Thursday begins the 2011 budget year for Baltimore County. This is an opportune moment to assess where the local economy is headed and whether a course correction is needed.
When the housing bubble burst in 2008, the damage was widespread. In order to prevent a complete collapse of the financial system, the federal government lowered interest rates to near zero, bought billions of dollars worth of bad mortgages, bailed out big banks and insurance companies with loans or equity investments and increased its debt burden by over 22 percent to $7.8 trillion in 2009.
That run-up in spending spared state and local government from making painful spending cuts, but now the day of reckoning is fast approaching, as the flow of federal stimulus dollars to the states has begun to cease. Maryland last year received $1.6 billion in federal grants to plug holes in its budget, $700 million for Medicaid and $400 million for education alone. Maryland is now facing a structural deficit approaching $2 billion. Unless tough austerity measures are employed, that deficit will worsen.
What ails our state will naturally affect Baltimore County's outlook, and that of other local jurisdictions. It is likely that the state will make up for its shortfall by shifting certain costs to the counties. Baltimore County can expect to be socked with at least 50 percent of the teachers' pension liability (approximately $50 million phased in over a period of years) and highway repair costs totaling about $36 million, and by reductions in local aid for police and targeted local health care programs. The impact might exceed $150 million.
These cuts could not have come at a worse time. Baltimore County's fiscal 20100 general fund operating budget spends $1.6 billion. But county revenues are expected to decline for the third year in a row. The result: A projected budget deficit of $150 million. The county was able to plug that hole by shifting money from reserve funds and delaying some capital projects, but if trends continue, that won't last.
A decline in personal income tax revenue, which fell by 24 percent in 2009, is largely responsible for this year's shortfall. And, it's not realistic to expect income tax revenue to rebound significantly any time soon. Job cuts resulting from Stanley's acquisition of Black and Decker, the impending closure of Solo Cup and the looming departure of Shire Pharmaceuticals Group, coupled with the adverse effects of weak stock and real estate markets and persistently high unemployment ensure that income tax revenues in Baltimore County will most likely remain stagnant through 2012.
In view of such realities, how can Baltimore County government grow its revenue stream? I believe two strategies are necessary.
First, Baltimore County must insist that the state legislature resist the temptation to increase tax rates — including capital gains, retail sales and real and personal property tax rates — because capital made available for people to invest, save or use to consume products and services will stimulate economic activity and employment. While raising the piggyback tax rate may seem a tempting option to some, higher taxes will effectively stunt business investment and risk-taking, ultimately reducing the amount of money that every citizen has available to meet expenses.
Second, Baltimore County must immediately redirect resources to economic well-being initiatives, such as job and business creation. Incentives should be created to lure state, national and global businesses to establish residency here. This includes simplifying regulations, reducing the complexity and cost of permits, reducing business fees and taxes, following common sense environmental practices, and finding other ways to reduce overhead costs for businesses until an economic recovery is underway. Baltimore County must aggressively persuade the state legislature to repeal the state income tax premium on entrepreneurs, align the inheritance tax exemption with federal levels and provide relief from the massive red tape and costs associated with doing business in Maryland.
The budget crisis is the single biggest issue Baltimore County voters face. County residents should ask everyone running for county office to offer their clear, specific suggestions on how to solve it. Given the magnitude of the challenges we face, feel-good rhetoric and vague hints of status quo solutions won't cut it.
Ken Holt is a Republican candidate for Baltimore County Executive. He is a former State legislator and currently on a leave of absence from Morgan Stanley Smith Barney, where he has been an investment executive for twenty five years.