December 21, 2010

Legislative fortune teller sees tax hikes and spending cuts in our future

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By Len Lazarick
Len@MarylandReporter.com

The no-growth budget for next year that legislative leaders recommended Thursday, combined with a promise of no new taxes, might soon look like a relic of the good old days if a new report from the Department of Legislative Services proves accurate.

In a section of a new 246-page study of the issues facing the legislative session that begins in three weeks, budget analyst David Juppe forecasts “structural deficits” of at least $2 billion in each of the next five years.

“Achieving long-term balance must involve a combination of revenue and spending actions,” Juppe says. (page 9)

Translation: You can’t balance future budgets without both tax hikes and spending cuts. Tapping the $600 million Rainy Day Fund may be needed as well — something he speculates the administration might try to do in the coming year.

Juppe’s analysis comes under the heading “Solving the Structural Deficit.” This subhead implicitly challenges Gov. Martin O’Malley’s continuing assertion that what we have today is a “cyclical” deficit caused by the harsh economy — not the same sort of “structural” deficits bequeathed him by Bob Ehrlich and supposedly cured by tax increases in 2007.

“Structural deficit” means spending that is programmed to exceed revenues year after year, not just once in a while.  

In recent years, DLS analysts have proven themselves a lot more accurate than the administration and the legislators they work for. They told lawmakers earlier this year that they should budget a surplus of about $400 million; the legislature left $100 million.

Just weeks after the budget committees congratulated themselves for their efforts, the budget was out of balance. O’Malley was forced to cut it on his own with the approval of the Board of Public Works.

Hiking taxes

Juppe gives examples of potential tax or fee increases: “expansion of the sales tax base to services, a more progressive restructuring of the personal income tax, repeal of tax credits or improved tax compliance.”

Sales taxes on a few services were rejected by the Assembly in 2007, except for a computer services tax repealed fourth months later. It was replaced by a millionaire’s surtax that Senate President Mike Miller said Friday will not be extended when it expires at the end of 2010.

“The structural deficit affords an opportunity to reexamine all programs and services with the aim of eliminating nonessential spending,” the analysis says. DLS has been advocating a review of spending mandates for years. A legislative workgroup is doing just that, but not for the coming session. 

Slots were part of the solution to the “structural deficit” by funding education but Juppe refers to “overstated revenue from video lottery terminals in the [budget] forecast.” DLS budget projections have yet to lower two-year old estimates of slots income, despite the prolonged delays in getting slots going with a smaller number of machines than authorized. Gambling revenues nationwide have also fallen off sharply, and neighboring states are competing by adding full casinos and sports betting.

(House Speaker Michael Busch, who represents Annapolis, did predict Friday that the Anne Arundel Council will finally vote today to approve zoning for a slot location.)

Republicans, such as Senate Minority Leader Allan Kittleman, have been warning of big tax increases in 2011, but the DLS analysis confirms this speculation is not just party rhetoric.

Debt to finance operations

Reporters were apparently absent from Friday morning’s meeting of the Capital Debt Affordability Committee, which raised the state debt ceiling $150 million, over the objections of Comptroller Peter Franchot. We’ll have to rely on the account from Les Knapp, associate director of the Maryland Association of Counties, in their new blog, Conduit Street.

Knapp says administration Budget Secretary Eloise Foster supported the bond increase to $1.14 billion because it would allow the state to take advantage of low interest rates and reduced construction costs.

Del. Adrienne Jones, D-Baltimore County, chair of the House Capital Budget Subcommittee and a non-voting member of the Debt Affordability Committee, said later that day, that in addition to low interest rates, “Our contractors are hungry and we can get good bids for our contracts.”

But Foster gave a second reason, Knapp said: “The increase would create additional capacity to shift general fund operating costs into the capital budget.”

Take out your credit cards, taxpayers.