Sales tax hike not solving state's woes

It wasn't supposed to be this way after last year's special session of the General Assembly.

About $1.5 billion worth of hard choices were made and many government leaders were confident the deficit demons had been vanquished.

But between $800 million and $900 million of expected new tax revenue never materialized because of faltering collections in a spiraling economy, according to the state's nonpartisan Department of Legislative Services, leaving Maryland again in a perilous budget situation.

One of the most dire symptoms of the fiscal disease sweeping through Maryland's budget is plummeting sales tax revenue, which accounts for about half the missing money.

Not everyone believed the problem was solved following the special session. Some repeated then and now that crucial signs of economic turmoil were missed, and raising taxes only made a precarious economic situation worse by taking more money from Maryland families and constricting the capital of businesses.

"We make our projections too rosy," said Del. Ron George, R-Arnold, who had a front seat to the tax increases as a member of the House Ways and Means Committee. "We had the evidence (of a bad economy). The evidence was there."

During a normal year, the next few weeks of holiday spending would provide a year-end boost to the state's coffers.

This is no normal year.

In the relatively halcyon economic days of November 2007, Gov. Martin O'Malley and the General Assembly felt confident some of the worst of Maryland's budget problems had been put to rest.

Besides the political sideshow of slot machines during the three-week special session, the sales tax was supposed to play a big role in bringing hundreds of millions of new dollars to heal Maryland's balance sheets.

"The most compelling argument for everyone (voting for the taxes) is how bad the downside would have been to every county and every district if we were to have failed," Mr. O'Malley said while signing the special session legislation. "That was truthfully the most overwhelming consideration in the minds of the men and women I met with."

But a funny thing happened on the way to the cash register, as the tidal wave of global economic problems has been drowning the sales tax, the fiscal centerpiece of the holiday season for the State House.

Businesses are just as pessimistic as public officials as shoppers head to the malls in dwindling droves. The Maryland Retailers Association expects sales revenue to be flat, the first time in decades a prediction has been this grim.

Sales tax revenue projections in the special session originally showed almost $3.3 billion in new revenue over five years, with $110 million set aside to replace Medevac helicopters and more than one-third earmarked for transportation projects.

Those numbers were based on increasing the tax from 5 percent to 6 percent and - more importantly now - people annually spending 5 percent more in the state.

Conditions have changed significantly since those projections, however, as spending contracts and the new tax revenue is being canceled out by faltering collections.

In fact, there would have been almost no sales tax growth at all in fiscal 2008 if there had not been a rate increase. That ranks as the worst performance since 1991.

Since last fall's special session, between $800 and $900 million of new tax revenue has been offset by worsening collections and about $400 million of anticipated sales tax money has disappeared since last fall, according to John Rohrer, a coordinator of fiscal and policy analysis with the state's non-partisan Department of Legislative Services.

"They have been kind of washed out," Mr. Rohrer said.

The outlook is actually worse for fiscal 2009, according to sales tax forecasts from the state's Bureau of Revenue Estimates. Without the tax increase, funds would actually be projected to fall by 1.8 percent.

Warning signs

In September 2007, about a month before the special session, some involved in state government began warning the legislature about raising taxes in an uncertain economic climate.

And there were reports to back up their concerns: revenue estimates released in June 2007 showed two sales tax declines in three months; an Aug. 29 hearing of the Senate Finance Committee emphasized how Maryland had climbed from 40th in the country for foreclosures in 2006 to 16th in 2007; and a revised revenue report in September, just weeks before the special session, dropped anticipated sales tax growth from 4.8 percent to 2.5 percent.

One of the most vocal critics was state Comptroller Peter Franchot, who was starting to begin his slide into infamy among some of Annapolis' power brokers. Revenue estimates had just started to show a sluggish sales tax because of high gas and electricity prices, falling home sales and the beginnings of the subprime mortgage problem.

In a conversation with The Capital's editorial board on Sept. 26, 2007, Mr. Franchot said the faltering sales tax was the "canary in the mineshaft" and should be viewed with extreme caution.

Once the special session was announced in October, the comptroller sent a letter that visibly frustrated the governor by describing the emergency gathering as ill-timed because the national and state economies were too volatile.

"There's no question the comptroller was leery of raising taxes heading into an economic slowdown, and many of his concerns have proved to be justified," said Joseph Shapiro, a spokesman for the Comptroller's Office, in an e-mail. "However, right now Marylanders in their homes and in their businesses are struggling to survive. The national and state economy are going to get worse before they get better and everyone has to work together to help the state get through this."

But the refrain from Mr. O'Malley and legislative leaders has been consistent: not raising revenue would have resulted now in even deeper cuts into state services, and the hard decisions made a year ago prevented total disaster when the national economy tanked.

Hard choices are still ahead for the governor, who has had to cut hundreds of millions of dollars from the budget.

Maryland essentially has been faced with two problems, said Shaun Adamec, a spokesman for the governor. One was the $1.5 billion gap between anticipated revenues and spending, and the other is the wider economic downturn.

By combating the deficit in the special session, he said, Maryland is in a better position to weather the storm than other states that have structural spending gaps on top of ones generated by the poor economy.

"That is exactly the compilation of horrible circumstances many states are dealing with," Mr. Adamec said. "The problems that the (governor's) cuts are designed to alleviate … are cyclical."

Although some recent problems could not have been foreseen, the General Assembly did miss some indications the economy was in danger, said Del. James King, R-Gambrills.

"To be fair, nobody saw the federal financial crisis coming," he said. "But there were certainly warning signs and indications."

Commodities, from milk and butter to electricity, were steadily rising in price for years and gradually eliminating disposable income, Mr. King said. The delegate, an owner of two restaurants, has had to cut 20 percent of his workforce this year as his food sales plummet 18 percent.

"With this economy, it has been brutal," Mr. King said. "It was kind of the perfect storm building."