Wednesday, April 07, 2010

How Would Ehrlich Balance the Budget?

At his campaign announcement this morning, former GOP Governor Bob Ehrlich said he would seek a repeal of the 2007 increase in the sales tax from 5% to 6%. But given the state’s massive fiscal problems, how can Ehrlich do that and meet his constitutional requirement to balance the budget?

Maryland is facing gigantic budget deficits as far as the eye can see. A November fiscal update shows structural deficits of more than $2 billion per year every year through FY 2015.

A sales tax cut would make matters worse. A group of Republican Delegates sponsored a bill this year that would reduce the sales tax from 6% to 5%, which is exactly what Ehrlich is proposing. The bill’s fiscal note estimates that the cut would deprive the state of more than $700 million a year by FY 2014. And since the Transportation Trust Fund receives a small portion of the sales tax, transportation spending – a major priority of the business community – would take a hit too.

Here is what the state structural deficits would look like before and after the tax cut.

Let’s keep in mind how big these deficits would be. Three billion dollars is almost a quarter of the state’s $13 billion general fund in FY 2010. That sum exceeds what the state spends on higher education, the state police, foster care payments and the judiciary combined.

So how would Ehrlich balance the budget? His campaign statement does not include a no-new-taxes pledge but does promise to “fix” the budget and help small businesses. It is noteworthy that immediately after his election last time, Ehrlich raised property taxes – provoking grumbles from Republicans that he had gone back on his pledge to avoid new taxes in 2002. And if Ehrlich really wants to help small businesses, he would lower the top marginal income tax rates, which apply to business income earned by sole proprietors. Why didn’t he make that pledge instead?

The State Democrats would like the media to ask Ehrlich about his law firm activities and his former protégé, RNC Chairman Michael Steele. Our advice is to ask Ehrlich to reconcile his impossible fiscal promises.