Gov. Robert L. Ehrlich Jr. reached out to Democratic lawmakers who control the General Assembly yesterday, indicating his willingness to consider measures to raise state property taxes, temporarily increase corporate taxes and boost corporate filing fees, according to legislative leaders on both sides of the aisle.
The discussions marked the first time that the new Republican governor has agreed to weigh specific revenue measures to close the state's gaping budget hole other than his proposal to legalize slot machine gambling.
The breakthrough came a day after Ehrlich suffered an embarrassing defeat in the Senate, which took the historic step of rejecting one of his Cabinet nominees. Some lawmakers predicted that partisan gridlock would follow, stalling efforts to address a shortfall that could reach $2 billion by June 2004.
Ehrlich said yesterday that leadership means putting that vote behind him and moving forward to broker a compromise. The governor met in his office with House Speaker Michael E. Busch (D-Anne Arundel) and Senate President Thomas V. Mike Miller Jr. (D-Prince George's) to develop ground rules to avoid a stalemate at the end of the 90-day session and to establish, as Miller put it, "what is and is not in play."
All three declared that the lunchtime session had been very productive, and Democrats heaped praise on the governor after they were briefed on the details.
"Both sides are really turning over a new leaf," said Del. Peter Franchot (D-Montgomery). "The governor should particularly be complimented for taking this very thoughtful step."
Ehrlich refused to comment on specifics, saying that discussions are preliminary and that he would answer questions when and if leaders reach consensus. He reiterated his opposition to a sales or income tax increase, two items under discussion in the House of Delegates, and he continued to lobby for slot machines.
In a series of briefings with senior Republicans and Democratic fiscal leaders, budget secretary Chip DiPaula outlined about $150 million in additional cuts and tax measures that Ehrlich might accept to raise as much as $300 million, lawmakers said.
Ehrlich campaigned on a promise to restore fiscal responsibility to Annapolis and since taking office has blasted his Democratic predecessor and the General Assembly for tax-and-spend policies he blames for the state's fiscal crisis. In January, he presented a balanced budget that relied on cuts, one-time accounting maneuvers and $395 million in slot machine revenue.
Since then, however, two things have dramatically altered the budget outlook: Ehrlich was forced to rewrite his slots proposal after widespread criticism by the racing industry and others, and his latest version brings in only $165 million in the next fiscal year.
And this week, leaders learned that the stagnant economy had produced an even steeper decline in revenue than anticipated. The bottom line is that lawmakers need to find another $50 million by the end of this year and will face a $410 million hole in next year's budget even if a slots bill passes, $575 million if it does not.
In his briefings with lawmakers, DiPaula sketched out a series of possible fixes. He told lawmakers that Ehrlich would consider an increase of up to 5 cents in the state's property tax rate that could net $165 million.
By law, the state's debt service is supposed to be funded with the property tax, but prior Democratic administrations borrowed more money than the current rate could raise and used money from the budget's general fund, making less money available for programs and services. For the owner of a $200,000 home, a 5-cent increase would raise the tax bill by about $56. Even anti-tax Republicans said yesterday that they could sell that to voters.
"You can't blame the governor for trying to fix mismanagement by the previous administration," Senate Minority Whip Andrew P. Harris (R-Baltimore County) said. "This makes sense to me."
DiPaula also told House fiscal leaders that the governor would consider at least a temporary, 1-cent increase in the state's corporate tax rate, a jump in business filing fees of at least 150 percent, to $250, and the application of that fee for the first time to limited liability companies. The business community, DiPaula said, prefers that approach to one that Democrats have been looking at, which involves changes to the state's tax code to eliminate certain exemptions.
In an interview, Ehrlich said that while he proudly campaigned on a pro-business platform, business may have to be part of the solution. But, Ehrlich added, "we want to give them something they can work with."
Not everyone was happy.
"It almost works against itself," William Burns, spokesman for the Maryland Chamber of Commerce, said of even a temporary increase to the corporate tax rate. "These businesses are employing Maryland citizens. . . . A tax increase would have a negative impact on the companies that we're relying on to bring us out of the recession."
Lawmakers argue that the measures under discussion might stave off even more unpopular options. House Majority Leader Kumar P. Barve (D-Montgomery) said that it may now be possible to balance the budget without raising the sales or income tax rates, and without resorting to slots.
"We're within spitting distance," Barve said. "We're hoping now to see the governor come forward and formally say the things we've been told in meetings."
Staff writers Christian Davenport and Lori Montgomery contributed to this report.