Leading Maryland Democrats made several observations about Monday's write-down of anticipated tax revenues for this fiscal year and next that merit some parsing. Comptroller Peter Franchot opined that "we're experiencing the downside risk of an economic model that's predicated on federal spending, rather than a robust private sector." Treasurer Nancy K. Kopp struck a somewhat more optimistic tone, noting that even the reduced estimates represent growth over last year. "It's a heck of a lot better than it was only a few years ago," she said. And Sen. Roger Manno, who is due to become chairman of the Spending Affordability Committee, said "it could be a whole lot worse" and pointed to Virginia, which is grappling with a $2.4 billion budget shortfall this year and next.
There is some truth to what all three said, yet none of those analyses of the situation captures the whole picture.
Mr. Franchot, who urged immediate cuts through the Board of Public Works to address the situation, is right that Maryland's degree of dependence on the federal government is hurting us now just as it had helped us during previous economic downturns. The Pew Charitable Trusts reported this month that federal spending dropped by $1.2 billion in Maryland during the last federal fiscal year, but if you factor out Social Security and other retirement benefits, the impact is even greater — other sources of federal spending, primarily contracts, wages and grants, fell by $2.6 billion. That's a problem because those categories of spending make up a larger share of Maryland's economy — 15.8 percent — than they do in all but one other state. It's no coincidence that Maryland experienced no growth in its gross domestic product in a year in which the federal government underwent sequestration and a shutdown.
Ms. Kopp is also right, though, to note that even the latest downward revisions anticipate what in many years would be considered healthy revenue growth. Overall, the state still expects that it will take in 3.5 percent more in taxes and other general fund revenues this year compared to last year, and 4 percent more next year. That's only slightly below the historical average and reflects the anticipation of continued strong growth in individual income taxes — 5.1 percent this year and 5.6 percent next year.
And Mr. Manno is right that things are worse in Virginia, where growth also flatlined last year and where the federal government occupies an even more central place in the economy than in Maryland, that commonwealth's reputation for being more business friendly notwithstanding. Federal government spending accounts for nearly a third of Virginia's GDP, more than any state except for Mississippi, and it is more dependent on government wages, grants and contracts than any state. To Ms. Kopp's point, general fund revenues in Virginia actually did decline by 1.6 percent from fiscal 2013 to fiscal 2014; in Maryland, they grew by 1.5 percent during that period.
But how does Maryland compare to a state that isn't so dependent on the federal government? Take Pennsylvania, for example, where the share of the state's economy that comes from federal wages, grants and contracts is a bit below the national average. The news releases from that state's Department of Revenue have sounded pretty rosy lately: revenues have beaten expectations in each of the last three months, and so far this fiscal year, they're beating projections by 1 percent, which amounts to $109 million.
That sounds impressive, but remember there are two variables at work here: how much money the state took in and how much it predicted it would take in. When Maryland legislators were finalizing the fiscal 2015 budget, the state predicted general fund growth of 5.4 percent, and it's behind. Virginia predicted growth of 5.3 percent, and it's behind too. Pennsylvania is ahead of projections, but it was only predicting 4.9 percent growth to begin with, and it's out-year projections are significantly more modest. When it comes to individual income taxes, for example, Pennsylvania's collections are 3.1 percent above what they were last year. Even with this latest write-down, Maryland's are running 3.2 percent ahead of last year. Maryland's problem is not so much that the bottom is falling out in terms of revenues but that the budget was predicated on what turn out to have been overly optimistic assumptions.
That's why the prize for the most important observation about Maryland's latest revenue projections goes to Gov.-elect Larry Hogan's chief lobbyist, Sen. Joe Getty, who noted that the problem is not so much crafting a balanced budget for the next fiscal year as it is dealing with the revenue shortfalls in this one. The Hogan administration can (and probably should) take a more conservative approach in estimating the revenues for fiscal 2016 and hence the level of spending in its first budget. But those decisions have already been made for fiscal 2015, and, as Mr. Getty noted, every day that passes without action means more money out the door. Former Gov. Parris N. Glendening used his last Board of Public Works meeting to make budget cuts — granted, not enough — to put his Republican successor, Robert L. Ehrlich Jr., in a better position when he took office. Gov. Martin O'Malley needs to do the same for Mr. Hogan.