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The Tentacle


September 20, 2007

A Worthy Plan

Tony Soltero

As Gov. Martin O'Malley puts the finishing touches on his budget and tax proposals and prepares them for release, we can all assume that his political opponents have well-honed talking points ready to attack any part of his plan that they find objectionable.

Given that the structural deficit the governor inherited from his predecessor isn't going to go away by itself, there's no doubt that he'll have to make some unpopular choices in addressing it.

This week Baltimore's Sun gave us a sneak preview from where the revenue adjustments will be made. According to the report by Andrew A. Green, Mr. O'Malley is likely to spread the pain as much as possible, making small upward modifications to the state sales tax and the corporate income tax, slapping an extra dollar on the tobacco tax, and perhaps including an offsetting tax decrease for working families and property owners. The gasoline tax will apparently be left alone, thank goodness.

Regrettably, it includes slot-machine revenues as well. Political leaders will do the wrong thing for the right reason far more often than they do the right thing for the wrong reason; and slots are just another data point in this regard. As disheartening as it is to see Maryland lapse into these quick-fix revenue solutions just because they're politically "doable," all that remains is to hope that the ancillary problems that inevitably crop up, when the state relies on gambling interests for money, don't come up and bite us too hard.

But let's hold our noses at the slot "solution" and instead examine the rest of the proposed package. It is within the character of Democrats to emphasize progressive taxes over regressive ones, and for good reason - no citizen should ever be in a position in which he or she cannot afford to pay his taxes. And weaving progressivity into the tax structure minimizes the chances of that occurring.

With that in mind, Mr. O'Malley's proposal, should it hew to what the article suggests, is largely a strong reaffirmation of these values.

While the sales tax is inherently regressive, the governor is going to be mitigating its impact in the form of an income tax cut for lower-bracket families, and tax reductions in other areas that disproportionately impact those Marylanders whose incomes derive primarily from wages and salaries (as opposed to dividends).

If property taxes are suitably reduced and the earned-income tax credit is expanded, the average wage-earner in the state will likely see a small improvement in his personal financial situation.

Unless he's a smoker, of course. And that leads us to the tobacco tax, which will likely be the most controversial part of the package.

I am of two minds about so-called "sin taxes." It is true that taxes on tobacco and alcohol are regressive, and impact lower-income citizens far more than they do affluent ones. But tobacco and alcohol (unlike, say, food and clothing) are strictly voluntary purchases, largely financed by discretionary income. A smoker can quit if he wants to (not that it's easy, of course, but smoking is not necessary to live).

And the over-consumption of tobacco and alcohol leads to significant public health problems in the long run. So, if extra taxes on such products ultimately lead to less consumption of them, then we can conclude that they're the least "bad" of regressive taxes.

In a less than perfect world, that's a worthwhile compromise. Unlike with the slot machines, there are compelling arguments for raising the cigarette tax.

Of course, hecklers will cite the projected corporate-tax hike as "evidence" that Maryland is bad for business. But is it really?

Maryland enjoys the highest per-capita income in the nation, one of America's best-developed infrastructures (strained as it is), a strong educational system that produces many highly-skilled workers, and a good climate for research - all positive factors when it comes to evaluating a state's economic competitiveness.

Not to mention, of course, that Maryland's corporate tax rates are still substantially lower than those of other industrial, high-wealth states. The current 7% tax rate in Maryland is still three points lower than the rate in Pennsylvania, and two and a half points lower than New Jersey's.

The lowest-tax states in America include Alabama and Mississippi. Toyota's decision a couple of years ago to bypass locating a plant in Alabama because the state's abysmal educational system had failed to produce qualified workers provides ample evidence that perhaps taxes aren't the end-all and be-all of things. If they were, companies would be flocking to Biloxi and Montgomery right and left.

We're still yet to see Governor O'Malley's final, formal proposals. And, of course, the General Assembly will have its chop - as it should.

But if the advance notices are any indication, it appears that Mr. O'Malley is showing sensible leadership in trying to make the best of a difficult fiscal situation while still delivering what he was voted in to do.

If he can pull it off and rescue the state budget, he might be poised to enjoy the remarkable rise in popularity Mark Warner experienced in Virginia when he cleaned up his state's financial messes.

Now, let's not get back into deficit mode, OK?



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