Proposed Budget Remedies Include Slots, More Taxes

By John Wagner
Washington Post Staff Writer
Sunday, March 11, 2007

By next year, Maryland residents could pay another penny per dollar in sales tax on most products they buy. They could pay several cents more for each gallon of gas they put in their cars and another dollar for each pack of cigarettes they smoke.

They could face new levies when they get their car repaired, get help preparing their taxes, get a haircut or even when they use an escort service. And they could, at long last, get the chance to play slots at racetracks.

Few, if any, of these ideas are expected to become law by the time the General Assembly wraps up its session next month. But all, lawmakers say, will be given very serious consideration in the coming year to help address a looming budget deficit that is expected to exceed $1 billion.

Gov. Martin O'Malley (D) and lawmakers have concluded that the state can no longer avoid dealing with what is known in Annapolis as a "structural deficit." In simple terms, for every $1 in revenue that Maryland collects, state government is now spending about $1.10.

"It doesn't take a math major to know that's not sustainable," said Del. Murray Levy (D-Charles), a leading voice on the House Appropriations Committee. "Judgment Day is coming. We know it, and there's no way around it."

O'Malley submitted a balanced budget for the coming fiscal year. But he did so by draining nearly $1 billion from a state "rainy day" reserve fund -- leaving little more than the minimum amount required by law. The House plans to pass O'Malley's budget, largely intact, this week.

Although lawmakers say it is too early to predict exactly what they will do beyond that, they are starting to talk about options they might weigh as early as a special session this year or when they reconvene in January.

"It's going to take spending cuts. It's going to take taxes, and it's going to take slots," said Senate President Thomas V. Mike Miller Jr. (D-Calvert).

Besides a looming shortfall of $1.3 billion in Maryland's $15 billion general fund -- which pays for services such as education, health programs and public safety -- a separate state fund for transportation projects is failing to keep pace with growing gridlock in Maryland's Washington suburbs and other areas.

The problems are years in the making, but lawmakers point to two decisions largely responsible for the position they are in today: an income tax cut pushed through nearly a decade ago by then-Gov. Parris N. Glendening (D) that sapped more than $700 million a year from the treasury; and Maryland's landmark 2002 Thornton education program, designed to pour tens of millions of dollars into jurisdictions that a statewide commission said had historically been underfunded.

Lawmakers never reached an agreement on how to pay for Thornton, which now costs the state about $1.4 billion a year.

A booming economy, coupled with fund transfers that shortchanged land preservation and transportation programs, allowed the state to get through the four-year tenure of Gov. Robert L. Ehrlich Jr. (R) without addressing underlying budget problems.

But there are no more easy fixes, lawmakers say, particularly with the economy slowing and tax collections remaining sluggish.

Some legislators, including Miller, have pushed to increase taxes or legalize slot-machine gambling this session, arguing that it will be easier to balance the budget next year if they start raising new money now.

But both O'Malley and House Speaker Michael E. Busch (D-Anne Arundel) have counseled a more cautious approach, arguing that the public and new members of the legislature need more time to understand the magnitude of the problem.

O'Malley said he is confident that the need for revenue can be reduced by better management of government by his Cabinet secretaries, about half of whom have not yet been sworn in.

"I'm very reluctant to tell the people they need to cut a bigger check before I've made some cuts myself," O'Malley said.

Republicans, who are in the minority in both legislative chambers, are advocating the need to slow spending. Sen. J. Lowell Stoltzfus (R-Somerset) introduced a bill last week that would cut $270 million from next year's budget, including $159 million planned for the Thornton education initiative.

"We need to have a serious discussion of where we can and should do cuts," Stoltzfus said. "Everyone's talking about revenues."

Here is a look at some of the options lawmakers are contemplating to close the gap.

Sales Tax Increase

Perhaps the simplest way to raise money, lawmakers say, would be to increase Maryland's sales tax, which is 5 percent. Bumping up the rate to 6 percent would yield about $750 million in the 2009 fiscal year, legislative analysts say.

Some lawmakers argue that an increase is justifiable, given surrounding states' rates. Virginia's is 5 percent, but the District's is 5.75 percent, and the rate is 6 percent in Pennsylvania and West Virginia.

One argument against an increase is that it would have the greatest impact on lower-income citizens, for whom the sales tax accounts for a greater percentage of household income.

Taxing Services

Another option, but one that could be more difficult to sell, would be to apply the state's sales tax to services that are now largely exempted.

Two bills have been introduced this session that would apply the existing 5 percent rate to a host of new services. Among them: barbershop visits, car repairs, shoe repairs, exterminating, use of a notary public, interior decorating, massage, dieting help and hot-tub cleaning.

Some states already have similar policies. When Maryland considered such a move in 2004, legislative analysts estimated that it could raise more than $400 million a year.

Proponents of the bills say they are an attempt to modernize the state's tax structure, reflecting a shift in the economy from consumption of goods to consumption of services. But leading lawmakers acknowledge that such a move would evoke outrage from a range of constituencies.

Other Tax Increases

Maryland's individual and corporate income taxes have received relatively little attention this session but will be part of the discussion moving ahead, lawmakers say. Raising income tax rates on the state's highest earners alone could generate several hundred million dollars, according to analysts.

Others bills that have been introduced this session and are likely to be weighed again would double the current $1 a pack tax on cigarettes and raise the gas tax by 12 cents a gallon.

The tobacco tax increase would raise close to $200 million a year initially, analysts say, but then decline as fewer people smoke. Proposals pending in the legislature would use the money to expand health care and therefore not help reduce the budget deficit. But some argue that the money could be better spent on that purpose.

The gas tax is used to fund transportation projects and also has no effect on the general fund shortfall. But many lawmakers, including Miller, say the money is badly needed. Miller's bill would raise the tax from 23.5 percent to 35.5 percent a gallon, yielding about $400 million a year.

Legalizing Slots

Efforts to close the budget gap would also resurrect a long-running battle over legalization of slot-machine gambling, lawmakers say.

A bill put in by Miller to generate discussion this session would legalize 15,500 machines at seven venues and generate about $800 million a year for the state. O'Malley has voiced support for a more limited program, and Busch has been a staunch slots opponent.

Miller argued that any package passed to address the deficit should include slots. In an interview last week, Busch declined to say whether he would be willing to entertain a slots proposal, saying he wants to first see what O'Malley proposes.