Maryland’s state government budget has avoided catastrophic shortfalls so far during the pandemic-induced recession, largely due to federal coronavirus aid programs.
But things could get much worse if there’s a second wave of the virus that requires a return to shutdowns or if Congress fails to approve another package of aid to families and businesses, state economic forecasters warned Tuesday.
“The extent of the federal stimulus has just been unbelievable...," said Comptroller Peter Franchot, a Democrat. “Hopefully, there will be a second one, because this one has proven to be extremely beneficial to our state.”
Franchot led a meeting of a state panel known as the Board of Revenue Estimates, which tracks how much in tax dollars comes into the state and makes predictions used to craft the state budget.
When Gov. Larry Hogan creates the next Maryland state budget, he can expect to have more money in the state’s general fund — a total of $19.7 billion, about $2.1 billion extra — to work with than was anticipated in a worst-case estimate that was released in May.
The Republican governor’s team is in the early stages of behind-the-scenes work on the next budget, which would start on July 1, 2021, and run for 12 months. State lawmakers will review the administration’s budget proposal during the General Assembly session that starts in January.
The current budget runs through June 30. It’s been cut by about $400 million as an emergency measure due to the economic downturn.
For the current budget year, the total general fund estimate was revised Tuesday to $18.7 billion. That’s an improvement of $1.4 billion over the May projections, but still down about $800 million from prepandemic projections.
At one point, early in the pandemic, economic forecasters predicted the state could see its revenue drop by billions of dollars compared to past years. But the most dire scenarios have not yet materialized.
David Brinkley, the governor’s budget secretary, said the latest forecast is a “reality check.” While things are better than feared in May, the state is not out of the woods.
“The situation is very precarious and critical,” he said.
Hogan issued a statement crediting the budget cuts and his administration’s reopening plans for making sure the state’s economic hit “is significantly less painful than it could have been.”
“Though we are in a better position both economically and health-wise than much of the country, this is still the biggest challenge we have ever faced,” he said.
The governor said he would lobby Congress for more help and make “tough decisions” on the state budget.
The state is holding its own in large part due to federal actions that have kept some families and businesses afloat, including business grants and loans, stimulus payments to families and enhanced unemployment benefits, according to David Farkas, the state’s acting director of revenue estimates. Essentially, when individuals still have money coming in and businesses still are operating, they continue to pay taxes.
The state’s general fund gets most of its money from income taxes and sales taxes.
Income tax withholding has held steady as some industries have flourished (home improvement, online sales), even as others have struggled (restaurants, recreation, entertainment). Unemployment benefits that were temporarily beefed up by the federal government also helped, as those payments were taxed.
Those who lost their jobs were more likely to be low-wage workers. As higher-wage workers have largely stayed employed, they have continued to contribute to income tax revenue.
With personal income staying roughly steady overall, and families receiving stimulus payments in the spring, people still spent money and paid sales taxes. Online orders, which are subject to sales tax, have surged, helping the state’s bottom line.
Treasurer Nancy Kopp, a Democrat, said while it’s good to have “strong” budget numbers, she remains concerned that the economy has hurt low-wage and less-educated workers.
“When they are unemployed, the numbers that are reflected in [income tax] withholding only tell a small part of the story,” Kopp said.
She added that it’s important to do work “to bridge those differences.”
The patterns of steady income tax and sales tax collection will continue only if the federal government can pump more money out to taxpayers and if the coronavirus can be kept in check, Farkas warned.
The uncertainties have made economic forecasting more difficult than ever, Farkas said. He said his forecast is based on assuming there will be some sort of second federal stimulus plan and the virus doesn’t require once again closing stores, restaurants, theaters and other businesses.
Members of Congress have been unable to agree on a second stimulus plan. In the latest maneuvering Monday, House of Representatives Speaker Nancy Pelosi and Democratic leaders introduced a revised version of their “HEROES Act,” which would provide $2.2 trillion in financial aid, including $1,200 stimulus payments and restoring the extra $600 per week in unemployment benefits.
“Forecasting uses past relationships and projects them forward,” Farkas said. “The coronavirus pandemic is an unprecedented event, and there is nothing like that in our modern data that we use for forecasting.”
Farkas cautioned that this forecast could change substantially in the coming months. The next forecast will be issued in December.