With one month until the start of the 90-day legislative session, Maryland lawmakers will find themselves debating what to do about recent reports from the Spending Affordability Committee that the state will have a $339 million structural deficit for the upcoming fiscal year 2018 if it maintains current spending levels. According to projections from Maryland’s Department of Legislative Services, by fiscal year 2022, the structural deficit will exceed $1.3 billion.
In an October briefing, executive director of the Department of Legislative Services, Warren Deschenaux told policymakers to “get real” on addressing the continuing gap between spending and revenues. The gap was revealed after a significant write-down in tax revenues from previously projected levels, which the Department of Legislative Services, Department of Budget and Management and comptroller’s office pointed to a high degree of volatility in revenues. In large part, capital gains taxes, which come from a very small segment of the population, were overestimated.
While the agencies and offices are working to formulate policies to reduce volatility in revenue estimates, the problem of Maryland’s projected structural deficit remains. Throughout the fiscal year 2018-2022 period, spending is projected to increase 4.9 percent, while revenues will only grow 3.7 percent. There is the general consensus that slow economic growth was a major driver of reduced revenues, and that the state, much like the rest of the world, should continue to expect slow growth for the foreseeable future. Facing slow economic growth and modest revenues as a result, what can lawmakers do to bring Maryland’s structural deficit under control?
Understanding Maryland’s structural deficit comes from an understanding of what will be driving projected spending upward over the next five years. Department of Legislative Services reports show that the two largest sources of growth will be entitlement spending (mainly in the form of increased Medicaid spending passed off from the government), and other forms of mandated spending. The average annual growth of spending in these categories is 8 percent and 4.6 percent respectively, and they combine for 67 percent of spending growth over the fiscal year 2018-2022 period.
Last year, Gov. Larry Hogan spent the legislative session asking for the legislature to reform mandated spending provisions, identifying them as a chronic source of budget difficulties for the state. With the most recent facts and figures on spending and revenues, it should be even more clear to the legislature that his assessment is indeed accurate. While the governor is responsible for producing a budget that the legislature can only cut, his ability to effectively bring spending growth in line with revenues is limited by laws mandating spending increases that often exceed rates of revenue growth.
So how can policymakers address Maryland’s ongoing structural deficit problem? From a revenues standpoint, tax increases should be off the table. Policymakers should recognize that a major reason for Hogan’s election in the first place was a general anger at the tax increases that have made Maryland a highly taxed state. Further hikes in corporate and income taxes would only harm Maryland’s economic climate. While economic growth would also help drive revenues, policymakers should understand that many forces in the economy are simply out of the hands of state lawmakers, and that economic growth will likely remain slow for the foreseeable future. At the same time, bipartisan regulatory reform is one way to drive economic growth and make doing business in Maryland less onerous, and could be an area of progress this upcoming legislative session.
Maryland’s structural deficit can only effectively be addressed by taking a hard look at the drivers of spending, primarily mandated spending. Hogan and the legislature should use this upcoming session to form agreements that allow the governor to effectively tackle the state’s structural deficit and address the long-term drivers of spending growth.
Sam Wallace is a public policy graduate student. He can be reached at samhwallace@gmail.com.
