ANNAPOLIS – A tax hike seems inevitable, but not this year.
Lawmakers, faced with trying to preserve the last phase of a tax cut and closing a $1.2 billion budget gap, are unlikely to approve such an increase in an election year.
But political analysts say that’s just putting off a certainty.
With deficits surpassing $750 million for fiscal year 2004 in all current budget proposals and pressures to fund a postponed $1 billion school reform measure known as the Thornton Commission report, there will be few other solutions, analysts say.
“The irony is (lawmakers) may well be delivering the last phase of the tax cut a year before they raise taxes,” said Blair Lee, a political columnist.
This year’s budget debate fixated on preserving the final 2 percent of an income tax reduction begun in 1997. Lawmakers raised those taxes during the recession of the early `90s with the promise they would later lower them.
They would have to explain to voters in the November election why they went back on their promise. The entire General Assembly is up for election this year, and the state will have a new governor because Gov. Parris N. Glendening is in the final year of his last term.
Glendening’s budget proposal, which canceled the cut, only intensified the debate.
“We’re not going to go back on our word,” said Senate President Thomas V. Mike Miller Jr., D-Calvert, earlier this session.
The sentiment has dominated discussion to preserve the reduction.
Although some lawmakers started to move toward postponing the cut once the $1.2 billion budget deficit for fiscal year 2004 and inevitable program trimming became clear, the move failed to gain much momentum and neither the Senate nor the House budget proposals rescind the cut, so far.
“Politicians didn’t want to go before the electorate vulnerable to the charge that they didn’t fulfill their promise,” said American University history professor Allan Lichtman.
Reversing the tax cut is problematic because the pain is not “theoretical,” Lee said. Since taxpayers are already receiving the reduction in their paychecks and spending it, delaying the cut means they will have to give money back to the state, Lee said.
Instead, lawmakers winced and made program cuts as they whittled a third of the deficit away and plugged the remaining gap with one-time reserve funds and various revenue-generating measures, such as decoupling state death taxes from the federal reduction of the tax.
But the moves won’t plug all the holes for the upcoming 2004 fiscal year budget.
They will return to face a $500 to $800 million deficit, depending on the economy, said legislative budget director Warren Deschenaux. And with little left in reserve funds to tap, analysts predict the debate will be more intense next year.
Once the election is over and the promise to preserve the tax cut has been fulfilled, there will be new pressures – pressures to raise revenues, Lichtman said.
A gas tax would be likely and possibly a sales or income tax hike or the introduction of slot machines, Lee said.
“You can bet on slot machines because they’re going to look good after running out of accounting tricks,” Lee said.
Still lawmakers hope a rebounding economy could alleviate their coming budget woes.
There might not be a need to raise taxes next year if the economy bounces back, said Sen. Robert R. Neall, D-Anne Arundel, a budget leader.
Budget and Taxation Committee Chairwoman Barbara Hoffman, D- Baltimore, echoed his words.
Others said they thought raising taxes depended on whom would become the next governor.
“If you have a Democratic administration next year, there will be a tax increase,” said Sen. Larry Haines, R-Carroll.
Despite their hopes, analysts predict lawmakers will be cornered into finding new revenues.
The deficit didn’t result from the Sept. 11 terrorist attacks or the recession, said Steve Hill of the Maryland Budget and Tax Policy Institute.
“It is because we don’t have a strong enough revenue base to keep up with demands of state and local government for services,” he said.
His institute’s studies found that Maryland stood at 38th among states ranked for how much their total taxes compare with their economy.
Maryland is a low tax state, he said.
“It is hard to make cuts when you’re already operating at a minimum level or spending at the bare bones,” Hill said. “They’re still going to want to make some cuts next year. But there is no question that they’re going to need to raise revenues.”
Lawmakers realized the problem, he said. That is why they introduced a bill to study possible new tax sources or program downsizing as a result.
That bill, introduced by House Speaker Casper R. Taylor Jr., D- Allegany, has passed the House and is now undergoing hearings in the Senate.
“All they’ve done is defer the pain till after the election,” Lee said. “They will run saying they cut your taxes, knowing fully that they will raise your taxes next year.”