Cherry trees bloom along Lawyers Mall outside the State House in Annapolis in February. Barbara Haddock Taylor/Baltimore Sun

How Maryland found its way to a $3 billion budget crisis

Originally published in the Baltimore Sun

MPPI in the News Steve Janesch and Hannah Gaskill | The Baltimore Sun Dec 20, 2024

A nearly $3 billion hole in the next state budget is the most intense challenge facing Maryland’s elected officials in the coming months — a problem that has the potential to ripple through schools and grants for local projects, through child care programs and public transit services.
 

But after years of budget surpluses and pledges around fiscal responsibility, what’s behind the crisis that at least one independent analyst described as the worst in two decades?
 

The answer is multifold.
 

Inflation and the spike in health care costs. An underwhelming local economy. The approval of new taxpayer-backed initiatives that carry both large and relatively small price tags. Sidestepping ideas for reliable new revenue and, in some cases, intentionally reducing the amount of money that leaders have to work with.
 

The issues are not new, and independent observers have warned about them “for years, maybe even decades,” said Benjamin Orr, CEO of the Maryland Center on Economic Policy.
 

“They have been highlighting and trying to bring this to policymakers’ attention that they need to act, and they’ve avoided making some tough decisions and that’s caused the problem to get worse,” Orr said.
 

With both the Democratic-controlled Maryland General Assembly and Gov. Wes Moore now promising that “everything’s on the table” when the annual 90-day legislative session kicks off Jan. 8, here’s how they got into the situation in the first place.
 

Bills coming due

Maryland’s state budget, like all governments, has consistently grown over time — from roughly $39 billion in spending a decade ago to $63 billion this year.
 

The Blueprint for Maryland’s Future is by far the largest new taxpayer-backed program in recent years.
 

The 2021 law calls for billions in new spending over a decade to improve education outcomes through expanded prekindergarten for 3- and 4-year-olds from low-income households, pay raises for teachers and career-readiness efforts, and more.
 

Lawmakers have poured more than $1 billion in the effort in the last two years. But they passed the law without a full funding mechanism, a move then-Gov. Larry Hogan and other conservatives said was irresponsible. While funded now for the next two years, lawmakers need to find another $2.1 billion for it in 2028, $2.7 billion in 2029 and $3.4 billion in 2030, according to the analysts for the state’s Spending Affordability Committee.
 

“The Blueprint legislation has to be one of the most reckless pieces of legislation ever passed by a legislative body,” said Christopher Summers, founder and CEO of the conservative Maryland Public Policy Institute think tank that has opposed the plan since its creation. “This is why we’re at this fiscal disaster the state is facing.”
 

Lawmakers and the governor have continued to add other new programs to the books. And though they pack less of a punch than the Blueprint and are sometimes scheduled to be paid off over several years, the money adds up.
 

About $1 billion for public school construction programs in 2023. Authorization of $1.2 billion in bonds in 2021 to renovate the Orioles’ and Ravens’ stadiums, which could end up costing more than $2 billion over three decades. Promises this year to use $400 million in state funds to remake the Pimlico Race Course and build another training track for the state’s beleaguered horse racing industry. The list is seemingly endless.
 

“Seriously, that’s a function of Maryland government? To be in the horse racing business and owning a race track?” Summers said.
 

Still, the state’s overall spending level has remained steady since Moore — who, like Hogan, became governor after spending most of his time in the private sector and talks often about fiscal responsibility — entered office two years ago. The $63.1 billion budget he and lawmakers passed earlier this year actually represented $1.1 billion less in appropriations than the prior year, according to state fiscal analysts.
 

Though the overall fiscal impact of new legislation can’t be fully tallied, new laws that could be quantified had a net-negative impact on the state’s general fund to the tune of $443 million in 2023 and a net-positive impact of $170 million in 2024 when lawmakers left the session in each of those years, the Department of Legislative Services reported.
 

Costs for existing programs rising
 

Rising costs for state-backed entitlement programs like Medicaid, health care for people in prisons, subsidized child care and developmental disabilities have also repeatedly forced lawmakers to find more money.
 

A previously underestimated deficit at the Maryland Department of Health’s Developmental Disabilities Administration was the latest hit, adding about $350 million to the upcoming deficit in an update this week.
 

“It is not because of inappropriate spending in any way,” Senate President Bill Ferguson told reporters, emphasizing that health care costs have stretched everyone “to their wits’ end.”
 

Maryland’s share of covering Medicaid for roughly 1.6 million people enrolled in the state is about $4 billion annually. Costs have exceeded expectations, in part, because of eligibility requirements changing after the pandemic. Changes over just a few months between the end of the session in April and July led Moore to make other cuts — about $150 million — to keep that and other programs fully funded.
 

Critics have said Medicaid enrollment should be scrutinized, while health care advocates say the the alternative means taxpayers still pay the bill for care that isn’t otherwise covered.
 

“The fact of the matter is that we have lots of people being helped by Medicaid, and that helps all of us because then they don’t cause uncompensated hospital care,” said Vinny DeMarco, of Maryland Health Care for All. “We will fight very hard to make sure that that funding is not cut. We think it’s critical for the state that Medicaid be fully funded.”
 

The state’s child care scholarship program, meanwhile, saw enrollment skyrocket from about 24,000 children in January 2023 to more than 40,000 this year because of policy changes that expanded access. After the state approved a record $328.5 million for it in the current budget, Moore’s cuts in the summer also aimed to keep pace with still-rising enrollment.
 

Proponents say it’s been a worthy investment because it allows parents or guardians to participate in the workforce. The program’s still growing but likely not at the same rate as last year, said Daraius Irani, an economist at Towson University whose team is working with the state to forecast the program’s future.
 

“That’s going to be a hard decision. Many people need affordable, accessible child care and if those individuals may not be able to work, and if they are not working, that means the labor participation rate goes down even further,” Irani said.
 

Bypassing revenue solutions

Though leaders in Annapolis are now considering options for new or higher taxes, lawmakers have bypassed those ideas in the past — ensuring the plans they did pass didn’t have enough money behind them.
 

Discussions about new revenue only really kicked into a higher gear during the 2024 session, but legislation was largely left on the cutting room floor even as proponents had an urgent message: Pass the bills now or face a dire situation focused on cuts in the future.
 

Options proposed, mostly by House Democrats and a growing coalition of advocates, would have expanded taxes on corporations and the wealthiest individuals in the state to raise up to roughly $2 billion per year. Some proposed slightly lowering the state sales tax from 6% to 5% but expanding it to other services to raise hundreds of millions more. Other ideas to legalize and tax online gambling were set aside.
 

One revenue-raiser lawmakers did pass was the digital advertising tax. Aimed at charging the nation’s largest technology companies for digital ad services, Democrats hoped it would raise up to $250 million annually to help finance the Blueprint. Amid challenges to its constitutionality in state and federal court, it has so far raised just under $300 million since collections began in the 2022 fiscal year, including $126 million for the last full fiscal year, according to figures provided by Comptroller Brooke Lierman’s office.
 

Moore has so far shied away from all major revenue proposals, saying only he will keep a “very high bar” for new taxes.
 

He’s refused to comment specifically on ideas like combined reporting, a method of forcing companies that operate in multiple states to pay Maryland’s corporate taxes if they operate here. Closing that “loophole,” as proponents refer to it, is applied by a majority of states and has been in consideration in Maryland for decades.
 

“Maryland just hasn’t stepped up to the plate,” Orr said. “These solutions and ideas have been in policymakers’ hands for a long time, and they have to act.”
 

Others have celebrated the lack of change on taxes or are pushing for lower rates.
 

Hogan, for his part, entered office in 2015 on a platform of slashing taxes and fees — and in his two terms afterward refused to consider new options for tax revenue.

His policies also directly affected parts of the budget. Cutting tolls in 2016 and 2019 cost the state more than $500 million. A package of tax cuts he and Democrats agreed on in his final year was projected to cost almost $1.9 billion over five years.
 

A ‘lackluster’ economy

Maryland’s sluggish economy has pushed the state further into the hole.
 

Economic growth in the state has been stagnant since 2017, with Maryland’s gross domestic product growing at a rate of 1.6% between 2016 and early 2023 compared to 13.9% for the entire U.S., the comptroller reported earlier this year. A 1.2% growth in per capita personal income tax growth over that time also lags the country and neighboring states, and it’s one of the reasons behind what have been routine downgrades in state revenue estimates.
 

Irani, the economist who serves as Towson University’s vice president of strategic partnerships and applied research, said Maryland’s economic performance has been “lackluster” in terms of GDP growth and labor participation.
 

Roughly 100,000 to 130,000 fewer individuals are participating in the labor market compared to before the COVID-19 pandemic, Irani said. That’s had an impact in areas like income tax collections, though Irani said he hasn’t studied how much exactly it has cost the state.
 

“Those are workers who would’ve contributed to Maryland’s productivity and economy,” Irani said.
 

The high cost of housing and an outdated transportation network that keeps some workers from reaching jobs has added to the state’s inability to attract workers, he said. Another big challenge is the state’s reliance on the federal government for jobs and funding. Even before considering President-elect Donald Trump’s threats about cutting the federal workforce, Maryland being so closely tied to the federal government for its economic performance means private companies have to really excel to create new wealth in the state.
 

“If we don’t have superstar growing industries it means we’re not growing because the federal government is not growing (at a large rate),” Irani said.
 

As lawmakers debate targeting corporations for new tax revenue, conversations in the coming months are expected to get heated over how to turn that economic performance around.
 

“We’re at the level now in terms of budget deficits that raising taxes is not going to solve this problem. It’s only going to make it worse,” said Summers.
 

Have a news tip? Contact Sam Janesch at sjanesch@baltsun.com or Hannah Gaskill at hgaskill@baltsun.com.