Maryland’s Fiscal Challenges Are Real – But with Fair Tax Reform We Can Face Them

Recent media coverage and statements by policymakers have put a spotlight on Maryland’s fiscal health. We face real challenges in the years ahead, but there is no cause for panic. With fair tax reforms to ask wealthy individuals and profitable corporations to pay their fair share, we can afford to support bedrock services like schools, health care, roads, and transit that Maryland communities need to thrive.

Where Are We?

Maryland’s fiscal picture has undergone dramatic ups and downs since the onset of the COVID-19 pandemic in 2020. Although state analysts initially predicted severe shortfalls, positive federal responses like the CARES Act’s unemployment insurance enhancements and the American Rescue Plan’s Child Tax Credit improvements instead delivered strong economic performance and unprecedented revenue growth. With those laws’ impacts now largely behind us, the state is now facing fiscal challenges comparable to those seen in the years preceding the pandemic.

State analysts are currently projecting general fund structural deficits averaging about $600 million per year between fiscal years 2024 and 2028 – meaning that ongoing expenditures are expected to exceed ongoing revenues. These shortfalls are likely to grow further into the future, as revenues fail to keep up with the cost of basic services.

Even in recent history, the current budget outlook is far from exceptional. In the five years before the pandemic, state analysts’ five-year budget projections consistently showed significant and growing deficits. In 2017, 2018, and 2019, analysts projected cumulative five-year deficits larger than what we face today.

How Did We Get Here?

Today’s budget outlook is the product of both changing background conditions and policy choices made over multiple years:

• Higher-than-expected education costs are the largest driver of Maryland’s long-term fiscal needs.
  • After years of eroding and increasingly lopsided support for public schools, lawmakers in 2021 enacted the Blueprint for Maryland’s Future, a plan to ensure that children in every part of Maryland can get a great education. It has been clear from the start that the Blueprint can succeed only with sufficient resources.
  • Recent data improvements have changed our understanding of how many children with low family incomes our schools serve. Because growing up amid financial hardship creates barriers that make it harder to succeed in the classroom, this new information has increased the expected cost of implementing the Blueprint.
  • These changes are expected to have minimal impact on the general fund in the near term, as the bulk of new Blueprint investments are coming from the separate Blueprint for Maryland’s Future Fund. However, because ongoing Blueprint Fund revenues are not growing at the same rate as educational costs, we will need to make significant general fund contributions beginning in FY 2028. Failing to do so would undermine the education reforms that are critical to our children’s and our state’s future.
• Changing economic conditions have reduced expected revenue growth.
  • As the impact of the American Rescue Plan and earlier federal pandemic relief bills recedes, recent years’ explosive revenue growth will not continue. While these laws’ expiration has long been known, other risks such as a potential federal government shutdown could create additional economic turbulence.
  • The Federal Reserve has responded to rapid inflation in 2021 and 2022 with a series of aggressive interest rate hikes, a course of action intended to rein in price increases by slowing economic growth and increasing unemployment. These measures may not cause a recession, but are nevertheless dampening revenue growth and increasing state borrowing costs. These fiscal impacts are on top of the lopsided risks the Fed’s approach creates for workers of color.
  • Responding to these developments, state analysts in March reduced projected general fund revenues for the current budget year (July 2023 to June 2024) by about $400 million. Similar or slightly larger impacts are expected in future years.

• Policymakers cut taxes in 2022 and again in 2023 – but in very different ways.
  • In January 2022, outgoing Gov. Hogan proposed to eliminate income taxes on all retired Marylanders regardless of income. Once fully phased in, this proposal would have cost the state $1.7 billion per year, with more than half the benefits going to the small number of households with annual income over $200,000.
  • Lawmakers rightly rejected this radical proposal, but enacted a tax cut primarily benefiting middle-income seniors. This measure is expected to cost just over $300 million this year, with gradually rising impacts in future years. The structure of this tax cut does very little for retirees who face real financial hardship.
  • This year, Gov. Wes Moore began his first legislative session with a smaller tax cut proposal primarily targeting working families. This plan centered on expanding the state’s Earned Income Tax Credit and small Child Tax Credit. After minor modifications by the legislature, this measure is expected to cost about $200 million this year, with smaller impacts in future years.

• This year’s budget makes a serious effort to rebuild Maryland’s state government.
  • As of 2022, there were 17% fewer people working at state agencies than 20 years earlier, despite a 13% increase in population during the same period.
  • Shrinking numbers of authorized positions and rising vacancies are making it impossible for state agencies to deliver public services effectively. The results include wait lists, subpar customer service, and dangerous conditions in many state facilities.
  • State agencies have long struggled to attract and retain workers, and this challenge is greater still in today’s strong labor market. Analysts have repeatedly cited inadequate pay as a major barrier to maintaining sufficient staffing.
  • Moore and lawmakers increased authorized staffing levels across a range of state agencies and included funding for significant salary increases.
  • The math is straightforward: Hiring more people and paying them more costs money. This is what it takes to ensure Marylanders have access to things like clean water, safe health care facilities, legal due process, and good customer service.

Several one-time actions, such as up-front capital expenditures and accelerated Medicaid provider rate increases, are not reflected in the structural balance as they will not have any continuing impact on the budget.

Where Do We Go Now?

The bad news is, there is no “one weird trick” to navigating the current fiscal situation. There is no money under the cushions or edges to trim. The only choices are cutting essential programs and services or raising new revenue.

The good news is, we can raise the revenue we need to invest in thriving communities across Maryland by asking more of the large, profitable corporations and wealthy individuals who today get away without paying their fair share:

• Income tax reform: The most effective way to address the inequities in our tax system is through reforming the personal income tax. With a millionaires’ tax and higher rates on those with income over $250,000, we can raise hundreds of millions without a single additional cent from working and middle-class families.
• Corporate tax reform: Our state continues to put our small, Maryland-based businesses at a disadvantage compared to their large competitors by maintaining loopholes that allow profitable multi-state corporations to use accounting gimmicks to avoid state taxes. Maryland should join the majority of states that have already closed major corporate tax loopholes.
• Asking more of those with built-up wealth: While most of us pay the bills with the money we earn at our jobs, the small number of individuals with significant built-up assets can make a living simply on what they own. And tax policies treat certain income from wealth more favorably than income from work. We can raise significant revenue and narrow the racial wealth gap by offsetting federal special treatment of capital gains and restoring our millionaires’ estate tax.

Policymakers should avoid the alternative path of trying to cut their way to balance. This approach would deprive Maryland children of a great education, further deteriorate public services, and heighten the structural barriers that hold back Black and Brown Marylanders.

We Need Better Maps

An effective and democratic budget process requires clear communication of the fiscal situation and the choices we face. Through no fault of executive and legislative budget staff – who produce voluminous, thoughtful analysis under tight deadlines – policymakers can do more to improve public understanding of Maryland’s budget:

• Publications at key points in the budget process – before the legislature convenes, after introduction of the governor’s budget proposal, during legislative consideration of the budget, and after the adopted budget is finalized – should include a multiyear baseline broken down by spending purpose.
  • Specifically, this projection should distinguish between the impacts of changing underlying information and the impacts of policy choices on spending and revenue levels.
  • Most of Maryland’s multiyear projections currently include only budget totals, with no information on the composition of spending. The governor’s budget does include a slightly more detailed projection, but does not distinguish between changes due to new information and changes due to policy choices.
  • Although it is common for aggregate long-term projections to report revenue and sometimes expenditure impacts of legislation, this is only a subset of the policy choices made each year that shape the state’s long-term fiscal situation.
• We should update the way publications summarize the state’s fiscal situation to reflect the current structure of the state budget.
  • Special funds account for nearly one-third of state-source spending (excluding higher education funds) in this year’s budget, and the Blueprint for Maryland’s Future Fund in particular is expected to grow significantly in coming years.
  • For the first time, the governor’s budget this year included a wealth of detailed, long-term information on the Blueprint Fund’s revenue and expenditure path.
  • However, neither the Department of Budget and Management nor the Department of Legislative Services updated this analysis for policy changes or new information during the legislative session.
  • At key points in the budget process, state analysts should publish at least the same aggregate information on the Blueprint Fund as they currently do for the general fund: total ongoing revenue, total ongoing spending, and the cash and structural balance, over a five-year window. This analysis should use consistent rules for classifying fund transfers as one-time or ongoing.
• The policy choices embedded in the state budget do much to determine who has access to opportunity in Maryland. Even choices that appear neutral on the surface can interact with historical and ongoing forms of discrimination to either obstruct or assist Marylanders of color as they seek to contribute to a thriving state. Policymakers should incorporate routine racial and ethnic equity analysis as a routine part of the budget process, and require state agencies to collect and provide to analysts the racially disaggregated data necessary to support this analysis.
• Detailed analysis and clear communication of the state budget picture require significant staff time and other resources, and the agencies responsible for this work are already stretched thin. Lawmakers should ensure that the Department of Budget and Management and the Department of Legislative Services have the resources they need to do their jobs effectively.