Don Fry Commentary: Tax structure central to Maryland’s fiscal challenges

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A recent report from the Chicago-based Institute for Truth in Accounting noted that Maryland was among 13 state governments that spent more than the revenue they collected in fiscal 2012.

The list also included all of Maryland’s mid-Atlantic neighbors, except Virginia. Additionally, the institute reports that Maryland has not collected enough revenue to cover its operating expenses in any year since 2008.

To be fair, during the worst years of the Great Recession, Maryland was one of many states that borrowed to balance its budget by transferring special funds for dedicated uses to the general operating fund and, among other things, issuing bonds to pay back the special funds that were transferred.

But in reality, Maryland’s cash flow challenges didn’t begin with the recession. Our state’s general fund spending has exceeded its actual revenue in all but two of the last years 13 years, according to the state’s Department of Legislative Services.

In its 2012 Financial State of the States report, The Institute for Truth in Accounting described Maryland as “sinking in debt” resulting from use of accounting rules to push operating costs and other financial obligations into the future.

While the reasons for a state regularly spending more than it takes in can be complex, the evidence is compelling that the root of what is now a chronic fiscal imbalance is Maryland’s current tax structure, which is largely derived from the state’s tax structure that was developed in the 1940s.

By the way, Maryland’s fiscal challenges are not just at the state level, but at the local level as well.

Not only are elements of Maryland’s tax structure major factors in the state’s poor ranking in a number of national business climate reports, but property taxes in our state’s local jurisdictions appear to be problematic. The Tax Foundation ranks average property taxes on homes in Maryland’s local jurisdictions the 11th highest in the nation. Maryland property taxes as a percentage of homeowner income rank 19th highest. For property taxes as a percentage of home value, Maryland ranks in the middle at 25th highest.

There are those in Annapolis who contend that local jurisdictions have some room to generate more revenue. But generally at both the state and local levels Maryland’s revenue sources, as currently structured, appear largely pushed to their reasonable limits when it comes to funding government operations.

The obvious short-term fiscal solution, other than enacting more tax rate increases, would be to nurture strong post-recession economic growth while restraining spending. But so far Maryland’s economic recovery, while encouraging, has been short of robust and our state’s existing tax structure is not generating enough revenue to match budgeted spending.

This is why the next administration and lawmakers serving in the next term of the Maryland General Assembly must get serious about reforming Maryland’s tax structure.

Business leaders at the Greater Baltimore Committee contend that the top priority should be tax reform that complements today’s economy and is geared to better position our state to be competitive for business growth and job creation. The goal of such reform should be to achieve sustainable long-term government revenue growth without damaging the business climate and without state leaders needing to habitually increase tax rates.

A private-sector commission at the GBC is currently working to develop recommendations for a revenue-neutral restructuring to accomplish these objectives.

The broader and infinitely more ambitious assignment that awaits the next generation of policymakers relates to finding a way to step back and thoroughly assess how the many elements of federal, state and local government are to be funded in the future. This could entail envisioning a potential realignment of primary responsibilities for various government operations between the federal, state and local jurisdictions and of the revenue mechanisms to fund it.

Both nationally and locally, our existing revenue structure for funding government and the process for allocating that revenue is no longer serving us well.

Of course, any comprehensive fiscal policy realignment would be easier said than done. And it would likely generate pain in some form that taxpayers would need to be willing to accept in order to achieve sustainability that benefits all in the long run.

The degree to which these issues get resolved in Washington, D.C. and in other states remains to be seen. But in Maryland the immediate first step to address our fiscal challenges must be to reform our state’s tax structure and to conduct a frank assessment of our state’s spending priorities and budgeting processes.

Above all, our policymakers must continually keep in mind the ultimate source of the economic and fiscal vitality we’re all striving for – a thriving private sector.

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.

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