FY2015 budget – monoblogue

Time to get serious

While I mentioned the other day that not much fresh news would come from the political races until after the Independence Day holiday, that doesn’t mean that “Maryland’s top conservative blogger” (at least according to David Gerstman, contributor to Legal Insurrection) won’t have his say on things. I wanted to open up by taking a look at Larry Hogan’s “Hogan’s Plan” for the state’s finances.

Over the course of the primary campaign I was critical of Hogan for having such a vague “to-do list” of priorities he would have as governor, and this wasn’t a whole lot better. Be that as it may, I’m going to try and work with it in the real world anyway.

In Maryland, the governor perhaps has the most power of any such chief executive in the country – particularly if he wants to get serious about cutting the budget. The General Assembly can’t come back with a larger budget total, although they can tweak around the edges to some extent. So let’s go with the baseline established by Martin O’Malley when he set the FY2015 budget that takes effect tomorrow at $39.224 billion. Hogan promised that:

On day one, he will begin to run the government more cost-effectively and honestly. The Hogan-Rutherford administration will implement the recommendations of past audits, conduct additional independent audits of every state agency, and immediately get to work eliminating duplication, fraud, and waste to make sure that every cent of taxpayer money is spent efficiently.

By his reckoning, there is “$1.75 billion in waste and abuse” in state government. Figuring this with my public school math, that is 4.46% of the state budget – which seems like a nice little chunk of change until you realize the difference between the FY2015 and FY2014 budgets is $1.886 billion. In other words, the “waste and abuse” only accounts for about the same amount of money as an average annual increase. Something tells me there’s more low-hanging fruit than that. Yet Hogan says:

By cutting the waste and abuse from state government, he will be able to save the taxpayers of Maryland billions of dollars without having to cut our priority programs and agencies. It is a simple solution to a problem that has plagued our state for the last eight years, and it will enable him to cut and eliminate the regressive taxes that have crushed middle-class families and small businesses.

Nothing is ever that simple, but on the other hand his opponent is willing to blow up the budget with millions and millions of dollars in additional spending. If Anthony Brown simply maintains the Martin O’Malley glide path of 4% budget increases each year, this is what the next four budgets would look like:

FY2016: $40.793 billion
FY2017: $42.425 billion
FY2018: $44.122 billion
FY2019: $45.887 billion

Compared to level-funding the budget, that’s an additional $16.331 billion in tax dollars needed and you can bet your bottom dollar the Democrats will take all that and more from hard-working Maryland families.

And if you look at what Anthony Brown is promising, particularly in the area of education with universal pre-kindergarten, student loans for children of illegal aliens, creating a new Office of Educational Disparities, and providing extra money for HBCUs, assuming 4% annual increases may be on the low side.

The other part of Hogan’s Plan deals with business climate:

Maryland’s unemployment rate is 75% higher today than it when the recession began. In fact, the nonpartisan Tax Foundation ranked Maryland #41 in the nation for business climate. The main reason for this unfortunate reality is that it costs too much for job creators to stay in or come to Maryland. He will reduce the burden on job creators, open Maryland for business, and make our state more competitive with others in our region. The Hogan-Rutherford administration will overhaul the Department of Business and Economic Development to focus on aggressively attracting and retaining job creators in order to bring more and better-paying jobs to Maryland.

This is where the lack of specifics is really aggravating, particularly when Hogan’s vanquished opponents directly addressed the issue by proposing corporate tax cuts. In the FY2015 budget, corporate taxes bring in $1.011 billion so eliminating them entirely is affordable if you assume Hogan has the $1.75 billion of waste and fraud elimination in his pocket. Now THAT would turn some heads, but Hogan refuses to make the commitment.

Let’s look at Brown’s “Competitive Business Climate Tour” plan, though. There are nine “areas of focus” therein, but I’m going to focus on five of them:

Tax Liability: Reform our tax code to ensure that it reflects our current economy, enables state and local government to adequately fund our shared priorities, and encourages job generating investments in Maryland.

If you want the tax code to reflect our current economy, rates should be decreased to match the zero growth Maryland is enjoying right now. Unfortunately, it will instead be certain to “enable…government to adequately fund” all the brilliant schemes these liberals come up with. And don’t be surprised if combined reporting isn’t among those items designed to “encourage” investment in the state by hiking taxes on national companies.

Cost and Reliability of Energy: Promote the cost-effective generation of energy and improve the reliable delivery of energy through the grid to businesses and residents while transitioning to more sustainable energy sources.

There’s either one of two ways to go here: we get a “grand bargain” where fracking is finally allowed on the western end of the state in return for “investment” in wind turbines off Ocean City (perhaps via a tax on natural gas producers), or we just get the necessary subsidies to make these unsightly and inefficient wind turbines and land-wasting solar panel farms a reality. Look for the “renewable energy portfolio” to increase the percentage of “sustainable energy sources” to levels unsustainable for utilities to address without huge increases in consumer bills.

Cost of Living: Expand access to affordable housing and healthcare, healthy food options and cost-effective transportation to create a reasonable cost of living for all Maryland families.

When you see the words “expand access to” they really mean “spend more on,” with two exceptions: expanding access to “healthy food options” will involve the elimination of those options deemed unhealthy, such as fast food outlets. You will eat your broccoli and like it. The same goes for “cost-effective transportation” because, for many, transportation will become cost-ineffective: gas taxes will increase in order to subsidize mass transit, which is only cost-effective to the inner-city user whose farebox donation isn’t nearly enough to cover its cost.

And just how is a “reasonable cost of living” determined by the government? To me, that is determined by the market and the desires of those families as to their priorities.

Reliable and Predictable Legal System: Provide a civil justice system that allows deserving individuals to get justice and hold wrongdoers accountable while ensuring that awards are fair and equitable.

That is called tort reform, and the chances of pigs flying in Maryland are probably far higher than passage and enforcement of anything of the sort – especially if Brian Frosh is elected as AG.

Small- and Medium-sized Business Access to Working Capital: Ensure all viable small- and medium-sized businesses have access to affordable capital by working with lenders and businesses to maintain a strong environment for growth.

When I read this, I immediately thought: nice little financial institution you got there, be a shame if something happened to it. It’s the market’s job to figure out if a business is capital-worthy, not government’s.

My gosh, Larry Hogan, you have to do better than this. There are so many holes and code words in Brown’s plans that it should be easy to come up with something actually viable for keeping businesses and people from leaving the state.

Slings and arrows: criticizing a “timid” approach

I wasn’t sure just what I was going to write on tonight, but thanks to Charles Lollar I have some blog fodder. It’s the kind of thing that happens when the race establishes a front-runner and those who aren’t king of the mountain try and climb up the hill.

Here’s what Charles Lollar had to say regarding Larry Hogan’s comments, quoted in the Washington Post, about his plan for “prudent” tax cuts:

All the Democrat candidates agree with Larry on this, that we should be “timid” in cutting taxes and putting government on a diet. Lt. Governor Anthony Brown has said the state “can’t afford” even a modest reduction in the corporate tax.

Ken and I believe on the contrary that the time is over for Republicans to advocate tinkering around the edges of our bloated state budget, our confiscatory tax policies, and our corrupt and inefficient state government.

It is time for bold reforms that go to the core of our problems here in Maryland. That is why Ken and I turned to Dr. Art Laffer, who helped turn around our national economy in the 1980s, to vet our plan to eliminate the state income tax.

We have looked at the numbers, and we know we can achieve this step by step over the next five years, without putting at risk the services Maryland citizens expect their state government to provide.

Government is overhead on the economy. When you tax income, you reduce economic activity. Our objective is to restore economic vitality to Maryland, so families and small businesses will want to come here, invest, and grow.

Lollar and Timmerman are also vowing to eliminate the “rain tax,” the death tax, and the latest increases in the gasoline tax. So let’s look at what is at stake.

It’s difficult to quantify what chucking the “rain tax” would actually save because it does not affect all Maryland citizens equally. Sitting in Wicomico County, I pay no “rain tax” because our county hasn’t been forced to adopt one. Annual rates for counties which were mandated to adopt the fee range from one penny to $170.84, depending on location. Of course, we could go into why we are forced to come up with this when other states in the Chesapeake Bay watershed successfully fought the mandate, but that’s for another time.

As far as eliminating the “death tax” goes, according to the fiscal note for this year’s House Bill 739, which set in motion a four-year process to recouple Maryland’s estate and inheritance taxes with federal law, these two taxes combine to create approximately $200 million a year in revenue for the state – a significant amount, but barely 1/2% of the state’s FY2015 budget. In short, we could easily eliminate this as a rounding error.

The gasoline tax, however, is another matter. By the end of Lollar’s first term, the increased tax is expected to bring $685 million in annual revenue, not counting the roughly $700-800 million the existing tax has taken in annually over the last decade. The intent of increasing the tax was to build light rail in Baltimore and metro Washington – note that by FY2019, O’Malley’s budget projected the Maryland Transit Authority would be allocated nearly as much as the State Highway Administration receives (page 33 here). Currently the MTA gets about 56 cents for every dollar that goes to SHA; by FY2019 it would be 92 cents. Just keeping the MTA at its current 56 cent rate to SHA for FY2019 would save about $405.5 million; reducing them to the 25 cents per dollar MTA/SHA rate exhibited in the FY2007 budget (Bob Ehrlich’s last, see page 19) would save $752.7 million. Guess what? There’s your gas tax increase.

In looking at the two example budgets, which happen to be the final ones presented by the respective governors, it’s remarkable that income tax has remained a fairly constant portion of the revenue. Its share was 23% of Bob Ehrlich’s $29.6 billion FY2007 budget and 22% of Martin O’Malley’s $39.3 billion FY2015 proposal. (In terms of real money, though, the income tax increase is $1.999 billion, from $6.552 billion to $8.551 billion.) Over time, we have to figure out what to cut and how to grow the economy to backfill $8.551 billion in revenues if the state income tax goes away.

But let’s assume we can hold the budget where it is, rather than grow it at a 5% annual rate as Martin O’Malley has been doing for the last few years – a trend we could easily assume Anthony Brown would continue. Rather than looking at a $47.8 billion FY2019 budget, $8.5 billion higher than today’s, we would be in a position where other revenue sources could indeed grow to obviate the need for an income tax. Even as people prosper and have more income, the state would get a cut from increased sales tax revenue and perhaps even additional property taxes as housing becomes more valuable in a growing, thriving state.

Yet all of this is academic to a degree. Even if Republicans split 50-50 on all the contested races this year in the Maryland General Assembly, they would remain the minority by 91-50 in the House of Delegates and 29-18 in the Senate. Most of the Republicans who won would be replacing the centrists of the Democratic delegation, so those remaining Democrats would be farther left than ever. We would need Reaganesque leadership to shepherd tax cuts through that body, particularly after those aggrieved Democratic constituencies begin taking a haircut on the budget. (If you thought the grumbling about the “doomsday budget” from the Left was bad, the caterwauling on this would be deafening.) If Charles Lollar (or, for that matter, David Craig, who is also suggesting the elimination of the income tax) can get it done, the prospects are there for voters to further reward both them and the Republicans in general in 2018 – an important election because the winners will draw the next set of redistricting lines.

So I would prepare to be a little disappointed if you’re expecting our income taxes to magically disappear the moment Charles Lollar is sworn into office. However, he makes a good point in that we should be making bold initiatives, because being cautious isn’t really getting us anywhere. If you’re going down, go out with your guns blazing and don’t spare any bullets.

Another billion in the pipeline

Today the state’s Spending Affordability Committee allowed Maryland to increase its debt load another $75 million and to grow the state’s budget by 4 percent, both over Republican objections. This comes from the House Republican Caucus Facebook page, a note which will likely be prominent in an upcoming release:

Today Republican leaders in the House & Senate voted unanimously AGAINST supporting dramatic increases in state spending & debt.

Ultimately the Spending Affordability Committee passed a resolution to support allowing state debt to increase by another $75 million and spending in the state budget to increase by 4%. “After nearly 80 increases in taxes, tolls, and fees over the last seven years it is irresponsible to lay the foundations for yet another tax increase”, said Delegate Addie Eckardt of the Appropriations Committee. “Voting to expand our debt is basically voting to increase Maryland’s property tax; maybe not today, but certainly in the not-so-distant future.”

With structural deficits widening and lackluster growth in Maryland’s economy, Republicans also supported a measure for zero growth in the State’s operating budget.

While the state struggles with the aforementioned structural deficit – predicted to be nearly a half-billion dollars despite gleeful assurances we had eliminated it, both after the 2007 special session and after another series of tax hikes last year – the decision by the Spending Affordability Committee means that spending can increase as much as $1.5 billion next year, based on last year’s $37.3 billion state budget. Needless to say, the slow growth in the state’s economy will likely force the O’Malley/Brown administration and Democrats in the General Assembly to conjure up new sources of revenue.

It’s also likely the Republicans in the General Assembly will put together their own budget alternative which holds the line on spending, only to be ignored as they always are. A 2% across-the-board cut in this year’s budget would have saved Maryland taxpyers around $750 million. With that savings, for example, the sales tax could have reverted back to 5%, as it brings in $4.3 billion annually.

Eckardt, who represents a portion of Wicomico County as well as parts of Caroline, Dorchester, and Talbot counties in the General Assembly, isn’t the only local member of the SAC. Democrat Norm Conway is also an ex officio member based on his being Chair of the Appropriations Committee, and I’m told all the Democrats voted for this budget busting.

While the budget is created by Governor Martin O’Malley, it’s considered one of the most executive-heavy budgets in the country because of the lack of power the General Assembly has in changing it. Thus the emphasis on winning back the governor’s seat next year.

Since Martin O’Malley introduced his first budget one day after taking office in 2007 (the FY2008 budget) the FY2015 budget he’ll introduce early next year will be his last. Whether a dose of sanity is present for the FY2016 budget will be up to voters next November.