Monday, January 23, 2012

O'Malley's Budget Would Jeopardize Economic Recovery

Now is not the time to introduce significant and regressive tax increases on working families, nor is it the time to lose ground on education equality by shifting costs to economically unequal counties.

Last week Governor O'Malley unveiled his FY 2013 budget.  As with all prior years, O'Malley had to deal with a structural deficit - this time amounting to roughly $1 billion of the budget's $14 billion total. With the exception of a 2007 special session O'Malley has opted to bring the budget into balance every year through spending cuts and one-time transfers from special funds. Even in the 2007 special session of the Maryland General Assembly the $800 million in new revenue generated by taxes on businesses and individuals were were coupled with $500 million in spending reductions. All told, O'Malley has cut spending by $7.5 billion during his tenure - a commendable accomplishment during very lean times.

For FY 2013, O'Malley continues to make cuts - roughly $600-800 million depending on the math - but decided as well that the time was right for more tax increases, what O'Malley describes as a balanced approach. I do not disagree with the need to consider additional sources of revenue, unfortunately O'Malley's concept of "balance" is anything but balanced. O'Malley proposes capping deductions for singles making more than $100,000 and couples making more than $150,000. Estimates are this would impact the top 20% of wage earners in the state - so this tax increase is not targeted at the top 1%, 5% or 10% - it hits deeply into the middle class in a very high cost of living state.

The capping of tax deductions is not the worst offender, however. Though the income tax provisions would work to make Maryland's income tax structure more progressive (a good thing) it is offset by several proposals that would be especially harmful.

O'Malley has proposed an end to a decades old practice of the state covering the cost of teachers' pensions by beginning a steady shift of that responsibility to the counties. Under the proposed budget $239 million in teachers' retirement costs would be shifted to cash-strapped counties. The governor's budget offsets some of the cost transfer by having the state assume responsibility for some of the teachers' Social Security payroll tax (formerly handled by the counties) and via revenue sharing from the new tax policies. But even with these measures the cost shift to counties is tremendous. Maryland is home to significant income inequality across and between counties and this cost shift will be especially burdensome on poor counties - counties where quality teachers are already hard enough to attract. Consider the stark contrast between Allegany County with a median household income of roughly $39,000 and Howard County where the median household income is $104,000. Yes, wealthier counties would now see an increased income tax burdone, but the increase would hardly offset the increased pension costs shouldered by poorer counties - instead, residents of poor counties will see increases in their local taxes.

Not in the budget, but expected to follow soon, is a proposal from O'Malley to increase the gas tax by $0.15 a gallon - bringing the state tax to nearly $0.40 per gallon. O'Malley argues this is a reasonable increase given the infrastructure needs of the state and the fact that the gas tax has not been increased in years. It's true the state is in need of infrastructure improvements - making one question the governor's decisions to repeatedly raid the transportation trust fund for other purposes in the past - but an increase in the gas tax during a weak economic recovery is just a bad idea. Adding that gas tax increase on top of recent and dramatic increases in Maryland tolls makes it an unforgivable idea.

Excise taxes (like those placed on fuel) and tolls are especially regressive as they consume far more of the income of lower income earners. O'Malley is essentially raising the cost of working for Maryland families. He is also raising the cost of providing for those families. The higher fuel and toll costs will deplete the disposable income of working families - that means less money to save for college, for retirement, and less money to spend on goods and services that help maintain economic growth. Higher fuel and toll costs will also increase the prices of goods and services meaning that Maryland's working families will have less to spend on more expensive goods and services - a double whammy that makes no sense in the midst of a weak economy.

As if the increased fuel and toll costs were not enough, the Governor would also double the current $30 flush tax on most families. O'Malley proposes that the flush tax now be based on water usage, rather than a flat tax - but this only works for folks with public water (like Howard County). For folks living in rural Maryland (like Allegany County) who draw water from a well the tax would simply be doubled. The net effect likely to be a disproportionate cost shift to lower income Marylanders. According to the Congressional Budget Office, the bottom 20% of wage earners pay three times more of their income on federal excise taxes on gasoline and motor fuel alone as compared to the top 20%. When all federal excise taxes are considered, the proportional burden placed on the bottom 20% rises to nearly six times that of the top 20%. Six times the burden for federal excise taxes alone - and O'Malley would add to the inequality through increases in state excise taxes. So much for progressive leadership.

In introducing the budget O'Malley declared "Job creation is our No. 1 priority..." Such a statement can hardly be reconciled with a budget that seeks balance by placing significant new costs on working class Marylanders by increasing the cost of driving to work, the costs of goods and services purchased, and even the cost of the water they drink.

In a state that tops the country in millionaires, O'Malley is relying on regressive taxation and a tremendous cost shift to counties to balance the budget. The approach is anything but balanced or fair and should be rejected by the General Assembly.