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July 16, 2007

Taxes, or Cuts and Slots

Richard B. Weldon Jr.

Last Tuesday, Gov. Martin O'Malley rolled out his proposed budget cuts. They are designed to ease the $1.5 billion structural deficit facing Maryland in the next budget.

Governor O'Malley didn't really surprise anyone with his revelations, though. In fact, one could opine that the governor announced a plan that he had already presented several months ago. At a Cabinet Meeting following the last General Assembly session, he directed that his cabinet secretaries reduce their budgets by $200 million.

I have previously suggested that the number $200 million wasn't an accident, but part of a rather sophisticated strategy to find a budget target for reductions that demonstrates that the governor has done his part, and now all Maryland taxpayers will have to do their part and absorb tax increases.

Sadly, $200 million is merely a starting point when it comes to serious reductions of the overly generous spending trends of state government. Given that the trend is to spend a billion dollars more than the anticipated revenue, we don't have revenue issue, we have a spending issue.

The governor chose an interesting way to lay out his strategy for cutting and taxing. He blames the "other guy," one of the most oft-employed dodges available to a sitting politician.

Governor O'Malley's press announcement for the proposed cuts mentioned his inheritance, the structural deficit. Wouldn't it figure, the poor guy runs for governor for two and a half years, only to be shocked and surprised that former Gov. Robert L. Ehrlich, Jr., "left" him a deficit tucked in the drawer of the governor's Wye Oak desk.

Some lucky stiff gets a deceased wealthy uncle, poor Governor O'Malley gets the bill for the unfunded Thornton Mandate, the Glendening income tax reduction, and a 16-year rising spending trend.

Wait a minute, though. Seems we've forgotten Governor O'Malley's real inheritance. Governor Ehrlich did leave a wealth legacy for his predecessor, we've just forgotten and the media has conveniently neglected to remind us.

Governor Ehrlich, who was planning on being re-elected in 2006, had accumulated a substantial surplus as a hedge against the rising tide of deficit spending. Recognizing that the legislative leadership wasn't going to go along with his plan to introduce slot machines as a way to generate significant new revenue without a major tax increase, Governor Ehrlich salted away a pile of cash instead.

Governor Ehrlich is far from blameless in the spending department. His budgets, with one exception, all showed an upward spending trend. In fact, his last budget reflected a spending trend that rivaled Governor Glendening's record.

The difference is that Mr. Ehrlich also tried to get a new revenue source passed, but couldn't.

Governor Ehrlich wasn't planning on spending the surplus on a big re-inaugural, though. He intended to use that surplus in pretty much the same way Governor O'Malley has.

It just seems a little disingenuous for Governor O'Malley to blame his inherited structural deficit as the cause for cuts in services and increases in taxes. The reason he has to make cuts in next year's budget is because he balanced this year's budget using that same surplus accrued under Governor Ehrlich.

It would be nice, just once, to hear a succeeding politician thank their predecessor for having done something smart, creative, or even just proper. Not in this case, though.

The focus here is to affix blame, or at least to shift it to someone else.

Governor O'Malley could create that kind of unforgettable, legendary memory if he were just to deviate from the norm in how he deals with the deficit, instead of the predictable and dangerous strategy of making modest cuts while seeking massive tax increases which will hurt Maryland's competitiveness and financial posture.

Instead of planning $200 million in reductions, the governor should immediately institute a moratorium on new spending, and should cap state agencies at their FY 08 spending levels. Even when there aren't a lot of new programs added, the rate of increase alone becomes a huge problem.

Another policy choice is to delay further increases in the Thornton Commission recommendations. The four-year, $3.9 billion increase in public education funding has really made a positive impact, no one would argue that.

Unfortunately, we're in tight times that reduce the flexibility to fund program increases, even for something as important as improving public education. Again, we don't have to kill Thornton, just slow down the rate of increase.

If Governor O'Malley held state agency spending to '08 levels, and resisted any new major spending initiatives, he'd be more than halfway to his goal. Since cuts and controlled spending don't get us there, we turn to the revenue side.

Slot machines are definitely a "race to the bottom." Depending on gaming to balance budgets might not be the best thing to do; we are undoubtedly in a gambling culture. Marylanders have a taste for the one-armed bandits, spending upwards of $600 million on slot machines in other states.

Since it takes 18-24 months to generate revenue from slots, Governor O'Malley could design a license auction, and create a market place where billionaire casino operators could compete (and pay) for licenses to build and operate these facilities.

Five licenses could easily generate a one-time revenue increase of $1 billion dollars. Those licenses could be reserved for horse venues, or a mix of horse tracks and destination casinos.

So, there is a way to balance the upcoming budget without having to resort to a sales or income tax increase. The big question is whether Maryland's legislature is ready to swallow some distasteful medicine, and whether taxpayers are more concerned about higher taxes or a government that lives within its means.

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