For the first time since a recession gripped the country in 2008, Maryland is approaching a General Assembly session with good fiscal news: Neither tax increases nor drastic budget cuts are likely to be needed to balance the budget.
The improved forecast is driven by higher-than-expected revenues, led by corporate and individual income tax payments. For the current budget year and the one that begins July 1, the state is expected to take in $161 million more than anticipated.
"It's been a long time since we've had such good news," state Budget Secretary T. Eloise Foster said after the Board of Revenue Estimates adopted the forecast Thursday. "I'm always happy when we are writing revenues up."
State Treasurer Nancy K. Kopp added: "We are making significant progress. Maryland is going to see a brighter day, and we are ahead of the rest of the nation."
There is a significant caveat: The ink would turn red if the federal government goes over the so-called fiscal cliff, automatically triggering a combination of spending cuts and tax increases if Congress cannot reach a budget deal by the end of December.
Maryland would stand to lose more than 60,000 jobs and nearly $1 billion in tax revenue, analysts say, leaving the state with a significant budget shortfall that would have to be resolved during the 90-day legislative session that begins Jan. 9.
"These estimates assume that our political parties can come together to solve our nation's economic challenges," said state Comptroller Peter Franchot, a Democrat who once worked for a Washington lobbying firm. "Given the consequences, it's a reasonable assumption. But as someone who spent years on Capitol Hill, reason and logic might not be applicable."
Shortly after the board released its revenue forecast, a legislative committee that sets limits for government spending recommended that Gov. Martin O'Malley submit a budget that would narrow the remaining $383 million gap between long-term spending projections and expected revenue -- known as the "structural deficit" -- by at least $200 million.
That would bring the gap, which stood at about $2 billion just three years ago, under $200 million, thanks to a combination of cuts in expected spending growth and tax increases adopted over the past two years. The projected gap is small enough -- in a state budget of more than $35 billion -- that it likely could be closed without further tax increases or spending cuts on the scale of those made in recent years.
Taxes might not be entirely off the table, however. Revenue for transportation, which for the most part is financed separately from the state's operating budget, has been lagging far behind what experts say is needed. Taxes on gasoline -- or other revenue producers for roads and transit -- could become part of O'Malley's agenda.
The indicators for the general fund, which finances most other state programs, are looking healthier than they have since O'Malley took office in January 2007.
State analysts believe tax revenue in 2013 will be higher than thought even a few months ago -- a rare uptick after years of gloomy news. The increase is driven by an expected 38 percent rise in revenue from corporate income taxes amid improved earnings.
Meanwhile, personal income tax payments are expected to be up by 8 percent this year and 3.7 percent next year -- with the strong 2013 numbers driven by an expectation that many wealthy Marylanders will reap capital gains by selling off investments to avert higher taxes in case Congress does not reach a budget deal by the fiscal cliff deadline.
The Maryland Constitution requires that the state budget be in balance, and each year the General Assembly has reached that goal by the end of the session.
But each year since 2007, as the weather turned cold and the session drew near, state fiscal analysts have been offering grim predictions. In December 2010, with the state's economy battered by the recession, they warned lawmakers that the structural deficit was nearing $2 billion.
Lawmakers had hoped to eliminate the gap entirely in next year's budget, but the Spending Affordability Committee voted Thursday to keep open the option of taking an extra year to do so.
Del. John Bohanan, House co-chair of the panel, defended the decision. He said that by doing so, the legislature could fulfill its goals of fully funding such long-standing programs as aid to community colleges and private universities.
Bohanan, a Southern Maryland Democrat, said the recommendation calls for the governor to come within 1 percent of full elimination of the long-term deficit. With the right combination of legislative cuts and good revenue news, the structural gap could be closed in the coming year, he said.
"Essentially, we're saying we've eliminated it for all intents and purposes," Bohanan said.
House Minority Leader Anthony J. O'Donnell tried to amend the spending affordability goal to require elimination of the entire $383 million gap now. He was voted down, 17-3, joined by two other Republicans.
As he left, the Calvert County Republican expressed dissatisfaction with the outcome. "I still think we're spending too much money," he said.
But Senate President Thomas V. Mike Miller called it "a bit of a miracle" that O'Malley and the legislature will have been able to narrow a $2 billion gap to less than $200 million.
"I just want to congratulate the state of Maryland for coming together and working harmoniously," he said.
Miller, a Calvert County Democrat known for his long memory, complimented O'Malley -- who has generally abided by the legislature's fiscal guidelines -- while taking a dig at governors past.
"We thank the governor for staying within spending affordability limits. There's governors, Republican and Democrat, that have not done that," Miller said.
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The U.S. incarcerates its citizens at a rate roughly <a href="http://www.parade.com/news/2009/03/why-we-must-fix-our-prisons.html" target="_hplink">five times higher than the global average</a>. We have about 5 percent of the world's population, but 25 percent of its prisoners, according to The Economist,. This status quo costs our local, state and federal governments a combined $68 billion a year -- all of which becomes a federal problem during recessions, when states look to Washington for fiscal relief. Over the standard 10-year budget window used in Congress, that's a $680 billion hit to the deficit. Solving longstanding prison problems -- releasing elderly convicts unlikely to commit crimes, offering treatment or counseling as an alternative to prison for non-violent offenders, slightly shortening the sentences of well-behaved inmates, and substituting probation for more jail-time -- would do wonders for government spending.
End Of The Drug War
The federal government spends more than <a href="http://www.cbsnews.com/8301-18563_162-20072096.html" target="_hplink">$15 billion a year</a> investigating and prosecuting the War on Drugs. That's $150 billion in Washington budget-speak, and it doesn't include the far higher costs of incarcerating millions of people for doing drugs. This money isn't getting the government the results it wants. As drug war budgets balloon, drug use escalates. Ending the Drug War offers the government two separate budget boons. In addition to saving all the money spending investigating, prosecuting and incarcerating drug offenders, Uncle Sam could actually regulate and tax drugs like marijuana, generating new revenue. Studies by pot legalization advocates indicate that fully legalizing weed in California would yield <a href="http://canorml.org/background/CA_legalization2.html" target="_hplink">up to $18 billion annually</a> for that state's government alone. For the feds, the benefits are even sweeter.
Let Medicare Negotiate With Big Pharma
The U.S. has <a href="http://www.reuters.com/article/2009/06/01/us-healthcare-costs-sb-idUSTRE5504Z320090601" target="_hplink">higher health care costs than any other country</a>. We spend over 15 percent of our total economic output each year on health care -- roughly 50 percent more than Canada, and double what the U.K. spends. Why? The American private health care system is inefficient, and the intellectual property rules involving medication in the U.S. can make prescription drugs much more expensive than in other countries. Medicare currently spends about $50 billion a year on prescription drugs. According to economist Dean Baker, <a href="http://www.cepr.net/documents/publications/intellectual_property_2004_09.pdf" target="_hplink">Americans spend roughly 10 times more than they need to</a> on prescription drugs as a result of our unique intellectual property standards. These savings for the government, of course, would come from the pockets of major pharmaceutical companies, currently among the most profitable corporations the world has ever known. They also exercise tremendous clout inside the Beltway. President Barack Obama even <a href="http://www.huffingtonpost.com/2012/09/02/barack-obama-politics_n_1847947.html" target="_hplink">guaranteed drug companies more restrictive -- and lucrative -- intellectual property standards</a> in order to garner their support for the Affordable Care Act.
Offshore Tax Havens
The U.S. Treasury Department estimates that it loses about <a href="http://www.ctj.org/pdf/stopact.pdf" target="_hplink">$100 billion a year</a> in revenue due to offshore tax haven abuses. Sen. Carl Levin (D-Mich.) has been pushing legislation for years to rein in this absurd tax maneuvering, but corporate lobbying on Capitol Hill has prevented the bill from becoming law.
Deprivatize Government Contract Work
In recent years, the federal government has privatized an enormous portion of public projects to government contractors. Over the past decade, the federal government's staffing has held steady, while the number of federal contractors has <a href="http://pogoarchives.org/m/co/igf/bad-business-report-only-2011.pdf" target="_hplink">increased by millions</a>. This outsourcing has resulted in much higher costs for the government than would be incurred by simply doing the work in-house. On average, contractors are paid <a href="http://pogoarchives.org/m/co/igf/bad-business-report-only-2011.pdf" target="_hplink">nearly double</a> what a comparable federal employee would receive for the same job, according to the Project On Government Oversight.
Print More Money
There's an old saying in economics: You have to print money to make money. <a href="http://www.huffingtonpost.com/2012/10/09/underwear-sales-growth-economy_n_1952214.html" target="_hplink">Okay, there's no such saying</a>. Nevertheless, the great boogeyman of many conservative economic doctrines -- inflation -- isn't such a bad idea during periods where much of the citizenry is drowning in debt. Inflation is by no means a perfect remedy: it's a stealth cut to workers' wages. But it also has many benefits that are often unacknowledged by the Washington intelligentsia. Inflation makes housing debt, student loan debt and any other private-sector debt more manageable. Today, when <a href="http://www.corelogic.com/about-us/researchtrends/asset_upload_file448_16434.pdf" target="_hplink">10.8 million</a> homes are underwater -- meaning borrowers owe banks than their houses are worth, moderate inflation could ease that debt burden. By effectively reducing monthly bills, moderate inflation could actually put more money in the pockets of these homeowners to spend elsewhere, thus stimulating the economy. Moderate inflation -- 5 percent or so -- could also help alleviate the <a href="http://www.cbsnews.com/8301-505145_162-57555780/student-loan-debt-nears-$1-trillion-is-it-the-new-subprime/" target="_hplink">$1 trillion</a> in student debt currently plaguing America's graduates. Make no mistake -- hyperinflation of 20 percent, 30 percent or more -- is bad. But the U.S. has ways to crush inflation when it gets out of hand, as proven by the Federal Reserve under then-Chairman Paul Volcker in the early-1980s.
Print Less Money
The government prints a <em>lot</em> of $1 bills. But it turns out that minting $1 coins is much, much cheaper. Over the course of 30 years, the government could save $4.4 billion by switching from dollar bills to dollar coins. Here's looking at you, <a href="http://www.usmint.gov/mint_programs/nativeamerican/" target="_hplink">Sacagawea</a>.
Immigration: Less Detention, More Ankle Bracelets
The government spends <a href="http://newamericamedia.org/2012/04/ice-slow-to-embrace-alternatives-to-immigrant-detention.php" target="_hplink"> $122 per person, per day</a> detaining immigrants who are considered safe and unlikely to commit crimes. The government has plenty of other options available to monitor such people, at a cost of as little as $15 per person. For the first 205 years of America's existence, there was no federal system for detaining immigrants. The process began in 1981.
Financial Speculation Tax
Wall Street loves to gamble. In good times, financial speculation is the source of tremendous profits in America's banking system, but when the bets go bad, the government picks up the tab, as evidenced by the epic bank bailouts of 2008 and 2009. Unfortunately, this speculation is difficult to define in legalistic terminology and even more difficult to police. One solution? By taxing every financial trade at the ultra-low rate of 0.25 percent, the U.S. government can impose a modest incentive against gambling for the sheer sake of gambling. If there's an immediate cost to placing a bet, a lot of traders will choose not to bet. What's more, this tax could raise about <a href="http://www.ips-dc.org/media/why_a_financial_transaction_tax" target="_hplink">$150 billion a year</a> for the federal government.
Taxing greenhouse gases would generate $80 billion a year right now, and up to $310 billion a year by 2050, <a href="http://www.brookings.edu/research/papers/2012/07/carbon-tax-mckibbin-morris-wilcoxen" target="_hplink">according to an analysis by the Brookings Institution</a>. It would also help avert catastrophic ecological and economic damage from climate change.