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DOCUMENTS


The Tentacle


Dear President Miller and Speaker Busch:

October 25, 2007

October 23, 2007
Honorable Thomas V. "Mike" Miller, Jr.
President, Senate of Maryland
State House
Annapolis, Maryland 21401
Honorable Michael E. Busch
Speaker, Maryland House of Delegates
State House
Annapolis, Maryland 21401

Dear President Miller and Speaker Busch:

As you know, Governor O'Malley has signed an Executive Order convening the Maryland General Assembly to consider his proposed remedies for the State of Maryland's $1.7 billion structural budget deficit. The Governor's proposal includes, but is not limited to, an increase in the State's sales tax, cigarette tax and corporate income tax rates, an extension of the sales tax levy to service transactions that are currently exempt, a fundamental realignment of our State's personal income tax structure, and a plan to legalize slot machines in Maryland.

Having served two decades in the General Assembly, including several years as Chairman of a House budget subcommittee, I have been through similar fiscal challenges and appreciate the Governor's desire to address our State's looming budget shortfall in an aggressive manner.

As Maryland's chief fiscal officer, however, I must question the timing and necessity of this approach. Mindful of the reservations each of you has expressed about a special session, I must underscore the profound - and perhaps unintended - consequences of this undertaking on Maryland's economy, business climate and quality of life, and to caution against acting in haste.

THE TIMING

The special session that will convene on October 29 will take place against a backdrop of exceptional economic instability. The collapse of the subprime mortgage industry has effectively ended the most sustained housing boom of this generation. The recent, dramatic spike in foreclosures has created a national surge in housing inventory just as stricter lending standards have compressed the pool of potential buyers. These well-documented national trends have also been experienced in Maryland. For example,

The collapse of the housing market, in turn, has inspired a ripple effect throughout the entire U.S. economy. Just last week, Federal Reserve Chairman Ben Bernanke warned that the troubles in the housing market could be a "significant drag" on the economy.

The Dow Jones Industrial Average and other U.S. financial markets are in the midst of a period of high volatility. Consumer confidence has plunged, as evidenced locally by the sluggish growth in state sales tax receipts that led to last month's $130 million write-down of FY 2008 revenues. The dollar has dropped to an all-time low against the Euro, compounding concerns of higher oil prices and inflation. The Labor Department reported last week that applications for unemployment benefits are far exceeding expectations, raising concerns that the housing collapse will finally destabilize the nation's job market. As a result of these and other, similar developments, many national economists have elevated the odds that we will enter a period of recession.

It is in a spirit of concern over the general direction of our economy that I have recommended a more cautious and deliberative approach to addressing Maryland's structural budget deficit. In recent weeks, I have suggested that our December presentation of revenue estimates would offer a much clearer sense of Maryland's long-term economic outlook, as well as the dependability of the funding streams that the Governor is counting on in his package. The availability of this crucial data, coupled with traditional economic indicators that are duly reported by the media, argues in favor of taking up the Governor's proposal during the regular 90-day session. The politics of the day might argue in favor of a more dramatic gesture. From a budgetary and fiscal standpoint, however, the current state of affairs makes this special session - and its purpose - a high-risk proposition.

THE NECESSITY

In recent weeks, the media has reported warnings from senior O'Malley Administration officials that, without a special session, the State's structural budget deficit will mushroom. Please allow me to take this opportunity to set the record straight. There is no relationship whatsoever between the timing of the next General Assembly session and the magnitude of Maryland's structural budget deficit. As you know, the structural deficit is loosely defined as the negative balance between the sum of the State's ongoing spending obligations and its ongoing revenues. Unless we are required to revise State revenue estimates downward, or unless the State makes any unfunded spending commitments between now and January (which is highly unlikely), the structural budget deficit will remain at $1.7 billion.

At the risk of restating the obvious, it is also worth noting that through June 30, 2008, the State of Maryland has a balanced budget. That, too, is irrespective of the timing or outcome of the next General Assembly session. It has been suggested, by key lawmakers from both parties, that it would be more appropriate to take up the Governor's package during the regular legislative session, where it can be considered within the context of his FY 2009 budget proposal. Aside from affirming the basic logic of considering new revenues, spending commitments and budget cuts at the same time, I will further substantiate this approach by restating that there are no permanent costs associated with proceeding in that manner.

THE CONSEQUENCES

The Governor's revenue package includes the most dramatic reform of Maryland's tax structure in well over a generation and, in slot machines, a proven catalyst for a broad range of social and economic ills. It would directly affect all Maryland residents, workers and tourists, as well as every small business and corporation that has chosen to invest in our state. Mindful of its enormous ramifications, I must note that Governor O'Malley's plan was constructed in private, introduced gradually by press release, and the details have yet to be made available. This makes review and evaluation of the plan next to impossible, and further risks actions being taken that may have unintended consequences.

For example, according to press releases that have been made available by the Governor's office, the plan includes a proposal to extend the sales tax levy to property management services. Although the details on this particular provision are unclear, concerns about its impact on the State's affordable housing stock have already been raised. In meeting with citizens and business leaders throughout Maryland, I have heard numerous complaints that the costs of this tax will simply be "passed through" to renters, many of whom are families with low and moderate incomes who cannot afford further strain on their fixed budgets. My intent is not to render a personal opinion on this specific piece of the plan, or any others. Rather, it is to underscore the importance of sharing this plan with the public in open, inclusive and unscripted public forums. I am afraid that the current timetable allows virtually no opportunity for such stakeholder input, which could ultimately diminish public confidence in the process and result in a product that negatively impacts the Maryland economy and the taxpayers we represent.

In my view, the volatility of the U.S. and Maryland economies, the absence of an immediate fiscal "crisis" and the lack of detail about the plan could all combine to create a perfect storm of unintended consequences. Rather than act in haste, the fiscally prudent and practically wise thing to do would be to move cautiously and deliberatively throughout this process.

Should you have any questions, or if I can be of assistance to either of you, please do not hesitate to call. Thank you in advance for your consideration of these points.

cc:
The Honorable Martin O'Malley
The Honorable Nancy Kopp
Members of the Maryland General Assembly

Sincerely, Peter Franchot
Comptroller


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