Solutions to State's $1.5 Billion Deficit: Maryland Chamber Studies the Possibilities

By Mark R. Smith



By any stretch of the imagination, a state with a $1.5 billion budget deficit would seem like a place where there are more economic questions than answers.

In searching for a solution to Maryland's steep budget shortfall and looking for revenue to fund its transportation needs as its impetus, the Maryland Chamber of Commerce, along with several partners, is spearheading an approximately $90,000 study by Ernst & Young to identify various scenarios that would help relieve the state of its budget woes.

The point is to grasp the economic impact of any move made before any new laws go into effect. "The economic modeling in the study," said Kathy Snyder, president and CEO of the chamber, "will drill down into how these proposals will impact jobs in Maryland."

The results are due in late August and the chamber will share its thoughts with the governor and legislature after Labor Day. What the politicos have today, Snyder said, is "basically a list of how much revenue the various proposed taxes would generate in the way of revenues for the state. They don't yet know what the economic impact of each would be."

If any of the ideas become law, they will be viewed as only a partial step forward. "We think that slots need to be part of a long-term solution and also plan to promote a five-cent-per-gallon increase to the state gasoline tax," she said.



From All Sides

For instance, a sales tax rate increase from five cents to six cents on the dollar would mean another $700 million in revenue for the state. While the generation of millions upon millions of dollars in new revenue sounds like part of the answer to the problem, Snyder said that there is more to contemplate.

Not only would retailers balk, but "when you consider these proposals, you have look at what surrounding states do," she said. "For instance, Delaware does not have a sales tax and we could lose more shoppers to Delaware," if that route is chosen.

And a sales tax increase "could impact small business badly," Snyder continued, even if it is expanded to include business sectors that it does not encompass now.

"For example, if you expand the sales tax to accounting, engineering or consulting firms, it may take them out of competition in the national or global marketplace. Remember, companies don't have to be located in Maryland to charge that tax if they're doing business here. So it gets very complicated on that front," she said. "What we want to do with the study is find out what the negative impacts would be."

Other avenues under Ernst & Young's study (see sidebar) include the effect of raising corporate income tax rates, combined reporting for regional or national companies doing business in Maryland, and raising the personal income tax on higher incomes.

"In doing that, we need to remember that many small business people operate as LLCs," Snyder said. "Would that drive people out of the state? And where would we set the level to tax? At $100,000 or $200,000?"

The last item under consideration is a gross receipts tax proposal, without regard to profits or expenses. "We want to see how all of these ideas impact job creation and retention, because people will make choices based on the bottom line," Snyder said. "We know that some findings will be worse than others."



Fresh Info

As noted, while the state is figuring out how to reduce its deficit, the need also exists for an additional $400 to $600 million a year for transportation funding.

"We may support some of these tax increases or may not," she said. "No one in Maryland has this information yet. You can't fix those two huge holes on the back of any one solution."

Among the MCC's partners is the study is the Maryland Banker's Association. President Kathleen Murphy said her organization felt it was important to get involved "since the situation impacts banks, their clients and people who provide financial services.

"When the results come out, each partner will analyze the results and assimilate the data our own way and use it in the upcoming session," Murphy said. "So many organizations are involved to glean data and see how it impacts their own industries, as well as pooling resources to make funding the study easier."

Jim Dinegar is CEO of another partner, the Washington Board of Trade. He said his group is involved "since we understand that the fiscal situation in Maryland is not as strong as it needs to be. Business needs to have a strong environment to prosper. That's a concern because we aren't on an island, like Hawaii. In other words, many businesses can easily relocate."

Overall, Dinegar said the Maryland business community "is approaching the fiscal crisis in a responsible manor and is conducting this study to help better understand the reasonable alternatives and implications of each."



Will History Repeat?

Snyder noted the Maryland Association of CPAs and the American Council of Engineering Companies are also serving as partners, as are 13 of Maryland's chambers of commerce (which, combined, represent another group). Walt Townshend, president of the Baltimore Washington Corridor Chamber, said his organization wants to back the efforts of the partnership "because we believe that it's important to have as much information as possible about the proposed tax expansions, increases or modifications.

"No one wants to pay more taxes," Townshend said, "but if we have developed all of the savings we can out of existing programs and we still need additional revenue, we have to make sure [that any proposed changes] are fair and equitable to all concerned." Don Fry, CEO of the Greater Baltimore Committee (GBC) and a former state legislator in the '90s, offered some historical perspective on raising revenues to come back from a severe deficit.

"Back in 1992, we had to deal with a similar budget shortfall," he said, noting that the cigarette tax was raised and some adjustments to the sales tax were among the fixes, as was a temporary assessment on high-income individuals that contained a sunset provision after a couple of years.

"We'll have to see the legislators reach a consensus 71 votes in the house and 24 in the Senate, and it will take a lot of hard work and analysis on their part," Fry said. "They need to look at other efficiencies as well, including making sure that various programs are still viable."



Don't Cross the Line

No one expects any changes that could be made will be easy. "Personal income taxes were reduced several years ago and the public doesn't want to see them go back up," said Fry, searching for answers. "There is no solution that everyone will be happy with.

Like Snyder, he is concerned about any negative impact on the business climate in the state, especially due to the recent Wal-Mart health insurance issue (with the state requiring the retail giant to insure its workforce due to the company's size) and the failed Constellation-Florida Power & Light merger.

"Recent legislative activity suggests that Maryland is not a business-friendly state," he said. "So we're concerned about making sure that steps [to solve the deficit problem] are taken in a way that does not negatively impact the business climate in Maryland." Fry said.

Noting that the state borders Virginia, Pennsylvania and Delaware - "all of which have business-friendly reputations" - he pointed out similar changes that were made by the legislature back in the '80s that had ramifications that were hardly intended.

"That's when some changes to the law were made in regard to interest rates that caused the major credit card companies to move - to Delaware," Fry recalled. "Wouldn't it be great to have all of those jobs back?"