Dear Friend:

Wherever I go these days, I hear people asking questions about the budget deficit; how did we get a budget deficit; what should we do about the deficit; and how do we raise the money needed to cover the deficit?

Recently the House of Delegates was briefed on this subject and given a handout which explained this issue in some detail. I realize that some of these answers are not short because the financial situation is complex, but I wanted to share this material with you and hope that it answers some of your questions. If you still have questions or suggestions after reading the newsletter, please call my office at 301-858-3247. I am here to help in any way I can.

Q: What is a structural deficit?

A: A structural deficit occurs when ongoing spending exceeds actual income. This occurs in one of two situations: (1) when the cost of maintaining programs grows faster than the State’s income over a long period of time, or (2) when policy makers decide to reduce revenue or increase spending without making necessary adjustments to the other side of the ledger. That being said, economic cycles have a direct impact on a structural deficit. For instance, the recent real estate boom increased State revenue, which temporarily closed the gap between spending and income and helped balance the budget in FY 2005 and 2006.

Q: I thought we ended the 2006 session with a $1 billion surplus. Where did the deficit come from?

A: Maryland’s structural deficit has been 10 years in the making. A $600 million income tax cut in 1997, combined with $1.5 billion in increased education spending with the Thornton law left Maryland facing a $1.2 billion structural deficit as early as 2002. During the first years of Governor Ehrlich’s term, the deficit was covered with tuition hikes, fee increases, spending cuts and transfers from the Transportation Trust Fund and Program Open Space. In the final year of his term, the real estate boom caused an unexpected surge in State revenue, which created a one-time cash surplus. While this helped the State get through another fiscal year, nothing was done to address the ongoing gap between projected revenue and spending. In the 2006 90 Day Report, analysts noted: “The fiscal 2007 budget is balanced on a cash basis… However, a structural imbalance between ongoing revenues and spending persists and is projected to exceed the billion dollar level in the out-year forecast.”

Q: What role did the legislature play in balancing the budget during the previous administration?

A: The legislature played a critical role in reducing spending, and in checking spending growth in the final year of the term. The legislature cut over $1 billion from the State budget over four years and eliminated over 3,000 positions from the State workforce. In the final year of the term, the legislature raised the minimum account balance of the Rainy Day Fund from 5% to 7.5%, increasing the State’s cash balance by over $300 million in FY2007.

Q: When I talk to people, they want to know why we can’t trim State spending to solve this problem. Why can’t we?

A: The legislature has taken the lead in cutting State spending. The legislature cut over $1 billion from the State budget during the previous administration and eliminated over 3,000 positions from the State workforce. During the 2007 session, the legislature cut more than $225 million from the Governor’s budget proposal and eliminated over 140 State jobs. After the 2007 session, the Governor and the Board of Public Works cut an additional $280 million from the State budget.

Q: In Annapolis, I hear a lot of talk about the services government provides. In my neighborhood, I hear a lot of talk about wasteful spending. How does the State spend our money?

A: Education and Medicaid account for half of the general fund budget. The State’s $14.6 billion general fund is divided between public education (35%), State agencies (33%), Medicaid (15%), higher education (8%), and other programs (9%). Of the money invested in State agencies, 32% goes to public safety, corrections and the judiciary, 29% goes to mental hygiene, developmental disabilities, and other health-related programs, and 12% goes to juvenile and social services.

Q: What role do spending formulas and mandates play in driving State spending?

A: Mandates play a major role in driving State spending. Altogether, funds with a mandated amount or purpose represent 79% of the State-sourced portion of the budget. Of the State’s non-mandated spending, 67% is spent on higher education, public safety, and health programs in the FY08 budget. Over 90% of mandated spending in the general fund goes directly to local government or individual programs.

Q: What are the primary sources of Maryland’s tax revenue?

A: Nearly 80% of the State’s general fund revenue comes from the personal income tax (52%) and the sales tax (27%). Other major sources of revenue include business taxes (8%) and lottery revenue (4%).

Q: There’s a lot of talk about increasing the sales tax and expanding the base. How does Maryland’s sales tax compare with surrounding states?

A: Maryland’s sales tax is 5 cents – lower than New Jersey (7 cents), Pennsylvania (6 cents), West Virginia (6 cents) and the District of Columbia (5.5 cents), and several states allow local jurisdictions to levy a sales tax. Maryland’s sales tax base is much narrower than surrounding states. There are a total of 168 services on which states could assess services. Of those 168, Maryland only taxes 39; Delaware taxes 143; West Virginia taxes 110; the District of Columbia taxes 70; and New Jersey taxes 55. Virginia only taxes 18 – but Virginia also taxes food.

I hope that this information helps clarify some of the confusion surrounding our budget challenges. As we approach our next legislative session, I will continue to listen carefully to the many options available to us and consider my position based on the benefits to Charles County and the state as a whole.

As part of my effort to gather as much information as possible from Charles County Citizens, I am holding a series of open meetings to give you the opportunity to share not only your concerns, but perhaps solutions to various problems facing us.

I hope you will be able to make one of the meetings and please spread the word. I truly believe that if we commit to working together, we will continue to keep Charles County the place in which we want to live and raise our families.

November 7   
Nanjemoy Community Center,
4375 Port Tobacco Road, Nanjemoy
Wednesday, 6:30 pm to 8 pm

November 19   
Piccowaxen Community Center, 2834 Rock Point Rd, Newburg
Monday, 6:30 pm to 8 pm

November 24   
Potomac Branch Library, 3225 Ruth B Swann Dr, Bryans Road
Saturday, 10 am to 11:30 am

November 27   
Wade Community Center, 2300 Smallwood Dr., Waldorf
Tuesday, 6:30 pm to 8 pm

November 29   
La Plata Library, 2 Garrett Avenue, La Plata
Thursday, 6:30 pm to 8 pm

Again, thank you for your confidence in me and for your continued support.

With best regards,

Delegate Peter F. Murphy
Charles County, District 28