. Had the sales tax not been increased during the second half of the year as a result of the special session, the revenue take would have ranked as the worst performance since 1991. David F. Roose, director of the Bureau of Revenue Estimates, called the sales tax results "the real big unpleasant surprise."

Individual income taxes came in less than projected largely because of falling investment and real estate gains, as stock and housing markets stumbled. Similarly, court revenues came in $12 million under the forecast, partly because of fewer recordation fees collected by clerks of the court.

An unexpected result was a 10 percent increase in death taxes. Estate tax receipts reached a record $194.5 million. There were 55 payments in this category of more than $500,000 for a total of about $100 million. Also mitigating the state's bad fortunes was an unexpectedly strong performance by state investment funds.

However, cigarette taxes also fell $17 million short of the forecast, as sales declined more than predicted after the state doubled the levy to $2 a pack during the special session.

Brinkley, who represents Western Maryland, said that more budget cuts are needed, and the sooner the better because a delay would only mean deeper reductions later. He also blamed the tax increases for hurting the state's economic outlook.

"If they wanted to win the race for highest-tax state, they may win," he said of Democrats who control the State House. "But they are losing on the revenue side."

But Del. Norm Conway, the Eastern Shore Democrat who chairs the Appropriations Committee, said Maryland is not immune to what's happening on the national level.

"We have been very much aware that the revenues were below the estimates in almost every category," Conway said. "This is something that is happening not just with Maryland but with a number of other states. It's something that we will certainly try to stay on top of."

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