TAX NEWS - June 2010
O'Malley, Ehrlich have fuzzy views of each other's taxes, spending
Whom do voters trust more to control taxes and spending: Gov. Martin O'Malley or his Republican rival, former governor Robert L. Ehrlich Jr.?
In a state that has generally fared better in the recession than others -- but has also raised a bevy of taxes over the past eight years -- each is racing to cast his opponent as a tax-happy, out-of-control big spender.
In so doing, each has concocted a convenient history of his opponent's time in Annapolis and assigned sinister motives that often only make sense in the candidates' jumbled versions of the past.
The two candidates' pithy campaign lines about egregious tax and spending changes almost always omit any nod to the dire budget situation the other faced. And through a hail of numbers, they each grossly inflate totals for the other's spending and tax increases by counting the same cuts, taxes and fees over and over again.
To hear Ehrlich tell it on the campaign trail, O'Malley and the state's Democratic-controlled legislature have run amok in the past four years.
O'Malley increased spending even as the housing crisis loomed, Ehrlich says, and it was all just a setup so O'Malley could later claim that he had no choice in 2007 but to lead Democrats to raise a heap of new taxes -- sales, income and corporate, as well as ones on car titles, cigarettes and electronic bingo.
"They spent beyond our means, and we spend within our budget. They kill jobs. We help create them. They whine, and we lead," Ehrlich has told crowds of cheering supporters.
By O'Malley's math, Ehrlich committed the bigger budget sins during the previous four years. He raised property taxes, let tuition for state university students soar by more than 40 percent and, when state coffers were flush with housing-bubble money, engineered Maryland's biggest single-year spending increase in decades, funding programs to please both friends and foes before he ran for reelection.
"He wants to take Maryland back -- back to what?" O'Malley charges each time he takes the stump. "Back to a time when special interests had control in Annapolis and [Ehrlich] proposed $3 billion in new tax increases and the largest spending increase of any governor?"
So where does the truth lie?
As governor, Ehrlich made good on a pledge not to raise the income tax or sales tax. But he did raise property taxes for the first time in decades.
Ehrlich also raised more fees than any governor in the past 25 years. His philosophy was that they were better than broad tax increases; government should charge for services, as a business would. As such, people who sought to register a car or business, visit a state park, or use a slew of other services paid more. Ehrlich's approach extended to public universities, where tuition increases compensated for what he said the state couldn't afford.
O'Malley persuaded the legislature to pass the largest package of tax increases in state history, in real-dollar terms, primarily to cover unfunded education costs. It raised sales, income and other taxes that totaled $1.4 billion a year, according to estimates at the time.
But his taxes generally sought to put a bigger percentage of the burden on higher earners: The wealthy saw their income taxes go up, while many middle- and lower-income earners got a break. The glaring exception was the sales tax, which arguably hit the state's poor harder than other groups.
In some cases, it's difficult to keep track of who raised which tax or fee:
Ehrlich raised fees to license corporations. O'Malley? Corporate income taxes. Ehrlich raised car registration fees; O'Malley, car-titling taxes. The list goes on.
There's also overlap on the spending side. Education had the single biggest increase under both governors, and neither could do much about it. An overhaul set in motion before either took office ramped up spending on K-12 education to an additional $1.3 billion annually on a set schedule through 2008.
The big issue
The face-off over taxes and spending has emerged as the most contentious point of debate between Ehrlich and O'Malley.
Ehrlich began his campaign by pledging to repeal O'Malley's 2007 sales tax increase. But he has not said how he would cover the lost revenue, and legislative leaders have said the repeal would stand no chance in the General Assembly.
On the other side, O'Malley's first radio ad -- titled "Fantasy Land" -- sought to discredit Ehrlich's claims of being a fiscal conservative. O'Malley has also hit Ehrlich hard on the property tax increase and the significant rise in spending in 2006.
A Washington Post poll conducted last month revealed that the debate will be more important to Ehrlich. Taxes, the state's economy and deficit are the only areas in which voters said they would trust Ehrlich to do a better job. And respondents said those three things would be among the chief issues in determining how to vote in November.
Whoever wins will be faced with billion-dollar budget shortfalls for years to come, according to state estimates, and they have started trading accusations about what the other might do.
Ehrlich warns that O'Malley would push through a "massive tax increase," larger in scope than that in 2007.
O'Malley has accused Ehrlich of being a "scaremonger" but declined to rule out raising taxes if necessary to preserve public safety and other priorities, but an increase is something he says he does not want to do.
Using their power
Ehrlich won in 2002 in part on a promise to balance the state's widening budget shortfall after the Sept. 11, 2001, terrorist attacks and dot-com collapse without raising sales or income taxes.
To fill a $1.7 billion hole, he introduced a budget that relied on a combination of cuts, one-time fund shifts and $400 million from licensing slot machines.
With only weeks to go before the state's budget deadline, however, tax-revenue estimates dropped precipitously, and the revenue Ehrlich had penciled in from slots was deemed to be overestimated by half. Ehrlich responded by proposing to raise property taxes. He couched it as "the elimination of a subsidy," because by law, state property tax collections were supposed to cover the state's debt service, but prior Democratic administrations had borrowed from elsewhere rather than raise the rate.
After that, Ehrlich generally clamped down on spending until a windfall from the housing boom left the state with a surplus. That prompted him to introduce a budget with a near-10 percent increase in spending in his final year. Democrats added even more to that plan, and Ehrlich ultimately went along with an 11.4 percent jump, the state's first double-digit growth in decades.
A year later, when O'Malley entered office, nearly $1 billion of the windfall remained. He needed most of it for the scheduled increase in education spending and other locked-in costs. Ehrlich had dealt with the rising education costs each year in piecemeal fashion after disbanding a commission that Democrats had set up before his election to recommend several new tax increases.
In a 2007 special session, O'Malley and the General Assembly approved a broad tax package and sent voters a proposal to allow slots casinos. O'Malley thought, the measures would finally solve Maryland's spending and revenue imbalance.
Almost immediately, however, his plan was overcome by the collapse of the housing market.
In his campaign, O'Malley frequently adds together all the shortfalls since then to say he has "cut $5.4 billion" from the budget, even though economists and state budget analysts question that math. Many were the same cuts, just used year after year, and more than $2 billion weren't cuts at all but fund shifts and transfers.
In similar fashion, O'Malley adds up all of the increased fees and property taxes collected over the prior four years of Ehrlich's term -- even those collected despite a veto by Ehrlich of an HMO tax -- to say his predecessor "raised taxes by $3 billion." At most, Ehrlich's property tax increase collected about $200 million a year.
By the same fuzzy math, Ehrlich backers say O'Malley's tax increases add up to nearly $5 billion.
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