Commentary

Another Tax Increase Legacy from Martin O’Malley

Navy-blue Marylanders have broken form and elected a Republican governor, Larry Hogan, who scored a five-point victory last November with a strong message of fiscal responsibility. Other state politicians haven’t gotten the message.

Exhibit A: Prince George’s County Executive Rushern Baker, who last week proposed hiking his constituents’ property taxes by a remarkable 15.6% and boosting spending by 8.2% in the coming fiscal year. Much of the bounty will go to raise teachers’ salaries from the current average of $65,000 to about $75,000.

Never mind the county’s teachers already are paid 15% more than the U.S. average, according to the National Center for Education Statistics. Or that shoveling money at teachers unions mainly delivers their political loyalty rather than educational benefits.

Mr. Baker is betting that county residents will be unable to resist his assurances that this is all “for the children.” But we’ve seen this movie before. In the 1970s the locals went down a similar tax-and-spend road, saw disaster and changed course.

The would-be presidential candidate created a loophole that could be used to bust local property-tax caps.

Like most American suburbs, Prince George’s County grew rapidly after World War II; the population increased sevenfold between 1940 and 1970. To cope with the mixed blessings of development and supply a generous array of services to new residents, it spent aggressively on social programs and public works—especially schools. By the mid-1970s the property-tax burden was the second highest in the state—trailing only Baltimore City, then suffering its third straight decade of population loss (of an eventual six).

Flight from an old industrial city was thought inevitable at the time, but observers were shocked to see that folks in leafy Prince George’s County were also voting with their feet. A 1977 Washington Post article reported that 34,000 county residents left between 1970 and 1976 and pinned much of the blame on local taxes. “I finally said to heck with it,” one Carolina-bound retiree told the Post. “ I got tired of fighting the higher costs.”

Fortunately two maverick Democrats—a liberal veteran of state politics named William Goodman and a first-time candidate named David Bird—understood the long-term threat and responded with a tax-limiting county referendum in 1978. Mr. Bird explained simply that “the property tax is running people out of their homes.”

Their “Tax Reform Initiative by Marylanders”—TRIM—won 70% of the vote. Ultimately, it capped the property-tax rate under 1% of assessed value and imposed spending discipline on a reluctant political elite. Population growth resumed almost immediately, soaring 21% during the 1980s and ’90s. In 1996 a referendum to repeal TRIM was defeated handily.

Today Prince George’s County is the wealthiest majority-black county in the U.S., with a median household income 39% above the national level and a poverty rate 42% below it. Naturally, some of county’s superior performance owes to its proximity to our nation’s capital. But the county is in the same spot as it was in the 1970s, when it shed population and jobs to its neighbors, even as the federal government exploded in size. TRIM reversed the exodus.

A property-tax cap, particularly in a liberal jurisdiction, is like a fiscal guardrail. It tells potential investors, “Yes, we’re on the progressive road here, but there’s a limit. We won’t—in fact, we can’t—tax away some of the value of your property whenever politically expedient.” So investors are more likely to make the kinds of long-term commitments that fuel job creation, wage growth and stability.

Since TRIM is still in place and highly popular, how does Mr. Baker think he can get away with this capital levy? The state, he believes, has created a loophole allowing him to defy voters and ignore the property-tax cap.

In 2012, Maryland’s then-Gov. Martin O’Malley signed a bill requiring “maintenance of effort” in education spending by local governments. The law now punishes localities that fail to put school-spending growth on autopilot. In partial compensation, the law professes to give local officials “authority to exceed local tax limitations to fund education,” voters be damned.

Mr. Baker is a lame duck, but the budget debates will tell us whether Prince George’s council members are similarly cavalier about public sentiment. Yet even if they roll over politically and give Mr. Baker a blank check, a legal battle would surely follow. It is by no means clear that the loophole on which this plan depends will pass constitutional muster, and that the state may dictate local budget policy and invalidate voter referendums so easily.

Gov. Hogan should relish the constitutional fight. Faced with a Democratic-controlled legislature, he has been hard-pressed to implement his budget and tax priorities. Challenging maintenance of effort in the courts might be his best chance to overturn the automatic spending formulas that have led to Maryland’s chronic structural deficits and, as well, to protect local sovereignty.

Preserving the fiscal guardrail in Prince George’s County and the four other Maryland counties with the wisdom to have installed them will encourage investment in a state with an overall business climate that the Tax Foundation has ranked 40th in the nation for three years running. Without them, we veer left—into a ditch.

Steve H. Hanke is a professor of applied economics at Johns Hopkins University. Mr. Walters is a professor of economics at Loyola University Maryland and the author of “Boom Towns: Restoring the Urban American Dream” (Stanford University Press, 2014).