Maryland Must Preserve Critical Investments When Addressing Budget Shortfall
Without major changes in the economy or state fiscal practices, Maryland policymakers will continue to face small budget shortfalls each year, the Department of Legislative Services told the General Assembly’s Spending Affordability Committee this week. Legislators have options for how to move Maryland forward. To preserve and build on the modest economic growth since the most recent recession, it is essential that we preserve critical investments in things like education, transportation, and health care. A fiscal strategy based only on spending cuts would hurt Maryland’s families and the economy as a whole.
The Problem
Revenue has not grown as fast as state analysts predicted, and new estimates show the trend continuing. The Board of Revenue Estimates now predicts that the state will have $365 million less than it expected when the budget for the current fiscal year was developed and $417 million less than estimated for the next fiscal year. One of the biggest factors is fluctuations in the stock market, as Maryland taxpayers are expected to declare less income, particularly from capital gains.
At the same time, the baseline costs to maintain state services and provide funding to counties for things like schools and fire departments is projected to grow by an average of 4.8 percent per year between 2018 and 2022. If current estimates remain the same, revenue will only go up 3.7 percent per year. In the past, economic growth would bring more revenue to the state to cover the increasing costs due to factors like population growth and inflation. However, this is not currently the case, as employment has increased steadily but wages have not.
Options
There are ways to reduce the budget shortfall while preserving economic security. A cuts-only approach would be counterproductive and could actually lead to further reductions in state revenue. State and local government employees – including teachers, social workers, police officers and librarians – comprise 13 percent of Maryland’s workforce. Layoffs, hiring freezes or pay cuts that affect these employees would hurt a significant chunk of the working population, reduce consumer spending, and further reduce income tax revenues.
Before looking to cut essential protections for Maryland families and important investments in our future, legislators should reevaluate the special tax preferences the state is providing to large corporations. For example, the state is expected to give $35 million in tax credits over five years and a $20 million loan (that ultimately may not have to be paid back) to Northrop Grumman, without any expectation that the defense giant will add any new jobs or make other investments in Maryland. The loan alone amounts to 5 percent of this year’s budget shortfall. Policymakers should evaluate the effectiveness of the state spending on tax credits and incentives. A better use of state resources would be to focus on promoting existing businesses and local entrepreneurs who, research shows, are responsible for most job creation.
Policymakers should also consider common sense options to bring additional revenue into the state. For example, freezing the estate tax at its current level would affect only the wealthiest 3 percent of families, those with estates worth more than $2 million, and maintain an important source of revenue. The state previously held all estates worth more than $1 million accountable for the estate tax but is now phasing it out to the federal threshold of $5.5 million by 2019.
As legislators and the governor work to address the challenge of structural budget shortfalls, it is imperative they protect programs that make economic growth possible and inclusive. Ensuring that corporations and the wealthy carry their share of the revenue load would reduce the harm cuts would impose on struggling communities.
