Maryland's 2013 Budget and the Need for Progressive Taxation

Maryland's 2013 Budget and the Need for Progressive Taxation

Sign made at Occupy Baltimore encampment in McKeldin Square. Photo By: Clayton Conn
Sign made at Occupy Baltimore encampment in McKeldin Square. Photo By: Clayton Conn

Since the national economy started shrinking in 2007, most Marylanders have felt the sting of high unemployment, food and energy price increases, and low wages.

In Maryland, State and local governments have been cutting back in the face of increased need and misery. People lack access to healthcare, housing, and heat in the winter. Public schools are losing $550 million per year in State aid, and local governments have cut about $243 million from their contributions to schools.1 Meanwhile, Gov. O’Malley says that the State has reduced spending by a cumulative $6.8 billion compared to the baseline budget he inherited when he took office in January 2007.2

The answer to our fiscal crisis, however, is not further cuts, but reforming our antiquated, unwise and unfair tax system.

SHARING THE BURDEN

Marylanders across the income spectrum pay about 10% of their income in State and local taxes except that the 20% highest up on the income scale pay an average of only 7.3%.3 When lower-income people pay a higher share of income in taxes than those who are better off, it is called a “regressive” tax structure, and it has been in place for many decades.

As in nearly every state, the property tax and sales taxes are regressive, and Maryland’s state/local income tax is virtually flat. That is, it taxes nearly the same proportion of income no matter how poor or rich the taxpayer. A “progressive” tax system taxes those with more wealth or income at a higher rate. This is fairer because it takes into account that individuals and families need a certain floor of income to obtain food, clothing, shelter, health, education, and other basic goods and services. A progressive tax is also more likely to boost demand to get the economy going in tough times.

Beyond considerations of fairness, there are economic reasons why progressive taxation makes sense during an economic slump. In the present recession, most people have lower income from business or employment, and the value of real estate and stock investments have also plummeted. Business managers, in turn, are reluctant to hire more people because they believe that customers are unlikely to buy more goods and services. In short, there’s a massive demand shortage, which is why corporations and the wealthy are hoarding instead of investing. Tax breaks for them, therefore, will do nothing to stimulate demand.

However, when working and low-income people get extra income, for instance through a targeted tax reduction, they tend to spend all of it quickly, thus boosting demand and triggering business investment.

In short, increasing taxes on the wealthy and redistributing the money to working and poor people makes moral and economic sense. These are some reasons why state and local governments, including Maryland, needs to transform its tax structure from regressive to progressive. An additional reason is that doing so makes fiscal sense in a time of State and local budget deficits.

According to United for a Fair Economy, if the top and bottom 20% of income earners were to “flip” their shares of Maryland State and local taxes—the bottom 20% would pay 7.3% tax rates while the top 20% would pay 10% like most of us do—Maryland’s State and local governments would have raised an additional $4.2 billion in 2008, more than a 15% increase in total revenues. This amount is four times the currently-estimated State budget deficit of about $1.1 billion.

This double benefit is one of the primary reasons why public service employees, unions, and activists have been calling on officials to reform the tax system to make it progressive, instead of regressive. By doing so, the state could increase revenues while closing the budget gap.

STATE BUDGET DEFICIT HURTS

A history of the past four years will give us a flavor of the damage to State and local budgets caused by the Great Recession and how that translates into pain for real people.

In October 2007, during a special session of the General Assembly, the Governor pushed for budget cuts and tax increases to close a $1.3 billion structural deficit. About half of the gap was bridged by raising the State’s regressive sales tax from five to six percent. The formula for State aid to public schools was changed so that no allowance was made for inflation. Yet despite those measures, the budget deficit grew—instead of closing—because of the economic collapse in the Fall of 2008.

The State’s general fund fell ten percent between 2008 and 2010, while gross state product actually increased 3.5%.

The Governor and General Assembly responded with several more rounds of cuts to state programs. We’ve seen cuts to community mental health programs, services to the disabled and those struggling with addictions, Medicaid, and other programs that provide Marylanders with relief.

Community mental health programs have received inflationary adjustments in only three of the past sixteen years. The public mental health system took five rounds of mid-year cuts, during FY09 and FY10, totaling more than $56 million. Services to people with developmental disabilities and addiction services have also seen substantial reductions.

The State 2012 budget has over $230 million in cuts to Medicaid (medical assistance for low income Marylanders and for elderly in long-term care facilities). This comes on top of $93 million in reductions in fiscal year 2009. (In 2010 and 2011 the ARRA—the so-called “stimulus” bill—provided extra federal Medicaid funds, and large cutbacks were not made.)

Medicaid cuts have created an environment where it is hard for those enrolled in the program to find the services they need. It is important to put a human face to this problem.

Medicaid Matters, a coalition of over 65 organizations, published the story of eight-year-old Malik from Baltimore, who needed some complicated dental work. “The dentists seemed okay as long as they were just doing cleanings,” said his mother, “but when more involved work was needed they sent me elsewhere. We went to four different dental offices but my son never really got the treatment he needed.”

Another problem exacerbated by the tight Medicaid budget is a reduction in community care slots. “If we could increase the number of slots, it would enable seniors and disabled consumers living in long-term care facilities to receive care at home at a much lower cost,” states Laura Carr, a Medicaid Matters board member.

These examples give just a tiny glimpse of the deprivations faced by Maryland residents who need access to health and education services over the past four years.

LOCAL GOVERNMENT SQUEEZE AND THE PUBLIC SCHOOLS

The 23 counties and Baltimore City are also making big cuts to spending. Their revenues from sales and income tax declined, a consequence of demand shortage. The main source of local revenue—property taxes—was hit even harder. As a result, fewer people are working for government either at the state or local levels. Teachers and other school staff have been laid off, and many school activities have been terminated, especially in the arts.

Maryland lost about eight percent of its total property tax base between July 2009 and July 2011—over $60 billion. When the Department of Assessments and Taxation issues its 2012 report, several more tens of billions of dollars in assessable value will probably have disappeared from the tax rolls. This means that local governments have to raise property tax rates, raise other revenues, or cut back on services. They have responded with service cuts, and one area that has been hit hard is education.

According to the Maryland Association of Boards of Education, seven of Maryland’s 24 jurisdictions have reduced funding to public schools, below the level the State defines as “Maintenance of Effort.” This means that local governments are providing less funding per pupil than they did in prior years. Wicomico cut $14 million (over 27% of the amount needed to maintain effort) and Montgomery lowered its contribution by $209 million, almost $1,500 per student.

In short, some jurisdictions are beginning to disinvest in our youth’s education.

TAXES AND THE BUDGET:RECENT HISTORY

Now, as the General Assembly contemplates the State’s budget for fiscal year 2013, despite nearly $7 billion in cumulative reductions to services and about $2.5 billion in increased sales tax, the State’s structural budget deficit is nearly as large as it was four years ago.

Deference to corporations and elites seems to put the budget deliberations in a straitjacket. In 2011, the Governor and the General Assembly let the so-called “millionaire’s tax” expire. This surcharge hit taxpayers with incomes over $1 million per year with an extra 3/4 of 1% on the amount over $1 million. For example, a family reporting $1,001,000 in taxable Maryland income would have $1,000 of income affected by the millionaire’s surtax and would have paid $75 more due to the millionaire’s tax than they are now required to pay. Not much if you’re a millionaire.

In addition, the General Assembly killed a proposal known as “combined reporting” designed to prevent national corporations from avoiding the Maryland corporate income tax by creating “shell companies” in lower-tax states. According to the Department of Legislative Services, these two measures would have brought in about $225 million annually.

On December 21st, 2012, the Spending Affordability Committee of the General Assembly estimated the structural deficit at $1.1 billion and recommended reducing it by half in the FY 2013 budget. “The recommendation is sensible and responsible and the Governor should seek to meet it,” said Neil Bergsman, head of the Maryland Budget and Tax Policy Institute.

“However, in doing so, the Governor should use a balanced approach. Maryland has already cut $2 billion from annual spending for education, health care, transportation, public safety, and other important services since 2007,” Bergsman concluded.

THE BUDGET FOR FISCAL YEAR 2013 AND BEYOND

The 2012 General Assembly session was largely consumed with the budget debate. The Governor, Senate, and House all developed proposals that would have closed between 50% and 70% of the long-term structural budget gap by a combination of tax increases and reductions to the baseline level of services that are provided under existing law.

There were key points of similarity among the plans as all three:

• Cut Medicaid very significantly. The Governor claims that key provisions will result in more efficiency and will not harm patients.

• Shift some responsibility for teacher pension contributions from the State (which now covers 100% of this expense) to the local level. Local governments are particularly strapped for cash since their revenues depend on real estate taxes that have been severely depressed by the recession. Education advocates believe that eventually the pension shift will cause cuts in the classroom.

• Raise taxes most significantly on high earners.

The Senate’s tax plan was much broader and would have raised significantly more revenue by requiring working and middle class individuals and families to pay small amounts. This plan challenges our definition of what is a progressive tax. Whereas the Governor’s and House’s budgets would not raise income tax on any individual with under $100,000 or joint filer with under $150,000, the Senate plan asks a family with $55,000 (corresponding to about $32,000 in Maryland taxable income) to pay an extra $44 per year.

The Senate also would have provided an enhanced earned income tax refund whereby workers on the lowest rungs of the income ladder (approximately the bottom one third) would actually experience an income tax reduction. And the Senate has a special tax surcharge of about $2,000 per year for filers with over $500,000 in taxable income.

As has been widely reported, the House and Senate failed to agree on taxes or the pension shift on the final day of the session. The Senate President insisted on passing new legislation to expand gambling. When the House did not concur, the revenue bill died, and an extra $500 million in budget cuts to education, health, local aid, and State agencies were enacted. Now there are widespread calls for a special session to avoid the deep budget cuts.

TOWARDS PROGRESSIVITY
As the drama plays out on whether there will be a special session, Maryland is confronted with stark choices. Further cuts to services deprive people with real education, health, and social needs and will cost many hundreds of State and local workers their jobs.

It is reasonable to say that all three basic budget proposals would move the State – however incrementally – toward a progressive tax structure. The Governor’s income tax plan would have raised about $400 million, less than 10% of the $4 billion in additional revenue available if the tax rates of the top 20% and the bottom 20% of the income earners were flipped. It received plenty of criticism for not being progressive enough in that it was not pointed at the top 1%.

The Senate plan would do a better job of closing the budget gap, taxing the rich, and helping the very poor, but it also included small increases for earners in the range of $30,000 to $100,000, many of whom feel they can afford no additional burden.

The House, by standing firm on not taxing these middle-income people, would leave a bigger structural deficit and require more cuts in the near future. The dilemma for progressives is to decide which is worse for lower- and middle-income families – budget cuts or small tax increases.

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Charlie Cooper is retired from a 38-year career in child protection and child health. He writes an occasional op-ed column for the Baltimore Sun. He is an activist with interests in money in politics, finance and banking, youth development, and peace. He serves as Chair of the Maryland Education Coalition.

1 State cuts based on analysis by Department of Legislative Services; local cuts based on analysis by Maryland Association of Boards of Education.
2 http://marylandreporter.com/2011/12/30/omalley-says-gas-and-flush-tax-hi... 2013-budget/
3 United for a Fair Economy: http://enews.faireconomy.org/2011/flip_it_to_fix_itstate_fact_sheets.pdf
4 Info on budget from Department of Budget and Management, Fiscal Year 2013 Budget
Highlights and Fiscal Briefing by Department of Legislative Services.