November 1, 2010

Tax increases are possible cure for next year’s deficit, legislative leaders say

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By Barbara Pash
For MarylandReporter.com

Updated with a clarification 12:15 p.m.

A range of tax increases and budget cuts are on the table next year as Maryland legislators struggle to get a handle on a $1.7 billion structural deficit, Democratic legislative leaders told a business conference Friday.

Taxes on alcohol, gasoline, corporate income and sales face possible increases during the 2011 General Assembly.

“We need to figure out a way to close that deficit,” Sen. Richard Madaleno said last Friday at the Maryland Chamber of Commerce’s annual Business Policy Conference, held in National Harbor, Md.

It may not be possible “to do it all with budget cuts,” said Madaleno, who predicted an even bleaker budget outlook with a possible $2 billion structural deficit.

On the alcohol tax, Madaleno, a Montgomery County Democrat on the Budget and Taxation Committee and a member of the Maryland Business Tax Reform Commission, said that “an increase would be significant” for additional revenue.

The last time the alcohol tax was raised was in 1972, on beer and wine. If the tax goes from 1 cent per drink to the equivalent of 11 cents per drink, he said, “that would bring in $200 million to the state.”

Senate President Mike Miller has long advocated increasing the gas tax and he did so again at the conference, as he had last year. This time, though, he had company.

The gasoline tax was last raised in 1992, from 18.5 cents to 23.5 cents per gallon.

Madaleno raised the possibility of an increase of 10 cents per gallon on gasoline. He figured this would raise $350 million for the state’s coffers, but the additional revenue would be used to replenish the state’s transportation trust fund.

“It puts back money taken [out of the fund] so it’s not really new money,” said Madeleno, who expects the upcoming legislative session to be devoted to the deficit.

Over half of the state’s $13.7 general fund budget goes to education, from kindergarten through college.  “We can’t touch that,” he said. But “that means we have to cut $1 in $2 from every other agency – health, economic development, the environment – and still deliver a certain level of service.”

“There are interesting areas we will look at,” Madaleno said of tax increases.

CLARIFICATION: House Minority Leader Anthony O’Donnell agreed. Speaking at an earlier session Friday, House Minority Leader Anthony O’Donnell said:“There are big challenges ahead of us. We’ve got a mountain to climb.” O’Donnell noted that the federal government’s stimulus money “is gone” and that “all our priorities [like education and transportation] are at risk because we haven’t been prudent.”

O’Donnell said that he expects the Maryland Business Tax Reform Commission, which is scheduled to hold a public meeting next week, “to look into a wide range of revenue enhancements,” including increasing the sales tax. He said he and his Republican colleagues will not support these tax increases.

Maryland is “not willing to take the California approach,” said O’Donnell, referring to drastic budget cuts in that state. His concern, he added, is that “the commission will [recommend] a wide range of tax increases.”

Gov. Martin O’Malley has repeatedly said he does not “intend” to raise taxes next year, but he has not pledged that he would not do so. In a radio campaign ad on O’Malley’s behalf by Baltimore County Executive Jim Smith, Smith says that O’Malley “will release his budget next year with no new taxes.”

Friendly or unfriendly to business

But other speakers criticized the state’s corporate and personal income taxes for their supposed negative impact on business.

Ellen Lord, general manager and senior vice president at AAI Corporation in Baltimore County, said that “Virginia offered Northrop Grumman a tax package that was twice what Maryland offered,” leading the defense contractor to relocate its California headquarters to Northern Virginia.

Lord indicated there were concerns over state taxes for corporations and individuals with high incomes, such as corporate executives.

“State government needs to think carefully about what it means to be business friendly,” she said.

O’Donnell said that he and Lt. Gov. Anthony Brown went on a trip to Israel sponsored by the Harry and Jeanette Weinberg Foundation, one of the largest private foundations in the country and headquartered in Baltimore County.

One of their stops was the Israel Aerospace Industries. “They knew all about Maryland,” O’Donnell related, “and they said, there is one problem – you have a corporate tax.”

Senate Minority Leader Allan Kittleman called the state “business unfriendly,” and said it discourages risk-taking. Business owners “don’t know what [will] happen. It’s so unpredictable,” he said.

Sen. David Brinkley, a Frederick County Republican on the Budget & Taxation Committee, agreed. “We are dealing with challenging issues,” he said, “and tax decisions are polarizing.”

Brinkley said he knows of “young guys, tech guys, who reside in Florida” because of Maryland’s personal income tax, considered by some as high, especially when compared to Florida.

“Tax the rich” is easy rhetoric. But, Brinkley argued, “If  business owners assume the risk, they want to be rewarded.”