Tax Increases or Budget Cuts Likely a Reality

At all layers of government, federal, state, county, and local, a long-coming reconning is on the horizon. Well, more walking up the driveway.

At the federal level, the U.S. reached an eye-popping $1.8 trillion deficit this year. The difference between what the government took in and what it spent in a single year's budget was larger than the entire federal budget in 2001.

At the state level, where Maryland law requires a balanced budget, substantial federal pandemic aid has run dry and the state faces a $300 million deficit. The governor has already announced major cuts to state transportation funding, and absent a tax rate increase, more cuts will be needed in education, social services, parks, and, or state law enforcement.

Many of those cuts will be felt at the county and city level, which rely heavily on state dollars. Prince George's $2.7 billion education budget is half-funded by the state. Cuts in state support will either result in closed schools, fewer teachers, and larger classroom sizes, or will come directly out of county residents' pockets in the form of higher property taxes.

The city is less dependent on state support, though cuts in transportation funding will mean more delays to state and local road projects. We can forget expansions to state highways 197, 450, or 301. Expect indefinite delays to county road fixes, Racetrack, Church, or Chapel Forge.

All of this raises the question of where our tax dollars go in the first place. Maryland's economy is larger today than at any point in its history. We boast the lowest unemployment in the nation, at a record 1.8% (an economy is considered healthy with an unemployment rate between 4% and 6%). With a strong economy and no shortage of jobs, where is all the state's tax money going?

The short answer is same as anywhere else: salaries and benefits. Though because we're talking about state government, we have to throw in pensions as well. Governments are often not as wasteful as people imagine. Yes, they tend to be heavy on administration. Every new law means someone has to implement, interpret, and enforce it, and Maryland passes some 1,000 new laws every year. But governments, believe it or not, are struggling to find workers, and many agencies are genuinely short staffed.

No, the real problem is the cost of legacy workers. Yesterday's teachers, police officers, fire-fighters, and, yes, the desk-dwelling administrators. Because unlike the private sector which will contribute to your 401(k), offer the occasional bonus, and maybe send you on your way with a severance, the state will pay a portion of your salary and cover your health benefits for much of the rest of your life. A typical police officer will retire at 55 and, provided they started working at 20, will draw 80% of their salary for life, and 100% of their health benefits until they reach Medicare age, though often with the option on remaining on their state health plan longer.

Unsurprisingly, paying workers most of their salary from age 55 to 70, 80, 90 years old, as well as covering most of their health expenses (healthcare doesn't get less expensive with age), creates a bit of a problem for state budgets. For decades, the longterm planned solution was to hope for an ever growing pool of taxpayers contributing incrementally a little more every year until someone else figured out a better solution.

The choices facing our leaders are fairly straightforward. Do we cut? What do we cut? Do we raise taxes? Which taxes do we raise?

My prediction is the State of Maryland will ultimately make very few cuts to their budget, opting to push unfunded mandates, i.e.: counties and cities having to take on more and figure out how to pay for it themselves. Maryland's legislature has a culture of preferring any alternative to budget cuts. Counties and cities, in turn, will be forced to make painful decisions, and I don't expect a strong appetite for tax increases even in ostensibly progressive jurisdictions like Prince George's. Instead, there will be much haggling between counties and municipalities over who pays for what, with the result that taxpayers ultimately face reduced services and a lot of confusing finger-pointing between county, city, and state leaders.

On the bright side, Maryland's economy is strong. Despite its budget woes, starting from a low unemployment rate and broadly high quality of life satisfaction is far better than the alternative. We're nowhere near the crisis levels of the Great Recession where governments were having to cut services and fire public employees against a backdrop of skyrocketing unemployment, home foreclosures, and financial misery. The state also has a tremendous opportunity to course-correct, maybe (though doubtfully) changing its approach to compensation and joining the 21st century where the rest of the employment sector has accepted that pensions are unsustainable–and less preferable to workers who would rather a more competitive salary up front.

All of this is to say that difficult decisions are ahead, though things could be, and have been, far worse. What will help going forward is Marylanders engage their state, county, and local officials understanding that every decision will come with a cost likely born one way or another by average households.