State Budgets

State of the State: Maryland

With a mediocre Rich States, Poor States economic outlook ranking of 31, Maryland has plenty of room for improvement. In his third State of the State address, Governor Larry Hogan discussed his proposals to strengthen the state’s economy. His fiscal policy proposals focused primarily on education, taxes and pension reform. School choice and pension reform are extremely positive developments for Maryland families.

According to the governor, education spending is at record levels for three consecutive years now. Governor Hogan announced $1.35 billion for Maryland’s university system, $334 million for school construction, more than $256 million for community colleges, $17.5 million for higher education tuition relief and $2 million for scholarships to private schools. Overall, a full two-thirds of Maryland’s capital budget is spent on education. Despite the past two years of record high education funding, Maryland’s educational performance has only ranged from C- to D+ in the past two editions of the ALEC Report Card on American Education. The proposed $2 million for private school scholarships is a step toward expanding educational choice—a key component of a results-focused educational system.

Governor Hogan correctly observed that not all Marylanders are experiencing economic success. It is encouraging that Governor Hogan is looking for ways to reduce tax burdens on hard-working taxpayers, which is a welcome departure from tax-happy past administrations that even taxed rain. However, the More Jobs for Maryland program, part of Governor Hogan’s Maryland Jobs Initiative, appears to foster the government selection of winners and losers rather than a growth-friendly environment across the board. The program eliminates all state taxes for 10 years for qualifying new businesses and grants tax credits along with accelerated depreciation deductions of capital assets for existing businesses. However, only specific industries headquartered in specific jurisdictions. This program is remarkably similar to START-UP NY under Governor Cuomo in New York which “created” a mere 76 jobs at a staggering $697,368 each during its first year. As the ALEC report The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth points out, tax carve-outs stifle innovation, pick winners and losers and hinder real economic competition. On the other hand, broad-based tax reform—such as reducing high-income taxes—can help expand economic opportunity for all Maryland job creators and taxpayers.

Governor Hogan acknowledged the multi-billion dollar elephant in the room—Maryland’s unfunded pension liabilities. According to the ALEC Center for State Fiscal Reform publication, Unaccountable and Unaffordable 2016, Maryland’s unfunded pension liabilities total an estimated $93 billion. Maryland’s assumed rate of return is based on the optimistic assumption that they will earn 7.55 percent each year, while Unaccountable and Unaffordable 2016 uses a more realistic, risk-free rate of 2.344 percent. As financial experts, Kent Smetters and Andrew Biggs explain, “No matter how well a pension plan manages its investments, it cannot generate 8 percent returns with certainty.” Maryland’s true liability far exceeds the roughly $20 billion mentioned in the State of the State address. When a more realistic pension fund valuation is applied, Maryland’s unfunded pension promises equal $15,541 for every man, woman, and child in the state. Overall, Maryland pensions are merely 33.1 percent funded. Governor Hogan encouraged the legislature to pass the State Retirement Choice Act for the 21st Century Workforce. While he did not elaborate on the plan in his State of the State address, the State Retirement Choice Act for the 21st Century Workforce would create an optional defined-contribution plan for government workers. This is a positive solution to help Maryland keep pensions solvent, give choice to new employees and provide retirement security for workers and retirees.

The steps toward school choice and pension reform are welcome news for hardworking Maryland taxpayers and their families.


In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace …

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State Budgets