The Economics of Desperation is slowly spreading around the country. More and more states are facing mounting funding problems for their obese government budgets. As a result of their rising levels of desperation they are willing to go further and further into the murky waters of morally questionable taxation, merely to save their budgets from cuts. I recently reported on the attempts by Maryland Governor O’Malley to raise taxes on incomes above $100,000. Today the Baltimore Sun adds another twist to the increasingly tense budget fight in The Old Line State. Apparently, the income tax hike is not enough – state lawmakers are also looking into raising more money from gambling, i.e., addiction taxes:
Gov. Martin O’Malley and top leaders of the General Assembly are considering the possibility of holding two special legislative sessions — one in May to deal with the state budget and another in summer to consider an expansion of casino gambling in Maryland. O’Malley disclosed the possible plan Tuesday in Baltimore, shortly after he met in Annapolis with Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch to discuss the prospect of calling senators and delegates back to the capital to raise taxes and avert about $500 million in cuts to popular programs.
The mere fact that the state legislature is so desperate to raise taxes shows that there is an urgent need for spending cuts in Maryland. But it is also worth noting that $500 million is not a very big cut in a $34.8 billion budget. In fact, it is less than half of the increase in Other Funds spending from 2010 to 1011:
- In 2010 the Maryland state government spent $13.44 billion through its General Fund, $9.83 billion worth of Federal Funds and $8.77 billion in the form of Other Funds;
- In 2011 Maryland spent $13.26 billion in its General Fund, $10.62 billion of Federal Funds and $9.83 billion of Other Funds.
In other words, when the state legislators in Annapolis wring their hands and talk about “doomsday” budget cuts of $500 million, they are in effect saying that all the state needs to do is scale back less than half of the increase in Other Funds spending, and the danger of Doomsday is gone.
However, instead of doing the simple, obvious and virtuous, the state legislators want more of taxpayers’ hard earned money. But not only that - they are also pursuing more addiction tax revenues by expanding gambling in the state. The two chambers of the state legislature are fighting not over the big moral problems associated with addiction taxes, but over what should come first – higher taxes on high incomes or more taxes from gambling.
State legislators and probably Governor O’Malley, too, will be happy to dispute the fact that they are all about more revenues and not at all interested in spending cuts. They will show you their General Fund which has decreased, on average, 1.7 percent per year since 2007. But what they won’t tell us is that at the same time Federal Funds have increased by an average of 14 percent per year since ’07 and Other Funds have grown by five percent per year. This has caused a dramatic shift in the composition of the Maryland budget: in 2007 almost half of all state spending – 49.1 percent to be precise – passed through the General Fund. In 2011 that share was down to 38.1 percent.
During the same time Maryland has increased its dependency on the federal government dramatically: in ’07 the state got 22 cents of every dollar of revenue from the U.S. government; last year that share was up to 30.5 cents per revenue dollar. This puts Maryland in a precarious situation when Uncle Sam puts an end to his reckless debt-funded spending spree.
A $500 million cut to Other Funds is a perfectly good idea, but it is only the beginning. This is a good time for Maryland to look into long-term spending reforms. Such reforms should not be aimed at simply adjusting down spending levels, but toward eliminating the driving forces behind state spending. This means structurally reforming away entitlement programs, coupled with free-market reforms and tax cuts that give the private sector both responsibility and opportunity to take over where government has failed. By implementing such reforms the state will shield itself against both the federal budget crunch, which is coming after the 2012 election, and future budget problems related to the state’s own economy.