Budget 'Fix' Didn't Last Long

Just over three weeks ago in The Gazette of Politics and Business, I wrote that "the state's budget balancing act is a short-term fix" that "leaves little wiggle room if revenue forecasts come up short." I thought at the time I was talking about this summer or early fall.

Last week, Comptroller Peter Franchot issued his report on April revenues, and yikes, the state was already coming up short for revenues this fiscal year and next. Gov. Martin O'Malley promptly ordered agencies to cut $200 million from a budget that was enacted just last month, with legislators congratulating themselves on the tough job they had done. They should have cut more, and not let O'Malley make all the tough choices.

He's asking for elimination of some programs that have been decimated by previous budget cuts. The failure of the legislature to further cut back on its own spending mandates also ties the governor's hands for fiscal 2010. If things get worse, he may need to call the legislature back in session before next January to reduce spending mandated by law.

And what of the disappearing millionaires Franchot reported? Taxes on people having over $1 million in taxable income were raised retroactively but temporarily in 2008 to replace the computer services tax. In calendar 2005, there were 6,300 of these millionaire returns, 41 percent of them in Montgomery County, and they had an average taxable income of $2.9 million a year. These 6,300 rich folks, about two-tenths of one percent of the tax returns (0.2%) pay about 10 percent of all state and local income taxes.

According to legislative analysts, their tax hike was supposed to raise $154 million in fiscal 2009, and $113 million in fiscal 2010, phasing out the following year. The average tax bill was supposed to go up about $14,000.

Didn't happen. The number of millionaire returns is down by a third, and the taxes they owe are also down, Franchot reported. There are a number of possible explanations. More of them have asked for extensions of the filing deadline. The economic decline undoubtedly has hurt these millionaires, 80 percent of them deriving some of their earnings from business returns as sole proprietors or partners. They also derive a higher proportion of their incomes from capital gains, and possibly may have chosen to take losses last year.

It is easy to speculate about net outflow of Marylanders to lower taxed states, but harder to document. According to state planning department analysis of IRS data, Maryland has had 19 straight years of out-migration to Pennsylvania and over the last 27 years has lost 47,000 people to North Carolina and 133,000 to Florida, which has no income tax. There is anecdotal evidence of wealthy people forsaking Maryland for homes in Florida for the more than half a year to qualify as residents there. Their houses in Maryland, where their businesses may be based, become second homes.

The planning department says the data show that people leaving Maryland is directly related to the state's economic vitality and to its higher cost of housing compared to its neighbors, except for Virginia. In 2007, even before the latest tax hikes, Maryland had "a record outflow … due in part to a relative weakening of the state's economy" and "lower housing costs" elsewhere, the department reported.

Maryland is benefiting from an inflow of federal dollars through BRAC and the stimulus package, but you have to wonder if the 2007 and 2008 tax increases that fell heavily on business and high earners – the millionaire's tax, the sales tax hike (40% paid by business) and the corporate tax hike -- had an impact on that "relative economic vitality."

In any case, the tax hikes didn't solve the structural deficit, and nothing but long-term spending cuts will.