Donald Fry: Governing between fiscal extremes in Annapolis

By Donald C. Fry

The report the Department of Legislative Services presented to lawmakers earlier this week is officially called “Contingent Reduction Options.” But lawmakers call it the “Doomsday” budget.

Every year that there’s a deficit to fill – which is an annual occurrence given the current fiscal structure of our state’s operating fund – a “Doomsday” list of budget cuts is prepared to examine options for closing the state’s deficit in the event that no new taxes, fund transfers or other creative revenue-enhancing measures are enacted.

Ostensibly, the “Doomsday” budget is prepared to present options and to educate lawmakers. But its real purpose is to scare them and their constituents.

On the other end of the spectrum is an abundance of proposals for increasing taxes, fees and other options to raise more operating revenue that are equally scary to lawmakers and the rest of us.

This year’s “Doomsday” budget includes more than $380 million in cuts to education funding at both the K-12 and higher education levels, more than $100 million in cuts to local aid, mostly reductions in police and law enforcement funding; a $100 million reduction in Medicaid funding and more than $75 million in cuts related to eliminating cost of living increases for state employees, increasing their health care premiums and cutting 500 positions. Another $50 million in “Doomsday” cuts would come from eliminating the Coastal Bays trust fund environmental program, stem cell research funding and biotech, and sustainable community tax credits.

Hardly anyone in Annapolis seriously expects lawmakers to enact a “Doomsday” budget. But the governor’s plan for increasing taxes to generate more than $240 million in new operating revenue has prompted a bevy of reactionary proposals from lawmakers for other potential new revenue instead of some of the governor’s options. Among those alternative proposals is an across-the-board income tax hike and legislation to broaden the state sales tax to 31 services that are currently not taxed, enact “combined reporting” corporate taxation, and to reinstate the so-called “millionaire’s tax.”

Granted, this kind of give and take is what the legislative process is all about, and the only constitutional requirement for any General Assembly session is to enact a balanced budget.

Nevertheless, this year’s budget process is having the effect of making virtually everyone in Maryland very nervous, including the business community.

As the Baltimore Sun editorial board recently pointed out, the last time this kind of fiscal dynamic existed in Annapolis, “last-minute, seat-of-the-pants deliberations in 2007 gave us the much-reviled ‘tech tax’ – a 6 percent tax on computer services – that was repealed before it could even go into effect.”

That particular exercise was very damaging to perceptions of Maryland’s business climate.

How can Maryland lawmakers best govern between fiscal extremes while strengthening our state’s capacity for economic growth and job creation, which is the only way to ultimately resolve its recurring fiscal challenges?

To start with, it’s important to recognize that increasing income taxes runs the risk of making Maryland one of the highest income-tax states in the region, when county “piggyback” taxes are taken into account. This would run counter to a key core pillar of economic competitiveness: a tax structure that is fair and competitive.

Rather than simply increasing operating revenues, sometimes we must hold the line on government programs. This means, rather than increasing revenues, lawmakers need to either cut or refrain from increasing spending on government operations that are nice to have but are not essential.

Nevertheless, the process of cutting expenses must be accomplished strategically, rather than in an ad hoc or arbitrary manner. Lawmakers must be careful to preserve essential services and programs that create jobs or are key to the economic engines of our state.

Ideally, the operational expenditures of each department and agency should be examined top-to-bottom to ensure that they are appropriate, that core services are intact, that all efficiencies have been exhausted, and that the programs are funded for their intended purposes and have not been extended beyond their original missions.

This kind of comprehensive review is not something that will get accomplished during a legislative session. But elected leaders could make it a priority to launch such a process during interim months when department heads and lawmakers could conduct a full evaluation where all programs would be justified from a zero-based budgeting perspective.

Another key fiscal distinction worth reinforcing is that there is a difference between raising revenues to fund operating expenses and increasing revenue to fund long-term capital resources that will directly cultivate economic growth and create jobs.

That’s why otherwise tax-averse business leaders support enactment of tax increases specifically targeted to strengthening funding for transportation infrastructure – which is among the most essential core pillars for commerce, economic growth and job creation, but for which lawmakers have allowed funding to stagnate while state operating budgets grew by more than 200 percent over the last 20 years.

Government needs to invest in its infrastructure to ensure it meets the growing needs of the economy and maintains its structural integrity. It is unfortunate the issue of raising revenues for government operations is being examined and considered separately from revenue enhancements that create jobs and promote our long-term economic growth.

Though complicated by political nuances and legislative cleverness in Annapolis, the challenge facing lawmakers is much more straightforward than it might seem. It all boils down to strategy, priorities and one fundamental question.

Does Maryland have a solid strategy for economic competitiveness and growth, and does its fiscal policy support that strategy?

It’s hard to imagine that a fiscal structure that has produced significant operational deficits and a collective legislative scramble for funds on an annual basis for almost a decade is reflective of a solid strategy being in place.

Warren Deschenaux, the General Assembly’s top fiscal analyst, said it succinctly during budget hearings this week when he told lawmakers they would be “well-advised” to eliminate the state’s structural deficit and “get on with the problems of the future.”

The bottom line? Maryland’s government needs a strategy. And strategies start with setting serious, practical priorities. Once those priorities are set, and the funds to effectively and efficiently implement those priorities are in place, the next step is for our government to live within its means.

We have played this game of budget deficits for years. It is time for Maryland to find its fiscal footing.

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