TAX TALK

Published by the Section of Taxation of the Maryland State Bar Association, Inc.

· Jonathan Z. May, Chair ·  
Stephanie Ketchum, Editor, 
Catherine Mary Rafferty, Asst. Editor

THE COMMISSION ON MARYLAND’S FISCAL STRUCTURE – INTERIM REPORT
By Karen T. Syrylo, CPA

The Commission 

The Commission on Maryland’s Fiscal Structure released its interim report on December 15, 2002.  This Commission is otherwise known as the HB1 Commission, for the designation of last year’s legislation that established it, or the Puddester Commission, for its chairman, Fred W. Puddester, a former Secretary of the Department of Budget and Management.  This article is a brief synopsis of the commission’s interim report and work to date.

This Commission is comprised of legislators, the Comptroller, representatives of the counties and municipalities, a representative from the Maryland Chamber of Commerce, a representative from the Maryland Association of Nonprofit Organizations, and several members of the public appointed by the Governor.  It is supported by staff from Legislative Services, the Comptroller, and the Department of Business and Economic Development.

Its Mission and Work to Date

House Bill 1 of the 2002 legislative session charged the Commission to “review and evaluate the State’s current budget and fiscal structure and make recommendations for:”  (1) changes to the state budget process that would allow for more effective development and enactment of the budget; (2) ensuring that the State will have a progressive tax structure; (3) funding sources for education, transportation and health care; (4) addressing inefficiencies in and improvement to State government services and operations; and (5) changes to the State’s tax structure that would allow the State to be more competitive with surrounding states regarding economic development. 

In conducting its work to date, the commission held a series of briefings on topics related to its goals.  It also held a meeting in which it received public testimony from interested parties regarding budget and revenue options. 

The interim report lists items intended for the Governor and General Assembly’s consideration for the 2003 legislative session to balance both the 2003 and 2004 budgets.  The executive summary says that “The commission views Maryland’s current fiscal situation as both a short-term and long-term problem.”  The commission intends that its next work will be to look at “longer-term solutions that will allow the State to better align its budget and tax structure to meet future fiscal challenges.”  The final report from the commission is due September 30, 2003.

“Options” Listed In the Interim Report

First, it is important to note that the approach of the interim report is as a list of options, a menu.  The commission’s report at times uses the phrase “the commission suggests” and often uses the words “could” and “option.”  In fact the executive summary says “in an effort to provide as many options as possible…”  It is important to read the report as such, a list of options from which to choose, and not as a specific formula or complete plan of recommendations.

For those of you who haven’t had the chance to read the 27-page report, plus appendices, we thought it would be helpful to reprint the commission’s selected options in the bullet list format attached here.  You can view the entire report, as well as other details about the commission’s proceedings on their website at www.mlis.state.md.us/other/MD_Fiscal_Structure/Options.pdf. 

Of much interest to attorneys and business people is Appendix 3 that accompanies the report, “Budget and Revenue Options” prepared by the Department of Legislative Services Office of Policy Analysis.  This 6-page list contains the staff’s ideas for balancing the budgets for 2003 and 2004, and potential revenue items, together with the related estimated amount of revenue impact created by each item.  Once again, this list is of options, possibilities.  Chairman Puddester’s November 15, 2002 cover letter to the DLS list states:  “Be assured, however, that this report is no more than a starting point, and that the staff concepts reported do not reflect my position or the position of any of the commission members.”  One finds in the staff’s list the veritable kitchen sink, and details that tax increase advocates are reading with interest.  For example, it lists several categories of services and the revenue result of subjecting those services to sales tax:  business services, information, professional, transportation, financial, personal, and repair services.  And it lists the impacts of repealing certain current sales tax exemptions:  food, residential sales of energy, property used in manufacturing, medical and health supplies, sales for agricultural purposes, sales to charitable/educational/religious organizations.

Conclusion

We know that the Governor and legislators have reviewed the commission’s interim report.  We also know that various advocacy groups have reviewed the commission’s work and are referring to it in their own platforms.  As this article is being written, Governor Ehrlich has just released his proposed budget. In summary, the Governor’s plan calls for legalization of slot machines to secure the related licensing fees and operating revenue, program cuts, increased funds for education and health care, reduction of the State payroll (by eliminating currently vacant positions and freezing salaries), and transfers from the Transportation Trust Fund.  The Governor and the General Assembly will have much discussion in their process of passing a balanced budget by the end of the session.  And there are 2 ½ months left in the regular legislative session, plenty of time for individual bills to be proposed; on exactly what topics, we don’t yet know.  It is reasonable to expect some proposed legislation language that looks very familiar to a reader of the commission’s interim report.

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The Commission on Maryland’s Fiscal Structure – Interim Report

December 15, 2002

Budget options for the current fiscal 2003:

• Eliminate state employee one-time bonuses
• Explore additional payroll cost reductions, e.g., abolish currently funded vacant positions, and/or use of furloughs
• Look at savings from a reduction in discretionary grants made by State agencies to private organizations
• Changes to Medicaid prescription process:  preferred drug list and pre-authorization
• Fund transfers:  (1) $50 million from reserves for State employees’ worker’s compensation; (2) $60 million in transfer tax over attainment and unencumbered transfer tax revenue; (3) $10 million in excess highway user revenues
• Recoup PAYGO capital into the general fund would provide $10 million (re-authorize these projects with taxable bonds)

Budget options for fiscal 2004:

• $100 million unallocated reduction in local aid through the local income tax (The commission notes that local aid represents almost 1/3 of the State budget, and recognizes that the localities would have to make tough decisions on program reductions.)
• Also, State payroll cost reductions, as outlined for 2003:  (1) abolish currently funded vacant positions and/or use of furloughs; (2) no salary raises or bonuses; increase health care contribution; (3) eliminate the deferred compensation match
• Medicaid and other health related expenditures:  (1) implement preferred drug list and require pre-authorization; (2) change mental health services to Medicaid-ineligible populations; (3) delay the second year of the developmental disabilities wage initiative
• State agencies, colleges and universities
  • Level funding for state colleges and universities
  • Consolidate, reduce or abolish some executive departments
  • Defer funding intended to reduce the State’s unfunded liability for workers’ comp charges
  • Liquidate the MD Housing Fund within the Department of Housing and Community Development (DHCD)
  • Defer information technology projects
  • Defer additional HOPE scholarships and provide only for teaching candidates
  • Defer Private Donation Incentive Program payments another year
  • Could consider $20 million transfer from State’s reserves for employee worker’s compensation
  • Fund Program Open Space with bonds
  • Shift transfer tax reserves to the general fund
  • Eliminate use of PAYGO capital; use taxable bonds to fund projects
• As a last resort, transferring a portion of the Rainy Day Fund to the general fund could be considered.  The commission notes:  “However, revenues from the fund should only be used in conjunction with a more permanent structural solution for the budget and the fund should not be depleted.”

Tax Compliance:

• Combined income tax returns for affiliated corporations and other measures related to the taxation of multistate corporations
• An increase in the Comptroller’s audit staff
• Altering the remittance date for income tax withheld from wages
• Allowing the Comptroller to limit withholding exemptions of tax delinquents to that of the prior year
• Permitting direct salary attachment for taxes other than income taxes
• Requiring the Department of Labor, Licensing and Regulation, other State agencies, and clerks to verify State license holders’ certifications of compliance with tax law
• Streamlining the bank attachment process
• Lowering the threshold for tax payment via electronic funds transfer (EFT)

Video Lottery Terminals:

• The report states that the enactment of video lottery terminals could generate annual gross revenues of $800 million, but the amount would depend on several factors, including the distribution of revenues.  It also notes that the timing of the revenues is unknown.

Short-term Revenue Options (potentially enacted for a period of two years):

• Increasing the top individual tax rate for incomes over $100,000 ($150,000 for joint returns)
• Increasing the corporate income tax rate
• Providing for income tax withholding at a flat 4.75 (removing the graduated scale), noting that excess would be returned to taxpayers via refunds
• Crediting all corporate income tax revenues to the general fund
• Increasing the sales tax rate
• Eliminating the sales tax vendor discount
• Imposing sales tax on various services or repealing various exemptions
• Crediting remaining sales tax on vehicle rental revenues to the general fund
• Increasing the State property tax rate
• Enacting controlling interests legislation for recordation and transfer tax

Transportation Trust Fund:

• The commission notes concern about reductions in federal funding for transportation projects
• Notes the need for substantial funding for homeland security costs
• The commission plans to look at a variety of transportation funding options in its next phase
• Current needs could be met by
  • Increasing the motor fuel tax by 10 cents
  • Increasing the motor vehicle excise (titling) tax
  • Eliminating the motor vehicle excise tax and motor fuel tax vendor discounts