GOV. ROBERT L. Ehrlich Jr.'s administration often speaks of Maryland's looming budget deficits as "structural," as if they were beyond repair -- except by slot machine gambling, of course. In fact, the deficits are man-made, and therefore subject to repair, if politicians would face a few facts.
The original sin of the state's fiscal problems was the income tax cut sponsored seven years ago by Mr. Ehrlich's predecessor, Parris N. Glendening (D). That irresponsible act, championed by Mr. Glendening to stave off a conservative challenge to his reelection, costs Maryland upward of $500 million each year in lost revenue -- an enormous chunk as measured against the state's $10 billion general fund budget. Extending a helping hand to rich, poor and middle class alike, the Glendening tax cut was enacted in a time of plenty and has come home to roost in leaner times with a vengeance. Now, facing a dramatic, legislatively mandated increase in spending on education, state officials project that by fiscal 2008, general fund expenses of $13.8 billion will exceed revenue by $1.4 billion.
The Glendening tax cut is a major piece -- but only a piece -- of the puzzle of Maryland's underfunded government. The state's entire tax framework, including taxes on corporations and sales, is illogical and ripe for reform. Fix it, and suddenly slots seem neither inevitable nor wise.
Start with the personal income tax. Glendening cut the rate from 5 percent to 4.75 percent while raising personal exemptions from $1,200 to $2,400. The rate kicks in for all taxable income above $3,000, an amount unchanged since 1967. By sticking with what amounts to a flat tax, the state turns its back on the area where much of the income growth in Maryland has occurred: in the top brackets.
There is precedent for a more progressive tax, drawing from those most able to pay. Facing revenue shortfalls in the early 1990s, the state levied a 6 percent tax for three years on individuals making more than $100,000 and married taxpayers earning more than $150,000. A similar, inflation-adjusted move today, for individuals earning more than $135,000 and married couples making more than $200,000, would yield about $192 million in annual revenue, according to the Maryland Budget and Tax Policy Institute, an independent, nonprofit group. A slightly more progressive regime, which would eliminate taxes on the poorest earners and establish four graduated brackets, with a top rate of 6.5 percent for those making more than $333,000, would produce $360 million in revenue, the institute found; it would also result in a tax cut for more than half of Maryland taxpayers, including many in the middle tax brackets.
Meanwhile, the corporate income tax has accounted for a steadily declining share of state tax revenue. Maryland is suffering from a phenomenon taking place nationwide: an explosion of tax shelters that deprive federal and state governments of tens of billions in revenue. According to figures compiled by the comptroller's office, 91 of Maryland's 131 largest corporations paid no state corporate income tax in 2002. That eye-opening figure may improve slightly as a result of legislation passed this year to close one loophole in corporate tax law. But others remain, and corporations in Maryland and elsewhere have devoted increasing energy and resources to exploiting an array of tax shelters. One such dodge allows companies to escape transfer and recordation taxes on the purchase and sale of property -- the same taxes that home buyers and sellers are required to pay -- by the creation of limited liability companies, figments that cost the state and counties tens of millions of dollars a year in lost revenue. Another permits multistate corporations to avoid Maryland taxes by shifting their profits to out-of-state, tax-sheltered subsidiaries. About one-third of the states have closed that loophole; if Maryland does, it could mean anywhere from tens of millions to more than $100 million in additional revenue.
More broadly, the corporate income tax rate of 7 percent is among the lowest in the region and, with loopholes and shelters, it has contributed to a steady erosion in the burden of state taxation borne by companies. In 1980, Maryland firms paid $2 in corporate income tax for every $10 paid by individuals in personal income tax. By 2002, the share firms paid had declined to $1.10. It is true that the corporate income tax is not the only one companies in Maryland pay, but a number of studies still find that the overall contribution of corporations to Maryland revenue is low compared with other states.
Last, the sales tax. Many states tax some services, but Maryland taxes practically none. Once, that made little difference; today, as the state and national economies tilt increasingly toward services and away from goods, it is an unaffordable anachronism. In recent sessions of the General Assembly, the Department of Legislative Services has produced a menu of services that might be taxed, along with the revenue that each would yield for the state. To ignore that potential tax base altogether in the face of sizable deficits makes no sense.
Mr. Ehrlich (R) opposes tax increases, insisting that Maryland is already a high-tax state -- which it is not. According to the nonprofit Tax Foundation, Maryland's combined state and local tax burden, measured as a percentage of income, ranked 24th among the states this year, down from 16th in 1984. But by crusading for slots, he is embracing what amounts to a different kind of tax, of which lower-income people would pay a disproportionate share. Many Marylanders might accept a tax reform package, especially one that included a more progressive personal income tax and tougher corporate income tax collections, if proposed by a governor who honestly explained the state's fiscal dilemma and its options. In the absence of such leadership, Maryland may be consigned to a stalemate on slots, and a future shrouded in fiscal uncertainty.