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Guessing Game on Hogan Policies, Budget

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Two months after his upset victory, Gov.-Elect Larry Hogan has kept everyone guessing about the specifics of the policies and budget he will implement after he is sworn in Jan. 21.

Showing the same discipline on message he exhibited throughout his campaign, Hogan has refused to take stands on issues beyond what he already promised. He will curb state spending, roll back taxes (when and if he can) and try to pursue actions that create jobs in the private sector.

Persistent prodding from reporters — and likely from many interest groups with which he has met — has not budged Hogan from the broad outlines of the message he began crafting in 2011, when he formed the group Change Maryland.

On state spending, departing Gov. Martin O’Malley and the Maryland economy have left Hogan little choice. As Hogan has often said since his 65,000-vote election victory (51%-47%), the state budget picture is much darker than he expected.

O’Malley persistently and repeatedly complained that Republican Gov. Bob Ehrlich left him with a deficit to fix in 2007; in fact, Ehrlich had left nearly $1 billion in reserves that O’Malley tapped in his first budget, but there remained a $1.3 billion “structural deficit,” largely due to the massive increase in education funding passed by the Democratic legislature and signed by Democratic Gov. Parris Glendening in 2002. (This is not partisan spin on what happened in 2007, but can be found in reports by the legislature’s nonpartisan staff.)

The structural deficit is due to estimated increases in baseline spending. This happens because of inflation, pay hikes, spending mandates mostly on education, entitlements mostly on Medicaid health insurance, and now also rising debt service. Debt service has gone up because of rising payments of principal and interest on 15-year bonds to replace money taken out of special accounts for open space and the Chesapeake Bay that O’Malley used to balance previous budgets.

Hogan Inherits a Deficit

What’s different about the situation Hogan faces is that O’Malley has not only failed to cure the structural deficits, as he hoped to do through the repeated tax increases Hogan railed against. O’Malley has left him with a $400 million deficit in the current budget with less than six months left to fix it.

O’Malley has the authority to cut the budget by bringing the cuts before the three-member Board of Public Works, which he chairs. O’Malley did that repeatedly through his two terms, as the Great Recession hit and persisted into a sluggish recovery, hampered in Maryland by federal budget cutbacks, a government shutdown and sequestration.

O’Malley has chosen not to use this authority again to officially cut spending, but his budget secretary has told all departments to clamp down on expenses this year, in expectation of budget cuts. The University System of Maryland has told its colleges and universities to expect similar cuts.

Maryland has what was once considered a conservative system of revenue estimates that are based on a consensus of legislative and executive analysts, along with outside economists. In other states, there are often competing revenues estimates between the executive and legislative branches.

But Maryland’s revenue estimates seem to be coming up short on a regular basis, partly pointing to a change in the state’s economy and what is now recognized as over-reliance on federal spending.

Maxed-Out Credit Cards

So, as Hogan takes office, he must cut a combined total of more than $1 billion in this year’s budget and on the one he submits to the legislature two days after he is sworn in.

“We’ve maxed out all the credit cards, we’ve drained all the savings accounts, we’ve broken into the kids’ piggy banks,” Hogan has told reporters. “We have no money left. We’ve got a serious hole to dig out from, and we’re going to have to make some very tough decisions.”

Except for some unrealistic progressives, there is general awareness that the state budget is stressed, and all the budget tricks have been played out. To make significant budget changes, Hogan must target where the bulk of the money is spent — education and health care. He has to ask the legislature to change the laws funding those areas.

About the best Hogan can achieve is flat funding health and education, allowing for zero budget growth. Making significant cuts in those areas needs legislative approval and is politically unfeasible. “Republican governor cuts funds for kids” is not the headline Hogan needs as he takes office.

Education advocates and the teachers union will scream that flat funding as enrollment grows is essentially reducing aid per pupil; health advocates will continue to push for expansion of health insurance coverage, even as federal funding under Obamacare tapers off. A majority of the legislature has already signed a pledge to raise cigarette taxes $1 a pack, a move Hogan would likely veto.

Resistance to Cut School Funding

Montgomery County legislators have already made clear that they will not support cuts in school aid or health insurance, in order to provide the tax relief Hogan promised.

“If he wants to just hammer education as a way to cut the budget and cut taxes, he will find very few friends in the legislature and even fewer friends out of the legislature, because I don’t think that is what Marylanders voted for in 2014 in the elections,” said Sen. Rich Madaleno, new vice chair of the Senate Budget and Taxation Committee. “We will be on the barricades if it’s cutting education funding to give tax cuts to the wealthy and most fortunate around the state.”

Contrary to the impression that O’Malley made no budget cuts, he significantly restrained the growth in spending by agencies not related to education and health care.

There has been substantial growth in the number of teachers and university faculty and staff. There has been little or no growth in jobs or salaries related to social services and law enforcement. Many of those positions continue to be underpaid by the state compared to what is paid by the federal and local governments, yet continued small pay hikes for state workers may be on the chopping block.

Transit Lines Up in Air

Hogan has considerably more leeway in transportation spending. Gas tax hikes have given a major infusion of funding there. Two multi-billion-dollar transit projects are prime targets. The proposed east-west Red Line in Baltimore City is likely dead, and the Purple Line in the D.C. suburbs is endangered. Both have substantial support from the political and business establishment, but there is major local opposition as well. This will free up some money to restore the highway user revenues to the counties that were severely cut by O’Malley, choosing to fund teachers (who supported him) instead of construction workers (who did not).

Hogan may feel the need to trim some of the gas tax hike that will go up automatically, since Congress is not likely to authorize the Internet sales tax that would have prevented a major increase next year.

The Hogan campaign has made much of $1.75 billion in “waste, fraud and abuse” uncovered by legislative audits. Ferreting them out may not produce immediate results.

Some of the bonds used to replace dedicated funds have been authorized but not sold. To save money on growing debt service in future budgets of his term, Hogan may ask to have those authorizations repealed.

Reducing Taxes

Accomplishing the other half of his campaign promise is particularly hard to do — rolling back as many of the tax increases of the last eight years as he can.

Hogan has promised to seek repeal of the “rain tax,” an easy promise to keep since it has no impact on the state budget. As Democratic legislative leaders have made clear, this state mandate for 10 counties to pass the stormwater remediation fee is not likely to be repealed in the face of intense opposition by environmentalists. But it can be modified so that funding for pollution controls doesn’t require a separate local tax.

Hogan needs to show some progress in reducing taxes on businesses. Like average taxpayers, businesses have also paid the added income, sales and gas taxes, and the added fees on licenses and permits.

Reducing the high-bracket personal income taxes that some small business owners pay will be difficult, since they are a major source of state revenues.

But Hogan could provide some relief on the personal property tax business owners pay and on the corporate income tax, which was raised in 2007.

The state no longer collects a tax on business assets, but the counties still collect the personal property tax from all businesses and even from many nonprofit organizations. It is a major source of annoyance and paperwork for businesses, large and small.

In exchange for the return of highway user revenues to the counties, Hogan could suggest gradual elimination or a major reduction of the personal property tax. This would both reduce expenses to businesses of every size and provide a major competitive advantage with Virginia. It also does not cost the state budget anything.

There are many other options Hogan has to cut spending and reduce taxes. None of them are without pain for people who get state funding.