The downside of Maryland’s federal dependence

By: Donald C. Fry

Maryland’s economy is beginning to feel some of the downside impact of what many have warned us about over the years — the state economy’s overdependence on federal government spending.

Last month, Maryland’s Board of Revenue Estimates made a $61.9 million reduction in its forecast of overall revenue the state’s government will receive this fiscal year, attributing the write-down largely to the potential economic effect on our state of fiscal turmoil in Washington, D.C.

In announcing the revenue estimate reduction, Comptroller Peter Franchot noted that Maryland’s fiscal “new reality” is centered on the fact that our state is “heavily reliant upon Washington’s direct, indirect and induced economic benefits.”

“Particularly troubling” is the fact that the reduced revenue estimate includes a $324 million reduction in withholding tax receipts from employers in the current fiscal year, said Franchot.

Total federal spending in the state is equivalent to one-third of Maryland economy, Franchot reported. “What had once been among Maryland’s greatest assets for economic stability has become a severe liability,” he said.

Maryland’s private sector has long been a beneficiary of the state’s proximity to the nation’s capital and has been looking forward to continuing to benefit from major BRAC relocations here and the establishment of the nation’s Cyber Command at Fort Meade.

Direct federal spending here includes employing Marylanders at government agencies, contracting with Maryland-based business vendors for numerous defense-related projects and a myriad of other needed services to government agencies.

However, thought leaders, policy advocates and economists have for years warned of the potential downside to Maryland’s economic reliance on massive federal government spending here.

Prior to his election, Maryland’s freshman 6th District Congressman and former CEO John Delaney warned about risks of a federally dependent economy. Maryland “has come to rely heavily upon the federal government as a source of economic vitality. But the state’s economy is now jeopardized by the unraveling of this relationship,” he wrote in a 2011 report, Blueprint Maryland.

In the past, the concentrated federal presence here has insulated Maryland from severe negative effects of past economic downturns.

For example, the fact that the Baltimore region suffered only modest economic contraction in the Great Recession, compared to other U.S. regions, “reflects its dependency on the government sector,” Towson University economist Daraius Irani reported in the Greater Baltimore Committee’s 2011 State of the Region Report.

Irani noted that the region finds itself “at a crossroad” where it could continue to rely on government growth or “follow new initiatives” to mitigate dependency on the federal government.

Robert R. Neall, a citizen member of the Maryland General Assembly’s Spending Affordability Committee, for years has warned about Maryland’s economic dependence on the federal presence.

Maryland has been “somewhat shielded” from the current recession because of the federal footprint here, Neall, a former state senator and former Anne Arundel County Executive, wrote in a 2010 letter to committee members: “What goes up can come down. If there is a serious federal military retrenchment as part of federal deficit reduction, Maryland could be disproportionally affected.”

Maryland’s recent reduction in projected state revenue raises the question: is this the beginning of a significant constraint on federal spending that will have fundamental long-term adverse impacts on our state’s economy, or will it dissipate?

It’s not advisable for Maryland policymakers to risk betting on a continuing status quo. To address the potential for constrained federal spending, Maryland must adopt a two-pronged strategy for bolstering its economy.

First, it must shore up its existing federal presence, working to ensure the retention of the considerable number of federal operations and agencies that are here. That should include leveraging the new concentration of cybersecurity and other high-tech missions at Fort Meade and at Aberdeen Proving Ground into robust private-sector business development.

Second, Maryland must ramp up its focus on nurturing private-sector economic growth and job creation in the two-thirds of the state’s economy that do not count on the federal government as the primary driver of business growth.

It’s important to remember such a strategy is about encouraging businesses already here to remain, invest and grow here as much as it relates to attracting new business to our state from elsewhere. To accomplish this, the state must develop smarter, modern government policies that strengthen our state’s business climate and its competitiveness as a premier location for business growth in today’s economic environment.

The current economic uncertainty in Maryland reinforces the need to start with a study of the state’s tax structure and spending. Such a study is currently being organized by the Greater Baltimore Committee.

A goal will be to develop options for a revenue-neutral tax restructuring in Maryland to improve the business climate. It was among recommendations compiled by business leaders at the GBC’s day-long Chesapeake Conference of CEOs in June.

Participants called for the development of a strategic “Compact for Competitiveness,” a set of business-climate priorities that leaders in the private sector and government agree upon. Other recommendations include improving strategic planning for transportation, investing in the port and airport, implementing regulatory reform, better aligning education with business needs, nurturing innovation, strengthening state economic development programs, and nurturing business partnerships for infrastructure development.

Maryland has so many competitive strengths that make our state a desirable place to live and work and that auger for a strong economy.

Whether the current economic stress being inflicted from Washington upon Maryland is temporary or longer term, business and government together must begin to pay serious attention to addressing issues that detract from our state’s strengths.

It’s time for us to smartly leverage Maryland’s many advantages through better policies for competitiveness.

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