O'Malley's Fiscal Plan Questioned
Governor Delaying Tough Decisions on Slots, Deficit

By John Wagner
Washington Post Staff Writer
Sunday, January 28, 2007

As Maryland's financial outlook worsens, some Democrats in Annapolis are starting to second-guess Gov. Martin O'Malley's choice to delay tough decisions about looming billion-dollar budget deficits and the legalization of slot-machine gambling until a year from now.

"When you see a snake in the yard and you have a hoe, you kill the snake right away," said Senate President Thomas V. Mike Miller Jr. (D-Calvert), sizing up the coming fiscal problems as "a python."

O'Malley, who took office this month, has submitted a balanced budget for the coming fiscal year, but analysts project a $1.3 billion shortfall for the fiscal year that begins in July 2008. Start cutting spending and raising taxes now, some lawmakers argue, and the task of balancing that budget will be far less painful.

Last week, O'Malley offered a package of legislative priorities that included proposals to reduce automobile pollutants, expand access to subsidized health insurance and replenish the oyster population in the Chesapeake Bay. The new governor avoided some of the most controversial issues that the legislature has debated in recent years.

Miller has argued for months that the legislature should forge ahead this session with the legalization of slots, which could add several hundred million dollars a year to state coffers. And last week, Miller said he would support any package of tax increases and spending cuts that he, House Speaker Michael E. Busch (D-Anne Arundel) and O'Malley could agree upon this session.

The last time lawmakers sought to tackle the state's chronic budget problems, Miller and Busch -- two powerful but dramatically different personalities -- locked horns. Miller pushed slots as a solution, and Busch muscled a $1 billion tax package through his chamber, but neither became law.

Aides to O'Malley said they want to avoid a repeat of that scenario from three years ago, given the new governor's promise of a more collegial atmosphere in Annapolis. O'Malley also argues that his administration could use the coming year to scour the $30 billion budget for savings and start building a public case for any tax increases or dramatic spending cuts needed to close the remaining gap.

"You can't ask the taxpayers for more without trying to cut government spending first," said O'Malley spokesman Steve Kearney. O'Malley has recently begun mentioning in his public appearances the fiscal "dark cloud" on the horizon.

"I think in fairness to a new governor, you have to give him the opportunity to look at the operations of government and find efficiencies," said Busch, who has endorsed O'Malley's approach of delaying difficult tax and spending decisions. "The reality is, this governor has the luxury of doing that. . . . There's no dire need to jump in this year."

Indications, however, are that the state budget outlook is growing more dire.

A robust Maryland economy helped pump up state revenue during the final years under Gov. Robert L. Ehrlich Jr. (R), allowing lawmakers to fund record increases in education spending while generating hundreds of millions in surplus cash that O'Malley tapped to balance the fiscal 2008 budget.

But tax collections have been sluggish in recent months. Income tax collections are not keeping pace with projections. Sales tax revenue is lower than expected, largely due to a sagging housing market, analysts say. Even lottery ticket sales are not keeping pace.

If the trends continue, state officials could shave as much as $250 million off official revenue projections for the coming year, forcing lawmakers to make cuts in the 2008 budget proposal they received from O'Malley last week.

"Based on what we have now, a write-down is more likely than not," said Warren Deschenaux, the legislature's chief fiscal analyst. "The question is the magnitude."

Such predictions, which could also portend a gap larger than $1.3 billion in fiscal 2009, are fueling talk of acting this session to reduce the shortfall.

Del. Luiz R.S. Simmons (D-Montgomery), among others, has promoted the idea of raising the state sales tax from 5 percent to 6 percent, which would generate about $600 million a year in additional revenue.

"There's no reason we couldn't do that now," Simmons said.

Simmons said he is concerned that if "Governor O'Malley proceeds too tentatively, he can find himself in a much worse environment than we are now a year from now. . . . Politically, I'm sure they're thinking this is something they didn't raise during the campaign, so how do they go in and do it now? But I think the public is ready for someone to have an adult conversation with them. There's a genuine opportunity he could seize this year. Everybody knows this state needs money."

Former Montgomery County delegate Peter Franchot (D), who as the state's new comptroller is also the state's chief tax collector, believes O'Malley and lawmakers should tackle the state's looming shortfalls during the current 90-day session.

"From a fiscal standpoint, the prudent timing is sooner rather than later," Franchot said. "It's only going to get worse. We're in an ocean of red ink."

The sales tax has been the most discussed target for new revenue. Busch noted that Maryland's sales tax is lower than that of several surrounding states.

Also, the tax doesn't apply to most services, such as automobile repairs, haircuts or accounting help. Moreover, the state exempts numerous products, including food, medicine, manufacturing machinery and some farm equipment.

Past efforts to broaden the tax's application have met stiff political resistance.

House Minority Leader Anthony J. O'Donnell (R-Calvert) said he believes that raising taxes "should be a last resort."

But he, too, advocated starting work on closing looming budget shortfalls this session by identifying spending cuts and passing slots.

"The sooner you start to resolve those issues, the less pain you'll ultimately have," O'Donnell said. "I don't think we can wait a year."

The case for slots was bolstered, supporters say, by the announcement this week of the cancellation of the Pimlico Special, a storied horse race in Baltimore. Organizers attributed the move to competition from neighboring states where slot machines are legal at racetracks.

Although Miller is preaching action on slots this session, as well as tax and spending measures, some of his top lieutenants have yet to move in that direction. Senate Finance Committee Chairman Thomas M. Middleton (D-Charles) said he tends to agree with O'Malley.

"You're going to have to engage the taxpayers," Middleton said. "The average voter out there is really confused. Governor Ehrlich left the impression that all the budget problems were solved."

That sentiment was echoed by Sen. P.J. Hogan (D-Montgomery), vice chairman of the Budget and Taxation Committee.

"Would I like to do something right now and solve the problem?" Hogan said. "Yes, but I know the problem better than most. Others deserve to be convinced."