Election over, talk of taxes begins

With the gubernatorial election over, the campaign rhetoric has quieted, but the problem of Maryland's billion-plus budget shortfall remains — and with it, the discussion of higher taxes.

Former Gov. Robert L. Ehrlich Jr. and Republican leaders in the General Assembly warned that the re-election of Gov. Martin O'Malley and the Democrats would mean tax increases. Indeed, O'Malley refused to join Ehrlich in a campaign pledge against raising taxes.

After defeating Ehrlich last week, O'Malley said the budget he proposes in January will not contain tax increases. But he did not address what would happen if lawmakers adopt a tax package and sent it his way as a means of paying for preferred programs or filling a gap between revenues and expenses.

Legislative leaders continue to say the fragile economy cannot withstand additional taxes, with House Speaker Michael E. Busch, a Democrat, saying, "People are going to have to deal with the budget in front of them" without new revenue sources.

Still, business groups are marshaling their lobbyists, out of concern that lawmakers will change their tune if the budget shortfall turns out to be larger than expected. This week, budget analysts will brief House leaders on the size of the gap, which some have estimated will be as much as $1.7 billion.

And conventional wisdom holds that the first year or two of a four-year term is the time for politicians to make unpopular decisions — such as increasing taxes.

That's what happened in 2007, O'Malley's first year in office, when he called a special session of the Assembly and steered a plan that contained the sales tax increase, a slots gambling plan and some income tax cuts through the legislature, in what he hoped would be a long-term solution.

Could Year One of O'Malley II hold the prospect of a similar plan? Here are some areas on which advocates and officials have focused in the search for new tax revenue:

Alcohol

For years, health advocates have pitched lawmakers on the idea of raising taxes on alcoholic beverages.

The "dime-a-drink" campaign, which reflects about how much more each beverage would cost, is a sophisticated staple in Annapolis. Advocates have armed themselves with opinion polls showing broad support for the idea and studies that indicate a higher tax would save lives and reduce underage drinking.

During the election season, more than 140 candidates for office pledged to support an alcohol tax increase tied to health care and community outreach on drinking. Seventy-five of them won and will take their seats in January in the General Assembly.

"We're poised," said Vincent DeMarco, president of the Maryland Citizens' Health Initiative. DeMarco lobbied successfully for a tobacco tax increase, which he frequently cites as a comparison.

Raising the tax by 10 cents per drink would generate $214 million in new annual revenue, the coalition says, and cut health care costs by $250 million by reducing drinking.

Maryland has some of the lowest alcohol taxes in the country. The levy on liquor hasn't gone up since 1955, and on wine and beer since 1972.

Transportation

Fixes to Maryland's roads and rails are supposed to be funded by the state's so-called transportation trust fund, but in recent years O'Malley has raided that pot of money to prevent cuts elsewhere. That's left critics saying that the state's transit infrastructure is in dire need.

One source of revenue for the trust fund is Maryland's 23.5-cents-per-gallon tax on gasoline. Twenty-seven states, including neighboring Pennsylvania and West Virginia, have higher rates. Gas taxes in Delaware and Virginia are lower; the rate in Washington is the same.

Senate President Thomas V. Mike Miller, a Democrat, has been a vocal advocate of raising Maryland's gas tax. Sen. Edward J. Kasemeyer, the Baltimore County Democrat who will head the budget and tax committee during next year's session, said he favors more frequent and incremental changes to the tax rate, which has not changed significantly in nearly two decades.

"We fall into this pattern of always putting off things that are not pleasant to do," Kasemeyer said. But he stressed that the time still might not be right, given that a commission studying the way the state funds transportation will not be finished by the next legislative session.

Unlike most tax increases, this one has support from some in the business community. Donald C. Fry, president of the Greater Baltimore Committee, said better state infrastructure is "an essential element of economic growth."

Fry said that any increase should come with some type of assurance that the money would be used to develop and maintain roads, bridges, trains and other transportation needs.

"We'd have to restore trust in the trust fund," he said.

Services

On the campaign trail, Ehrlich frequently passed out a list of 43 new service taxes that he said Democrats were ready to impose — and that he said his administration would block. He popped into barbershops, auto repair businesses and tax preparation offices to highlight the issue.

The basis of Ehrlich's feared "43 new taxes" was a 2007 bill co-sponsored by Del. Sheila E. Hixson, the Montgomery County Democrat who heads the House Ways and Means Committee.

The bill never made it out of committee, but fiscal analysts projected that it would have generated about $725 million in new revenue by its third year.

Ellen Valentino, state director of the National Federation of Independent Businesses, said small businesses would "be hit twice" if services were taxed. Many small businesses outsource tax and legal help, so taxing such services would hurt their own businesses, as well.

Valentino worried that "nimble" service providers would simply leave the state. "These are not bricks-and-mortar businesses," she said. "They can operate just as easily out of a basement in Delaware."

Combined reporting

Corporate leaders will focus their attention Tuesday evening on Annapolis, when a commission created to examine changes to Maryland's business taxes is scheduled to hold a hearing. One change that might pull in more dollars for the state goes by the fairly innocuous name of "combined reporting."

Technically a change in accounting rules, combined reporting would shift the way tax collectors view business income from regional or national companies. Larger firms can now shelter some of their profits by transferring money earned in Maryland to states with lower taxes.

Closing that loophole has populist appeal that could prove persuasive with lawmakers otherwise faced with the prospect of cutting popular programs, but businesses say it would make the state less competitive.

"At a time when we're trying to increase jobs in Maryland, why would we add on this type of taxation?" asked Kathleen Snyder, CEO and president of the Maryland Chamber of Commerce. She noted that three states Maryland views as competitors — Virginia, Pennsylvania and North Carolina — have not gone to combined reporting.

The chamber argued in 2007 that combined reporting might not be the money-maker that advocates were making it out to be; the legislature, using a time-honored delay tactic, commissioned a study. Fiscal analysts determined that the change could have netted $109 million to $170 million annually, though their work is based on pre-recession corporate profits.

Sen. Paul G. Pinsky, a Prince George's County Democrat, does not buy the argument that companies would flee Maryland.

"Every state is moving toward it," Pinsky said. "It would be silly if Maryland was last because of the chamber."

Busch hedged on whether combined reporting would be viewed as a tax increase, saying that he wanted to hear the commission's recommendation, which is due in mid-December.

Property

The state's property tax rate, set at 11.2 cents per $100 of assessed value, hasn't changed since Ehrlich was governor. It's a fund he used to pay the interest on state borrowing, and those payments will go up in coming years. Warren Deschenaux, the legislature's top fiscal analyst, said that rate will generate enough money to cover payments next year but it gets "harder" after that.

Local governments add to the rate, and any increase would hit particularly hard in Baltimore, which has the highest levy in the state. Business leaders and real estate agents say frequently that the rate strangles Baltimore. And city lawmakers agreed to accept a gambling casino with the thought that revenue from it would enable them to knock a few pennies off the property tax rate.

O'Malley, as mayor, tried to reduce Baltimore's property tax and has been particularly cool to the idea of increasing the state tax.

Education pension fix

Some lawmakers, including Miller, the Senate president, say the state must begin shifting teacher pension expenses to local governments — a move that could have a seesaw effect that raises local property taxes.

At the end of this year's legislative session, Busch, the House speaker and a former public school teacher, agreed that pensions must be addressed "at some point."

Some say it is fundamentally unfair for the state to pick up the entire tab, which comes to $900 million this year, when it is local school boards that make decisions on teacher hiring, salaries and benefits.

This year, the state Senate approved a plan that would have required that Maryland's 23 counties and Baltimore City eventually take on $337 million of the teacher pension burden, but the legislation never made it out of a House committee.

Harford County Executive David Craig, a Republican serving as president of the Maryland Association of Counties, said the group will oppose any attempt by the state to offload teacher pension costs.

He emphasized that local governments, which operate separately from local school boards, have nothing to do with hiring or setting salaries for teachers, who are state employees. Meanwhile, it was the state legislature that increased benefits for teachers in better economic times.

"They created their own problem," he said. "Now, if they create too much of a storm about this, we'll fight them, possibly legally."

Craig said O'Malley, as a former mayor, understands where local officials are coming from and likely would not press the issue. He said he can't say the same for lawmakers.

"It comes down to an attempt to shove costs to the local governments," Craig said. He noted that local officials are the people most likely to challenge state delegates and senators for their seats.

"They want us to be the ones raising taxes," he said. "They want us to be the ones to look bad."

A previous version of this story gave an incorrect number of legislators who won election after pledging to support an alcohol tax increase tied to health care and community outreach on drinking. There were 75.

annie.linskey@baltsun.com

julie.bykowicz@baltsun.com

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