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From Governing’s
Maryland has done better than that. Two years ago, seeing a lawsuit on the horizon, the state formed a commission to analyze its school funding formula, which relied largely on property and income taxes at the county level. In December 2000, the commission concluded that, in order to keep the courts at bay, the state had to increase general fund spending on education by $1.3 billion a year, to be fully implemented by fiscal year 2008.
This news could hardly have come at a worse time. Within a year, revenues were coming in $300 million less than expected. The state originally forecast a drop in capital gains receipts of about 10 percent compared with the year before; it now believes they fell as much as 50 percent. Through the second quarter of the current fiscal year, individual income tax revenue still hadn’t shown growth. The resulting calculation isn’t pretty: The state had to close a $550 million gap midway through 2003 and faces a hole double that size for 2004, amounting to about 10 percent of the general fund budget. Still, Maryland remains committed to its goal of equalizing school funding. An increase in the cigarette tax, from 66 cents a pack to $1, brought in enough additional cash to fund the initiative into 2004. What happens then? Nobody knows. And that’s scary. All that’s clear is that the state has promised to spend the additional money. If it dares cut any of the new school funding, it’s likely that litigation will materialize, forcing the expenditure anyway. The size of the budget crisis is partially attributable to over-reliance on an income tax that is dramatically susceptible to an economic downturn. Almost half the state’s revenues come from that source. Matters weren’t helped any by a 10 percent individual income tax cut the state enacted in 1997 — to be phased in through five installments of 2 percent apiece. Back in 1997, the change seemed justified. The state had plenty of money, and it wanted to confront its dependence on the income tax. But last year, when Maryland needed every dollar it could get, it continued to phase in the last 2 percent cut. Actually, then-Governor Parris Glendening’s original budget included an indefinite postponement of this final phase, but the General Assembly rejected it. “We probably shouldn’t have finished the 10 percent,” former state Senator Barbara Hoffman says, “but I don’t believe in going back on my word.” So other efforts have been made to bring in more tax revenues. In 2002, the popular sales tax holiday — which had cost the state $5.1 million the previous year — was discontinued. At the same time, a historic renovation tax credit was scaled back. Until last year, developers of renovation projects were entitled to a 25 percent state tax credit on their total cost. The state has plenty of buildings that date back hundreds of years, so the credit was popular; it also has been effective in generating construction projects in economically disadvantaged areas. But there was one major problem. The subsidy was written without limits, and some developers legally claimed credits of $10 million and higher, costing Maryland at least $75 million in 2002. The changes enacted last year cap individual projects at $3 million in credits and will require new legislation to keep the program going after 2003. Exemptions and credits such as that one are among the features of the tax system being scrutinized by a commission headed by former budget secretary Fred Puddester, which will issue its final recommendations for changes to the tax mix later this year. Members of the commission agree that every revenue source needs to be considered, including adding services to the sales tax base, raising the gasoline tax — which hasn’t been increased since 1992 — and installing slot machines at the state’s race tracks, a favored approach of new Republican Governor Robert Ehrlich. The Comptroller’s Office’s cost-effective compliance work has been helpful in boosting revenues. The office posts the top 50 non-filers on its Web site, and recovered $18.5 million last year through the IRS offset program, which uses portions of taxpayers’ federal tax refunds to make up for delinquent state payments. Electronic income tax filing, now up to about 26 percent of returns, has increased department efficiency, as have imaging and the use of 2-D barcodes in processing returns. But the state hasn’t moved to create a data warehouse that would help to ferret out non-filers. “What I need are more auditors,” says Deputy Comptroller Stephen Cordi. “Identifying potential taxpayers doesn’t do much good unless you’re able to follow up.” Puddester says his commission is taking into account the revenue that could be raised by hiring more people to chase after tax cheats. “You can’t solve the problem by hiring 2 million auditors,” he says, “but you have to be willing to spend some money to make money.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ore than half of the states have been hit by court orders requiring a more equitable means of funding their schools. In nearly every case, these have led to a painful overhaul of tax policies. Still, many states have squirmed and fought such changes as long as they could, demonstrating a series of reactions reminiscent of the five famous stages of grief: denial, anger, bargaining, depression and acceptance.