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For D.C., Maryland and Virginia, more than one way to balance a budget

By Neil Bergsman, Michael Cassidy and Elissa Silverman
Sunday, January 24, 2010

We just celebrated New Year's, but for legislators in Annapolis, Richmond and the District, it probably seems like Groundhog Day, with budget shortfalls (again), falling revenue (again) and high unemployment (again).

Even though economists say the recession ended last year, recovery from such a severe downturn takes time. So 2010 will look a lot like 2009, only worse in some ways.

Virginia has lost nearly 125,000 jobs in two years. Maryland foreclosure notices are at 20 times pre-crisis levels. The District's unemployment rate hit a record high of 12.1 percent in December, and one in eight D.C. families say they struggle to put food on the table. In the place hip-hop calls the "DMV" -- the District, Maryland and Virginia -- the Great Recession continues to shrink government resources just when they're most needed. The financial impact threatens many of the public assets that make our region such a desirable place to live.

It's time for legislators to truly put everything on the table. This means a balanced approach to budgeting that includes revenue, rather than cuts alone.

Unlike the federal government, state and local governments are required to balance their budgets each year. That's not going to be easy. Virginia is facing a $4.5 billion gap for the next two years. Maryland's not too far behind, with a $2 billion deficit for next year. The District's shortfall is projected to be $400 million.

A cuts-only approach hurts our economy in two ways. Take education, for example. Fairfax County is proposing dramatic spending reductions in its schools, increasing class sizes, laying off staff and eliminating innovative programs that have made it an exemplary system. In Maryland, proposed cuts to the state's "Geographic Cost of Education" index directly affect the classroom. D.C. public schools have already eliminated hundreds of teacher positions, and the city has had to cut library hours. These actions don't just hurt long-term competitiveness. In the short term, they also slow recovery. Teachers aren't nameless bureaucrats; they are our neighbors who shop at local grocery and hardware stores, keeping dollars and jobs circulating in our economy.

This problem is too big to solve with any one solution. Cuts are inevitable, but multiple strategies are needed to balance the budget while still meeting people's needs.

Options include:

-- Closing corporate loopholes. The District last year joined 23 states that have enacted legislation to prevent corporations from avoiding payment of state income taxes. The law, known as combined reporting, stops multistate firms from using accounting tricks to pay little or no taxes. Without this law, national retailers pay less tax than local businesses that can't shift their profits out of state. Maryland and Virginia legislators should pass this legislation as well.

-- Using "rainy day funds." All three jurisdictions have a reserve fund, designed to help stabilize their economies when revenue falls short. We save in good times to use during bad times. Legislators should tap into these important emergency savings accounts. Congress needs to remove the uniquely prohibitive restrictions on the fund for the District, which requires repayment almost immediately.

-- Reforming income taxes. Numerous studies show that state and local taxes fall most heavily on the middle class, while the wealthiest pay a lower percentage of income in taxes. Maryland temporarily raised its tax bracket on incomes over $1 million in its 2008 legislative session, and this is no time to let this measure expire. A similar millionaire's tax proposal has been introduced in the D.C. Council, and Virginia should look at this option, as well.

-- Expanding the sales tax. As the economy has shifted from goods to services, the sales tax system has come to cover less overall economic activity because it mostly taxes goods. If you buy a lawnmower, you pay tax on it. But your neighbor who hires a lawn service isn't taxed. Officials from the two states and the District should modernize sales taxes to reduce this inequity.

Federal aid is also critical. All three jurisdictions need Congress to extend state fiscal relief in such areas as support for Medicaid and education. Money from the American Recovery and Reinvestment Act has been crucial in helping to avoid severe service cuts. But those funds dry up in the middle of the next fiscal year, before states will have recovered.

The stimulus has been effective in the DMV. It has kept more than 210,000 families out of poverty in our area through increases in food stamps, unemployment insurance and Social Security, as well as lower taxes for low- and middle-income households. Roads have been improved, green initiatives implemented and teachers kept in classrooms.

There are indeed lean days ahead, but elected officials can take steps to ease the pain. An all-cuts, slash-and-burn approach to the budget will jeopardize the enviable quality of life in the DMV. By taking sensible steps now, the Washington region can help keep private industry, government and our fellow citizens healthy and productive now, and positioned to prosper once better times return.

The writers work for the Maryland Budget and Tax Policy Institute, the Commonwealth Institute for Fiscal Analysis and the DC Fiscal Policy Institute, members of the State Fiscal Analysis Initiative.

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