Shortsighted Cuts Won’t Solve Maryland’s Budget Woes

January 4, 2017 by Christopher Meyer in Blog, Budget and Tax

The governor’s budget proposal, expected later this month, is likely to include some cuts to the public services that Marylanders rely on. This move won’t change the fact that, in the long term, the state lacks sufficient resources to maintain the things that make Maryland a great place to live and work – like good schools and safe communities. To address the budget imbalance without weakening the vital public services that support our state economy, policymakers should call on the wealthiest and large corporations to pay their fair share for the services we all benefit from.

In December, the General Assembly’s Spending Affordability Committee met to recommend spending levels for Maryland’s next state budget. Like the committee’s briefings earlier this fall, the recommendations were dominated by news of lower-than-expected revenues. Thanks to slower than expected economic growth, revenues have not kept pace with predictions, leading to a fiscal imbalance.

Last month’s spending recommendations follow December projections from the state Board of Revenue Estimates, which lowered expected revenues for the current fiscal year by $14 million and for next year by $25 million. These projections were in addition to deeper reductions that came earlier in the year. Excluding one-time costs and resources, next year’s revenues are expected to fall short of the state’s needs by $377 million. The Spending Affordability Committee has called on the governor to cut this amount in half when he introduces his budget proposal in January.

No one would dispute that changes are necessary to put Maryland on sound fiscal footing. However, a cuts-only approach would do more harm than good, potentially reducing revenues further by weakening our state economy. Relying on cuts alone to close the budget gap would mean lost jobs for some of the 80,000 Marylanders who deliver state services, along with the taxes these workers pay. It would also mean less funding for schools, universities, hospitals, and parks—essential investments for Maryland to maintain a skilled workforce, good jobs, and a high quality of life.

Policymakers should call on large corporations and our state’s wealthiest residents to pay their fair share. In Maryland’s current tax system, those who have the most are asked to pay the least. Maryland families that take home less than $111,000 a year—the bottom 80 percent of the state—pay between 9.5 percent and 10.3 percent of their income in state and local taxes, according to an analysis by the Institute on Taxation and Economic Policy. Meanwhile, the top 1 percent of families pay only 6.7 percent of their income in taxes. This tax structure is a recipe for slow revenue growth at a time when those at the top are the ones seeing their incomes go up.

Policymakers have several options for shrinking the budget shortfall while protecting vital services:

  • Freeze the millionaire estate tax at its current level. Maryland’s estate tax exemption is scheduled to rise to the federal level of nearly $6 million by 2019. This tax cut has already cost hundreds of millions of dollars while benefitting only a few very wealthy families. Freezing the exemption at its current level of $2 million will prevent even greater losses.
  • Ensure large corporations pay their fair share. Maryland can level the playing field for local businesses by treating companies with subsidiaries in multiple states as a single entity, a reform known as combined reporting. This reform would eliminate three of the most common corporate tax shelters. In addition, policymakers should limit loans and other special deals for large companies like Northrop Grumman and Marriott. Research shows that these incentives are generally ineffective, and they use up resources that would be better spent elsewhere.
  • Reconsider cuts to tolls and fees. Governor Hogan’s fee reductions cost the state an estimated $130 million per year. While it is reasonable to periodically review fees for state services, most fees are intended to cover a portion of the state’s cost to provide those services. It makes little sense to reduce or eliminate revenue sources at a time when needed public investments are facing cuts.