When it's hard to avoid a tax hike
Even for a state that already has a "high tax" reputation
Welcome back, readers! Thank you for all the interest and feedback on my Maryland (rich state gone broke) newsletter. Because of all those responses and thoughts shared, I decided to follow up on a few things.
Here's what I'll cover:
Why this is not Wes Moore’s fault
Yes, Maryland will have to raise taxes
How this compares to other states
This is not Gov. Wes Moore’s fault. But it’s definitely his problem.
Let's clear a few things up. Maryland's structural deficit emerged during Gov. Larry Hogan's administration. BUT this is not a Republicans (Hogan) vs Democrats (Moore) thing. As usual in these situations, there’s plenty of blame to go around.
Lots of warning signs
Maryland's 2019 Fiscal Briefing on pages 18-22 talks about the structural deficit—then much smaller than now.
This analysis from the Volcker Alliance in 2021 calls out Maryland's budget maneuvers from 2015-2017 (the tail end of Martin O'Malley's (D) administration and the beginning of Hogan's), including paying operating expenses with debt and deferring some recurring expenditures to future years.
One last thing: Just because the state had budget surpluses in 2021 and 2022 does not mean its structural imbalance was solved. Just about every state (if not all of them) had surpluses those years because there was a highly unusual tax revenue surge nationwide. If you habitually spend more than you make but get a bonus two years in a row, that does not mean your problem is solved forever.
Four pressing questions about the state budget – CNS Maryland
Yes, Maryland will have to raise taxes. (And fees.)
Elected officials have been saying Maryland can't tax its way out of the budget imbalance, which is definitely true. But revenue has to be part of the solution because cutting arbitrarily spending just to get to balance is a draconian approach that only succeeds in slowing the economy. (Can anyone say, “sequestration?”)
Up until recently, Moore has only talked about the need for cuts while hinting they are not the only solution. This past week, we got a glimpse of the tax debate in store for lawmakers in Annapolis with a governor’s proposed budget that includes:
Higher taxes on the state's wealthiest households. (The Washington Post)
A new, 75-cent delivery fee to help Maryland’s other big deficit problem: its transportation fund. (Baltimore Sun)
Maryland's problem is different than other states.
Maryland is not the only one dealing with a budget deficit this year. Alaska, Colorado, Washington, Rhode Island, and Louisiana (to name a few) are also looking at deficits. The reasons are varied but the general theme is that states either increased spending and/or enacted permanent tax cuts that banked a little too much on those surging revenues in 2021 and 2022.
The difference with Maryland is that the state’s deficit is structural. Rainy day funds and one-time transfers won't solve the underlying problem whereas those other states probably will be able to get by with some shorter-term solutions. As State Sen. Jim Rosapepe recently noted on the I Hate Politics Podcast, “The rainy day fund is there for when we get to a recession, when people are getting laid off work, when our unemployment rate goes up…. This is NOT a rainy day.”
On the other hand, states that face chronic deficits have implemented the same types of taxes and fees that Maryland is facing now.
Let’s turn back to Connecticut and also include Illinois, which also resolved a fiscal crisis in 2017—after two years without a budget. Those cases were more extreme than Maryland’s is now, but the resulting policy decisions are a potential window into Maryland’s future if it doesn’t move faster to address its ongoing imbalance.
Both states resolved their crises in 2017 with spending cuts and taxes.
Illinois passed an income tax hike.
Connecticut raised fees, such as on rideshare apps.
After 2017, both also established and raised taxes on marijuana and other "sin taxes."
Then, they established spending controls and fiscal guardrails.
Illinois established a budget reserve fund, paid down its embarrassingly long list of backlogged bills and improved its pension funding level by making additional payments with revenue surpluses.
Connecticut implemented budget control measures that included automatically capturing certain volatile revenues and depositing that surplus in the rainy day fund or using that money to pay down debt after the fund reached a certain target threshold.
Both of these actions deal with setting aside “surplus” revenue. I’d watch for a discussion about this topic in Maryland this year as well.
Illinois and Connecticut have a long way to go, and they haven’t fully solved their chronic budget problems. (Some say Connecticut's guardrails are now too constraining.) But both have made significant strides over the past decade in establishing policies that provide more budget flexibility and guard against overcommitting on spending. Those changes helped the states stop digging themselves into a deeper hole.
Right now, Maryland is still digging.
*This story has been updated with a new reference to Maryland State Sen. Rosapepe.