A Teaching Moment for Maryland

An interesting report came out this week from Development Counsellors International (DCI), a company specializing in economic development and tourism marketing. They surveyed 3,591 U.S. companies with annual revenues of $25 million or more, targeting "C-level" executives with responsibility for selecting business sites, and 944 location advisors/consultants. This survey has been done every three years since 1996 and gives corporate executives the pulse of the business community when it comes to their perception of which locations have the most favorable business climates.  The state with the most favorable business climate was Texas, followed by North Carolina, Georgia, Tennessee and Florida in a tie, and Nevada. Texas, North Carolina and Georgia have consistently been in the top five. Who's at the bottom? For the third consecutive time in the survey, California was at the bottom, with New York second worst, Michigan third worst, New Jersey fourth worst and Massachusetts fifth worst. The states rated at the top were cited for strong labor markets, low operating costs and a pro-business climate. The states at the bottom were viewed negatively because of taxes, high operating costs, overregulation and an anti-business climate. There's an even more interesting story behind the story, however. Steven Malanga of the Manhattan Institute took a closer look at the best and worst states for doing business and found that $33 billion of the approximately $48 billion in accumulated budget shortfalls of the 29 states with projected deficits was concentrated in the five states considered by corporate executives to be the least friendly to business. In short, two-thirds of the red ink at the state level resides in the five "anti-business" states.

What about the "pro-business" states? Texas and North Carolina have no budget deficits, and Georgia, Florida and Tennessee have shortfalls totalling about $4.1 billion, less than one-tenth of the accumulated total. Mr. Malanga notes that while these facts should give state legislators pause and spur a reevaluation of their economic policies, the exact opposite seems to be happening. New York is pushing for a new tax on millionaires - hmmm, where have I heard that before? - and California is looking to boost its top income tax rate from 9.3 percent to 11 percent.

Is there a lesson in these numbers for Maryland? Well, that depends on whether or not the one-party monopoly in Annapolis is in a learning mode.

According to the Tax Foundation, Maryland's tax-and-spend policies of the past two years have saddled the taxpayers of our state with the fourth-highest state and local tax burden in the nation, behind New Jersey, New York and Connecticut and two places higher than California. Three of those four states are also on the "anti-business" list. The General Assembly imposed a "millionaires tax" on high-income Marylanders during the last session, making Maryland the first state to actually have a separate tax bracket for millionaires. California and New Jersey each have a "millionaires tax" on the books - a bit of a misnomer because the higher rate kicks in at income levels below $1 million - and New York is considering one. You guessed it, all three are on the "anti-business" list.

The parallels between Maryland and the "anti-business" states are scary. They all have high tax burdens and budget shortfalls in common - yes, despite the much-ballyhooed special session that was supposed to solve our budget problems once and for all, projections call for a $200 million budget shortfall in the current fiscal year due to the weak economy. Even before these projections were made public, Barry Rascovar, a longtime Maryland political columnist, made the observation that the Maryland taxpayers were sold a bill of goods when Governor O'Malley and his cohorts in the General Assembly said the special session would put an end to the state's budget woes:

"Remember the angst about raising taxes last November? Remember the anguish about making spending cuts then and again in January? These actions by Gov. Martin O’Malley and the Maryland General Assembly were supposed to end the state’s financial woes. No more billion-dollar budget gap. No more massive structural deficit. That was the line put out by the governor and lawmakers. But the Department of Legislative Services took a look at the state’s budget and concluded Maryland still faces significant hurdles. The bottom line: State government continues to spend far more than it brings in through tax revenues.

"If you compare ongoing income to ongoing expenses, Maryland remains $719 million in the red for the current fiscal year. The state will be at least $351 million in hock for the fiscal year that starts July 1. Even with all those new taxes on consumers, businesses and millionaires, we’re still paying out far more than we’re taking in. Only by shifting funds and dipping into cash reserves can Maryland pull off the required balancing act. Indeed, what state leaders like to call a $1 billion surplus actually consists primarily of a ‘‘rainy day” account that cannot be touched unless the state encounters a catastrophic financial crisis.

"So things aren’t nearly as sunny as state officials want us to believe. Looking down the road, it gets downright stormy. Legislative Services predicts O’Malley will have a nearly quarter-billion-dollar budget shortfall to deal with next January and a structural deficit (not enough ongoing revenue to pay expenses) of nearly half-a-billion dollars. In 2010, the budget deficiency grows to nearly $600 million. And if slot machines aren’t approved by voters this November, Maryland faces a budget gap of nearly three-quarters of a billion dollar in 2011 and again in 2012."

The possibility of voters rejecting slots in November has prompted the politicians in Annapolis to threaten everyone with dire consequences if we don't go along and sell our state to gambling interests, adding yet another avenue of corruption to a government already infected with cronyism and overconfidence because of their decades-long monopoly on power. Threatening to cut funds to education if slots aren't approved is despicable, especially since this is the second time they've led us down the primrose path with a promise of solving all the state's education funding woes through games of chance that disproportionately affect lower-wage workers. Whatever happened to the windfall that education was supposed to see as a result of the lottery? The fact they keep coming back to the well for more funds "for the children" despite their past promises should make you more than a little skeptical of their claims.

So what's the bottom line of all these facts and figures? It's this; states that govern and tax businesses lightly create a climate that attracts large and medium-sized firms and encourages entrepreneurs to create and grow small businesses. These businesses pay taxes, create jobs, expand the number of individual taxpayers and simultaneously reduce individual dependency on government programs. These outcomes all result in increased revenue for the state treasury. Texas, North Carolina, Georgia, Florida, Tennessee and Nevada have learned this lesson; California, New York, Michigan, New Jersey and Massachusetts haven't. Is Maryland teachable? Given the current trends, it's not looking that way.