Md. fiscal leaders propose change to reduce budget volatility

ANNAPOLIS — Three of the state’s top fiscal leaders are proposing to change how Maryland projects and sets future budgets in an effort to limit volatility.

A report written by Warren Deschenaux, executive director of the Department of Legislative Services and the legislature’s senior budget analyst; David Brinkley, secretary of the Department of Budget and Management; and Andrew Schaufele, director of the Bureau of Revenue Estimates within the Office of the Comptroller, proposes limiting the amount of capital gains taxes that would make up revenue estimates.

“Due to the ups and downs of the business cycle, revenue volatility is unavoidable for state governments,” the three wrote in a letter to Sen. Edward Kasemeyer, D-Howard and Baltimore Counties and chair of the Budget and Taxation Committee, and Del. Maggie McIntosh, D-Baltimore City and chair of the Appropriations Committee. “States that rely on volatile revenue sources like capital gains to fund ongoing spending are especially vulnerable to the vagaries of the economy.”

Deschenaux, in comments to lawmakers, said the blame lies not on the comptroller or governor but in trying to rely on numbers that are not reliable.

“The right number is unpredictable,” Deschenaux said. “You can’t really criticize someone for not knowing what the stock market is going to do next year.”

He told House Speaker Michael Busch that he and other lawmakers made budget decisions “on the best information available.”

Capital gains makes up about 20 percent of the state’s net taxes but the vast majority of that comes from just 5 percent of the more than 2.6 million taxpayers.

The report, which was discussed during an afternoon meeting of the joint Spending Affordability Committee, was requested by legislators earlier this year and comes after the state’s Board of Revenue Estimates lowered revenue projections for the current year by $250 million. All of that reduction in the current year was attributed to fluctuating capital gains revenues.

In response to that revenue write-down, Gov. Larry Hogan and the Board of Public Works approved more than $80 million in cuts to state spending in the current year.

Brinkley, Deschenaux and Schaufele propose limiting the amount of projected capital gains taxes that would factor into revenue estimates and proposed budgets. The so-called “collar” is similar to one used in Virginia beginning in fiscal year 2015.

Capital gains taxes that exceed the limit would not be spent but instead used to offset any general fund revenue shortfalls or to increase the state’s rainy day fund to an amount equal to 10 percent of the state’s general fund revenues. Once that target is met, the report calls for using any surplus capital gains revenues on unfunded state mandates and to pay cash for state capital projects.

Analysts recommended lawmakers use a 10-year average of the most recent past capital gains collections. That figure would be recalculated each year and used as the collar.

“If you use 10 years, it’s a more stable number,” Deschenaux said.

Deschenaux said the move would make the process more reliable and allow lawmakers “to tune out unreliable” parts of the revenue estimates. Additionally, doubling the rainy day fund would allow the state to have money for recessionary years and still leave the 5 percent fund that ensures Maryland can pay its bond obligations.

Some legislators worried that the excess money in the rainy day fund would not be used and that bond rating agencies would downgrade the state for it.

Deschenaux said the excess money would allow the state to fund the budget in lean times without touching special funds or the transportation trust fund — “vacuuming all the little cubbyholes.”

“If leadership decides we would never touch it that would be a stupid thing to do,” Deschenaux said.