Cardin Annapolis Report Week 9 - Budgeting 101: Tough Choices

As we continue to scrutinize Governor O’Malley’s proposed budget and accompanying legislation, I’d like to spell out some of the most important aspects of these proposals for cutting spending where possible and funding essential programs in light of current fiscal conditions.  Warning: this Report is dry, but these are important matters.

As we all know, this year’s budget proposes many very tough choices.  For perspective, growth in the state slowed from 36.4% growth over FY03-FY07 to 2.9% growth over the past 6 years.  In response to this trend, we’ve done all we can to decrease state expenditures without raising revenue or cutting essential programs.  5,500 state government positions have been abolished since FY08.  We now have the fewest state government employees per capita since 1973.  State employees have absorbed over $700 million in salary and benefit cuts.  Furthermore, we’ve closed 5 state hospitals, 8 welcome centers, 3 foreign offices, and many more state facilities.  And yet, there is more work to be done to balance our budget and reduce spending for the fifth consecutive year.

Last week, House and Senate budget committees held hearings to begin debate on the $15.3 billion general fund budget proposed by the Governor.  The proposal includes a series of tax increases and changes that, if passed, would generate $311 million in new revenue and $800 million in spending cuts, reducing our $1 billion structural deficit by roughly 60%.  Along with these spending cuts, the Governor has proposed changes to Maryland’s personal income tax code to reduce our deficit.  About $182 million would come from capping income tax deductions and phasing out exemptions.  A family of four with annual income of about $150,000 will pay $191 more, according to plan.

One such proposal is the reduction of the mortgage interest deduction.  As I noted in my last Report, many interest groups are fighting to defend their slice of the pie from the impacts of budget tightening.  Certain interest groups have been robo-calling my office arguing the mortgage interest deduction will kill home ownership in Maryland.  A group of real estate agents even rallied in the rain to express their opposition.  But this measure does not eliminate the home mortgage interest deduction; it decreases it, capping deductions at 90% for residents earning more than $100,000, and 80% for those earning more than $200,000.

I continue to analyze this budget to determine if such proposals will stifle commerce or disproportionately burden the most vulnerable in our state.  The Department of Legislative Services estimates that the mortgage interest proposal will impact 18.4% of all Baltimore County individual tax returns (or 57,487 residents), and that impacted taxpayers in Baltimore County will see their taxes increase by $208 on average.

We must scrutinize our budget each year in light of current economic conditions.  Along these lines, my Democratic colleagues are strongly considering the elimination of the 1996 tax cuts implemented in much better times.  The General Assembly lowered the state’s 5% income tax rate to 4.5%.   Now, over fifteen years later, reducing or eliminating this reduction is a commonsense response to our current budget challenges. 

Where do things stand in the House and Senate?  The Senate is considering a near-across the board increase of 0.25% to the income tax, costing the average Maryland family of four making between $50,000 and $100,000 just $44 a year.  Currently, earners making more than $200,000 pay 5% in income taxes, and those making more than $500,000 pay 5.5%.  The House is considering a proposal to increase the rate to 6% among the top 7% of earners.  Governor O’Malley’s budget would only increase taxes (through the reduction of exemptions and deductions) among the top 20% of wage earners.  The fate of one controversial aspect of the Governor’s budget – the proposal to generate $240 million in budget reduction by shifting part of the cost of teacher pensions to the counties in a single year – is in limbo in both chambers.  Some agreement must be reached by April 2, the General Assembly’s self-imposed deadline for passing a budget.  Stay tuned….

Jon S. Cardin