Political Points | 2009 Maryland Legislative Session: More Belt Tightening Ahead
By Mark Croatti
A year ago Maryland faced a second-half fiscal year 2008 budget shortfall of $1.7 billion that was eventually “covered” by a series of tax increases and spending cuts. We were told we had no choice—we were facing a financial emergency. We were also told that the solution arrived at after a special session a year ago would be a one-time approach. Don’t worry, analysts said—they can’t go to the tax well every year, let alone raise that many taxes every year—or can they? One year later, Maryland faces not only another second-half fiscal year 2009 budget shortfall of perhaps a billion dollars but even more difficult choices ahead—and not just for 2010. The outlook for the next several years is actually quite bleak, with or without slots. How did Maryland get into this position?
Parris Glendening’s Tax Cuts
The roots of the current economic crisis extend to the period between the late 1990s and the early 2000s; specifically from 1995 through 2002, when Governor Parris Glendening and the state legislature increased annual spending, on average, by roughly 7% while cutting personal income tax rates, beginning in 1997, from 5% to 4.75%; while more social programs from less revenue sounds great to the average tax payer, these policies resulted in a loss of $1.4 billion over the 5-year period before September 11th. Yet the state government continued to increase spending—a total of $3.5 billion by 2002, a 47% increase—even as total revenue declined 2% between fiscal years 2000 and 2001. Warren Deschenaux, the legislature’s chief fiscal adviser, said the budget, as structured in 2002, could not be sustained past fiscal year 2003. Maryland Comptroller William Donald Schaefer agreed, saying tax revenues at the time were lagging significantly behind expectations.
Recession, September 11th, and the Thornton Act
As the U.S. economy slipped into a recession in March of 2001 (according to the National Bureau of Economic Research), Maryland completed the 2001 legislative session by enacting a fiscal year 2002 budget of $21.4 billion, still believing that the state’s financial outlook was rosy. Then the unthinkable happened: on September 11th, 2001, Al Qaeda terrorists destroyed the World Trade Center, attacked the Pentagon, and crashed a passenger plane into a field in Pennsylvania. A few months later, the first legislative session of the post-September 11th era passed Governor Parris Glendening’s fiscal year 2003 budget of $21.7 billion and, on May 6, 2002, the Bridge to Excellence (Thornton) Act, which mandated that Maryland spend an additional $1.3 billion annually to public schools by 2008 as well as commit to $3 billion for new school construction over the next 9 years, was passed. That didn’t happen because of a combination of decreasing revenue and the sudden and unexpected need to protect Maryland from possible acts of terrorism; as a result, overcrowded Maryland schools pushed the state’s student-to-teacher ratio to 16:1, the fourth highest in the nation. As Comptroller Schaefer had predicted, another decline in expected revenues left Glendening’s successor, Robert Ehrlich, with a $1 billion budget deficit that the new governor had to incorporate into his fiscal year 2004 budget of $22 billion—which included executive order 01.01.2003.18 establishing the Governor’s Office of Homeland Security (OHS), issued in July of 2003. The Office serves as Maryland’s liaison to the U.S. Department of Homeland Security (DHS) and under Ehrlich was staffed with eight people, including a director, a deputy director, a spokesman, a military liaison to the National Guard, a liaison to police departments, two University of Maryland law school students, and a secretary.
Robert Ehrlich’s Fee Hikes and the Real Estate Boom Create an Illusion of Prosperity
Because of skyrocketing property values and a subsequent real estate feeding frenzy, Ehrlich’s $23.8 billion fiscal year 2005 budget proposal offset increased spending without raising sales or income taxes; the governor and the legislature had already agreed the previous year to raise the state property tax nearly 5 cents for every $100 in assessed value. But because of the decline in sales and income tax revenue that began in 1997, Ehrlich was forced to propose several other tax and fee increases that generated more than $500 million a year in additional revenue. These measures temporarily filled the state’s coffers; by June 2005 Ehrlich had amassed a $1 billion surplus, which he promptly began spending on a range of programs as part of his $29.6 billion fiscal year 2006 budget. Ehrlich drew criticism from Democrats who charged the governor with putting Maryland’s financial future in jeopardy by going on an election-year spending spree that drove the final budget past $25 billion. The “spree” didn’t work; Ehrlich lost to Baltimore Mayor Martin O’Malley by a 6-point margin.
O’Malley Calls a Special Session in Fall 2007 to Address the Fiscal Year 2008 Budget Deficit
For fiscal year 2008, O’Malley’s proposed budget of $30 billion represented an increase of only 2.5% and a lower rate of growth than 9 out of the last 10 budgets. In order to help meet the mandated $400 million in educational funding under the Thornton Act and other structural deficits totaling $1.7 billion, O’Malley in a November 2007 special session signed legislation that raised the state sales tax and vehicle titling taxes from 5% to 6%, increased the corporate income tax from 7% to 8.25%, raised the state income tax rates for people making over $150,000, and doubled the cigarette tax to $2 a pack, all of which was estimated would bring in an additional $1.3 billion. To cover the remaining gap, the legislature recommended $550 million in spending cuts. Although the fiscal year 2008 budget gap was plugged, it was dependent on one-time revenues, which cannot be tapped again, such as an opening fund balance of $471 million and fund transfers of over $150 million. The looming crisis averted, the special session took up the fiscal year 2009 budget, not foreseeing what remainder of 2008 had in store for Maryland, the nation, and the world.
Next month, we'll reveal the issues of the 2009 General Assembly and explore if slots in Maryland is a cure-all or cure-nothing for the state budget deficit.
mark croatti
dec 08
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