Friday, December 19, 2014

Maryland Must Fix Its Budget Shortfall Before It Adds to the Long-Term Debt

Maryland’s Governor-elect Larry Hogan certainly has his hands full as he prepares to take office in January. Maryland tax revenues are expected to be $1.2 billion less than expenditures over the next 18 months, but this shortfall can be fixed, or at least reduced, before it adds to Maryland’s long-term debt.
This could be a tall task for Mr. Hogan since he promised during his gubernatorial campaign to cut at least some of the various taxes raised under Governor O’Malley. But Barry Rascovar said in a recent article in the Maryland Reporter that the task is “easy.” While not necessarily agreeing with Rascover’s general prescriptions, his suggestion that the Hogan Administration base the budget on the prior year’s revenues, rather than projections that often turn out to be overly optimistic, is worth considering. This method should provide a greater amount of certainty about how much money will be coming in and thus increase the chances of running a balanced budget. Although Maryland needs to run a budget surplus in order to decrease its current $48 billion debt, balancing the budget would at least be a step in the direction of addressing the shortfall.
If Mr. Hogan implements tax cuts as he promised, the previous year’s tax revenues could be less than the current year’s. Therefore, economic models could be used to estimate the amount the previous year’s tax revenues would have been if the Hogan tax cuts were already implemented. Then, the budget expenditures could be reduced to match that amount. Cecilia Januszkiewicz, a former Free State Foundation Senior Fellow and former Secretary of Maryland’s Department of the Budget, wrote a Perspectives from FSF Scholars in March 2008 entitled “The Illusion of Declining Revenues, Reduced Spending.” Ms. Januszkiewicz said that there is an illusion within Maryland (that still remains six years later) that tax revenues are decreasing with each year, but in actuality, it is only the growth rate of tax revenues that is sometimes decreasing. Therefore, keeping the reduced budget expenditures constant for a few years while revenues continue to grow is at least an admirable approach to eliminating the shortfall and lessening long-term debt.
Maryland’s Spending Affordability Committee is required “to limit the growth of State spending to a level that does not exceed the rate of growth of the State’s economy.” Cecilia Januszkiewicz criticized this “spending affordability” process in a July 2008 Perspectives from FSF Scholars entitled “Avoiding Structural Deficits in Maryland: Recommendations for Reform,” because it does not take into account the decreasing growth of tax revenues. She also suggested many simple ways to reform Maryland’s budget process such as: requiring fiscal estimates for each proposed law to be available to the public at least two days before the first hearing on the legislation. (See here for more valuable recommendations.)
There are many things Maryland officials should do in order to balance the budget over the next year without Mr. Hogan having to break his promise of cutting taxes. Ongoing budget deficits are detrimental to the economy and society, not only because government spending slows down economic growth by crowding out private investment, but also because a deficit today means a surplus will be needed in the future to offset the debt. This places the burden on future taxpayers, whether they are currently children, foreigners, unborn, or already paying taxes. Running a budget deficit is the definition of taxation without representation.