Maryland Comptroller William Donald Schaefer's recent announcement that tax revenues are lagging behind expectations has heightened budget fears in Annapolis. According to some observers, the state's fiscal woes are primarily the result of insufficient revenue in the wake of tax cuts passed in the late 1990s.
But critics counter that increased spending is to blame for the budget shortfall. Who is correct? And, more importantly, what can be done to prevent a series of deficits from plaguing the state over the next decade?
Back in 1997, Maryland cut personal income tax rates, which at that time were among the highest in the nation. The cuts reduced state revenues by approximately $1.4 billion over the ensuing five years. Also, beginning in 1997, state expenditures soared, increasing by $3.5 billion by 2002 — a 47 percent increase. Neither the tax cuts nor the spending growth were helpful in avoiding the current morass, but it is fair to say the $3.5 billion spending increase deserves more of the blame for the budget shortfall.
Of necessity, the Old Line State must adopt tax increases or spending cuts — or some combination of the two — to bring its budget back into balance. But regardless of how the state rectifies its 2003 books, Maryland must find a long-term way of imposing fiscal discipline on itself, or a string of annual shortfalls will become a reality. The best way to do this may be for Maryland to adopt a Tax and Expenditure Limit (TEL).
TELs place a cap on how much expenditures or revenues can increase in a given fiscal year. During the early 1990s, two states — Colorado and Washington — enacted TELs that established limits on budgetary growth, and, as a result, both states successfully moderated their spending. According to data from the National Association of State Budget Officers, Washington ranked 46th in per capita state expenditure growth during the 1990s. Similarly, between 1993 and 2000, Colorado ranked 41st in per capita state and local expenditure growth, according to the U.S. Census Bureau.
As a result, residents of both states enjoyed a considerable amount of tax relief. Between 1997 and 2002, Colorado residents received tax rebates every year, totaling more than $3.2 billion. In Washington State, surpluses were used to first lower and then abolish the car tax, saving residents more than $1.3 billion. Not surprisingly, Colorado and Washington ranked first and second in terms of aggregate tax reductions during the late 1990s.
If, in 1997, Maryland had adopted a TEL, state expenditures would be considerably lower and the budget outlook far less bleak. The excess revenues could have been used to reduce taxes or held in reserve in the state's "Rainy Day Fund" to cover future fiscal shortfalls. Such reserves could have gone a long way toward resolving Maryland's current fiscal crisis.
Even in this economic lean time, adopting a TEL would benefit the state by forcing the governor and lawmakers to seek long-term solutions to Maryland's budget woes instead of feverishly plugging holes and hoping for an improved fiscal situation next year. However, simply enacting a TEL does not ensure a state's sound fiscal health. In fact, Washington State's current deficit is due partly to the fact that the state's legislature suspended the TEL in 2000 and spent in excess of the limit. If Maryland is to adopt a TEL, it should be constitutional and not statutory. Together with the state constitution's mandate for a balanced budget, the TEL provision would require the governor and lawmakers to maintain fiscal discipline.
Overall, Colorado's Taxpayer's Bill of Rights and Washington's I-601 have succeeded where Annapolis failed — the TELs have limited the growth of government, provided tax relief for their residents, and placed their states in a strong fiscal position relative to others. If Maryland leaders want to avoid a seemingly endless series of fiscal shortfalls in the future, they would do well to follow the example set by Colorado and Washington and enact a TEL.