Sticky Tax Conundrum

By Barry Rascovar

Feb. 23, 2015 — Sometimes a simple, sensible-sounding tax reform runs smack into sticky realities. The result is a puzzle for Maryland legislators trying to do the right thing.

That’s the case this session with bills (SB190, HB209) designed to clarify state law regarding the “taxable price” of discounted hotel rooms sold over the internet by travel websites.

Advocates claim companies like Orbitz and Expedia are ripping off the state by buying blocks of discounted rooms from hotels, re-selling them to Maryland consumers at higher rates but paying state sales tax on the original, lower purchase price.

Expedia logo

If that’s true, we should change Maryland’s tax laws and close this alleged “loophole.”

But it’s a complex situation in which the role of the internet travel companies isn’t transparent. There’s a yawning gulf between what lawmakers believe and what may be the true facts.

Confusion Abounds

Even the legislature’s fiscal analysts seem confused. They aren’t even sure if the proposed reform will result in more tax revenue. Opponents flatly assert the Department of Legislative Services got the facts wrong.

Travel agents maintain they are not purchasing discounted, hotel room blocks and then re-selling them to the public at a higher price. They maintain they aren’t in the room-selling business.

They say they are acting as an intermediary between the hotel and the consumer. The hotel negotiates a discounted room rate with the travel company, which then advertises this discounted rate. When a sale is made, the customer pays the discounted rate to the hotel, plus a service charge or fee that goes to the intermediary.

That extra charge isn’t taxed.Orbitz

The travel agents claim the hotels pay all the room taxes on the discounted, negotiated price. There’s no jacked-up extra room charge to consumers by Orbitz or Expedia other than that service fee.

Murky Issue

If all this is true, legislators need to take a closer look at those tax-reform bills. It may be a case of not understanding the true situation.

But it gets murkier.

The comptroller’s office is suing internet travel agents on much the same grounds. The case is before the Maryland Tax Court. Meanwhile, four counties already have sued the big internet travel sites and settled out of court.

While all this is going on in court, it seems senseless for the General Assembly to further confuse matters in ways that could mess up the current tax case and lead to years and years of new litigation.

There are other problems with the bills.

The measures would impact local travel agents, local tour operators and vacation rental managers. It would impose a new administrative tax burden on many small travel-related businesses.

Double Tax?

It also could wind up as a double tax on these local travel businesses, since they already pay a corporate income tax on their service fees.

Here’s another complication: This would amount to a new tax on services — an area where Maryland has tried not to impose levies. Is this opening the door to a broad application of the state sales tax to all service businesses?

Given the results of the last election, a drive to add more tax levies that will be paid by consumers seems ill-timed and poorly thought through. That’s especially true given the uncertainty about what’s really going on in the discounted hotel room-rate industry.

This is not the first tax squabble where well-meaning lawmakers have run into unexpected obstacles because the issue is poorly understood and hard to simplify.

For years, liberal lawmakers have pushed for a “unitary tax” on out-of-state corporations. The combined-reporting bill runs into insurmountable headwaters each session because it’s not a black-or-white issue. Previous studies show the reform might prove counter-productive and yield little in new revenue over the long haul.

Tread With Care

The best course for legislators on the room-tax issue is to proceed with caution.

Let the comptroller’s court case play out. That will provide additional definition of the “taxable price” of these discounted rooms, which is strongly under dispute.

There’s also need for more legislative study.

How do these internet travel sites really work? Do they jack up discounted room rates or not? Are they true intermediaries between the hotels and consumers, collecting only a service charge?

If the state starts taxing this travel-agent service, shouldn’t it do so uniformly on all business services? Would this be wise tax policy? Would it put Maryland businesses at a competitive disadvantage?

The more we learn about this room-tax issue, the cloudier things get.

With so much room for doubt, legislators would do well to pass on these tax-reform bills until they get a clear picture of what’s at stake and how the discount room-rental industry really works.

###

Baltimore’s Self-Inflicted Wound

By Barry Rascovar

Feb. 19, 2015 — Baltimore City stands to lose tens of millions of education dollars in Gov. Larry Hogan Jr.’s budget and much, much more in future years.

But Hogan is not at fault. City leaders, past and present, are to blame.

Baltimore’s self-inflicted wound was preventable and obvious. Yet elected officials chose to ignore it.

Now city schools will pay the price.

Tax-Avoidance Schemes

Mayor Stephanie Rawlings-Blake and past Mayors Kurt Schmoke, Martin O’Malley and Sheila Dixon got carried away with a tax-avoidance scheme that has enticed investors into the city.

These favored investors are allowed to make Payments in Lieu of Taxes (PILOT) and are given Tax Increment Financing  (TIF) deals that divert their property tax payments into public improvements for their developments.

The net result: New construction downtown but no tax windfall for city government.

Indeed, big projects like Harbor East and Harbor Point pay virtually no taxes to the city. The same would be true for the State Center development and the massive, now-bankrupt Westport project.

Yes, some of those PILOTs and TIFs led to development activity in Baltimore that never might have happened without these quite large and long-lasting incentives.

Damaging Tax Breaks

But someone forgot to get out an adding machine and calculate what these non-taxpaying projects would do to undercut Baltimore’s state school aid.

A big chunk of what the city receives in school funds from the state is determined by a formula based on its property valuation. The poorer a jurisdiction’s wealth base, the larger the state’s contribution.

Harbor Point and Harbor East helped Baltimore’s property wealth rise substantially. The formula assumes that this translates into markedly higher property tax revenue.

That’s not so if you’re handing out TIFs and PILOTs like sugar-coated cookies.

Baltimore’s property tax collections aren’t benefiting from these heavily subsidized projects. Now the state’s school-funding formula dictates the city will get $13 million less than last year due to all those new downtown developments.

Less School Aid

Down the road, Baltimore’s  state school aid will shrink even more as additional projects receive lucrative tax-exemption deals from the city. Most of these tax-avoidance schemes run for decades, which compounds the damage.

There’s no doubt city leaders had to offer enticements to jump-start downtown and near-downtown development, especially after the Great Recession. But they got carried away.

Any new and glitzy proposal outside the Central Business District seems to have won a major tax-relief prize.

Now the same officials who handed out those tax-avoidance awards to developers are scrambling to avert a big cutback in school aid.

They probably will get some money restored, thanks to Baltimore Del. Maggie McIntosh’s position as chair of the House budget panel.

New Critique Needed

They might even succeed in amending the formula language to take into account Baltimore’s unique situation.

What isn’t likely to happen is a frank reevaluation of Baltimore’s overly generous use of TIFs and PILOTs. It’s a good idea taken to dangerous extremes.

Think what Baltimore could do with $13 million-plus in its budget every year. That tax money isn’t helping city schools — it is helping developers who may not even need generous subsidies in today’s markedly improved development climate.

It’s time for city officials to analyze what went wrong — and fix it. Defending the indefensible no longer works.

###

Growing Maryland

 By Barry Rascovar

Feb. 16, 2015 — If there is one area where Gov. Larry Hogan Jr. can sing “kumbaya” with Maryland legislators, it is economic development. The path has been blazed for him by the legislature’s Augustine Commission.

A year ago, top Democrats in the General Assembly recognized Gov. Martin O’Malley had badly dropped the ball on growing jobs in Maryland. So they assembled a commission, led by former Lockheed Martin CEO Norm Augustine, with the assignment of suggesting how to turn things around.

Commision Chair Norman Augustine

Commission Chair Norm Augustine

The group came up with 32 recommendations, all sensible and none of them novel. It won’t take much for the Republican governor and Democratic legislators to find agreement on most of those suggestions.

Underlying the bipartisan nature of the commission is the fact that Hogan’s new budget secretary, former Sen. David Brinkley, served on the panel alongside Republican Del. Wendell Beitzel. Two key Democratic chairmen, Del. Dereck Davis and Sen. Ed Kasemeyer, were on the commission, too.

Key recommendations:

  • Consolidate economic development programs, develop one-stop shops for businesses and put more emphasis on technology industries.
  • Reverse the state’s hostile, rule-enforcement approach toward businesses through customer-service training and a new, “what can I do to help” attitude.
  • Put state money into university-generated business development and address the needs of underperforming public schools.
  • Focus on unskilled high school graduates who need vocational training and apprenticeship programs.

One of the more shocking findings of the commission is that 44 percent of kids in Maryland public schools qualify for free or reduced-price lunches, and most of them come from minority families struggling to eke out a living.

The state’s public schools aren’t giving them the right kind of education. These kids graduate without the tools to find jobs. Their path up the economic ladder is blocked.

Unskilled and Unemployed

Even worse, there are jobs out there for them — some 132,000 currently unfilled positions in Maryland. Employers told the commission they simply cannot find in-state workers who possess the right technical skills.

This glaring mismatch between education preparedness and job qualifications is one of society’s neglected weaknesses. Educators haven’t addressed it. Neither have the politicians.

They are too focused on creating college-prepared students. Those from the lower rungs of education are left to flounder with few, if any, employable skills.

Quick Fixes

Hogan and legislators can start addressing this situation with some quick fixes.

Find a pot of money for the state’s community colleges, which already lead in offering job-training and apprenticeship programs. What’s missing has been a major financial investment from the state and local governments in these specialized skills courses.

The state also needs to offer local school systems extra funds if they bring back vocational education in a big way.

High school students should be pursuing career paths and job-readiness courses, especially those not interested in college.

Such an approach is sorely needed in low-performing districts like Baltimore City and Prince George’s County and in rural jurisdictions where employment opportunities are limited.

Singing in Unison

The good news is that both Hogan and Democratic leaders in the General Assembly are singing from the same hymn book.

An even better sign: The Augustine Commission concluded what’s really needed is “a cultural change” that depends “on leadership, not money.”

If each side fully commits to the objectives laid out by the panel, Maryland actually could make progress in growing its business base and creating a workforce that is job-ready.

###

Hogan’s Continuing Campaign

By Barry Rascovar

Feb. 11, 2015 — When is Gov. Larry Hogan Jr. going to stop campaigning and get serious about governing?

He started on the right foot with his “placeholder” budget that lets him tread water till he wraps his arms about the state’s fiscal problems next year.

He followed the same approach with his State of the State address. In most respects, it was a bland, “placeholder” address.

But then he and his speechwriters lost their focus and started waving the Republican Party’s bloody flag during that speech rather than reaching out sensibly to Democrats.

Hogan addresses legislature

Gov. Larry Hogan Jr. addresses MD General Assembly

He said little that was new. There were no rhetorical flourishes. He offered no surprises or initiatives.

Instead, he reverted to campaign mode, re-hashing his partisan themes and denigrating the prior Democratic administration.

Everything Gov. Martin O’Malley did was placed in the negative. Larry Hogan and the Republicans are here to save Maryland!

No wonder Republicans applauded and Democrats responded with silence and growing anger.

Taxes are too high. We’re overregulated,. We need to get government off our backs. We’re anti-business. Maryland is in trouble. It’s headed in the wrong direction.

Sure, Maryland is beautiful. It’s citizens are hard working. But we’ve got to “get Maryland back on track.” Clearly Hogan thinks he knows how to do it.

Economic Turnaround

He pledged to turn Maryland’s economy around.

Who is he kidding?

Maryland is at the mercy of large, macro-economic trends and developments. He’s promising more than he can deliver.

Limited Role

Like any governor, Hogan can only nibble around the edges to make Maryland’s economy stronger and create jobs.

He is fortunate the national economy continues to show steady improvement. If that continues, Hogan will be the beneficiary. But he can’t claim he helped cause it.

His State of the State Address laid out a number of steps he wants to take in his first year, but few are realistic or achievable. They are far too partisan.

The worst aspect of his speech was the overwrought refrain about the dreadfully misnamed “rain tax.”

What an evil! Why, it’s almost sinful to ask counties to raise funds to prevent stormwater runoff from polluting the Chesapeake Bay and its tributaries.

Demanding an end to the “rain tax” is good Republican red meat.

The fact that the tax is pretty much voluntary already is irrelevant to Hogan. He’s in this fight for long-term political gain. He’s using this gambit to undercut Democrats.

He’s also making enemies in the General Assembly — powerful enemies he will need as friends in short order.

Democrats’ Response

There was few references to bridge-building in Hogan’s speech, or in the press conference he called to introduce his “rain tax” abolition bill. He was using tired campaign rhetoric.

No wonder Democratic leaders responded with coolness, followed by sharp criticism.

Then they delayed approval of his Cabinet appointments.

The battle lines are hardening far earlier than anticipated, and Hogan is to blame.

The new governor’s State of the State address was so short on specifics as to make it a useless document for determining how he intends to find common ground with the dominant political party in the General Assembly.

His “rain tax” remarks this week added fuel to the fire.

Hogan -- State of the State Hogan can win most of his budget fights with the legislature, but he is a sure loser on all other legislative matters if he doesn’t stop his partisan rants. He needs to figure out where he and House Speaker Mike Busch and Senate President Mike Miller are in agreement.

Delivering a budget that necessarily tightened the state’s purse strings was bound to cause ill will and anger. Hogan has done little since then to bridge the gap with Democrats.

In his State of the State address, Hogan pledged to “create an environment of trust and cooperation, one in which the best ideas rise to the top based upon their merit, regardless of which side of the political debate they come from.”

A week later, that remark seems a mere platitude.

Until Hogan drops the partisan politicking, his legislative agenda is dead in the water.

He’s got to start acting like a governor, not a candidate.

###

Hogan’s ‘Deflategate’

By Barry Rascovar

Feb. 2, 2015 — Talk about an uneven fight! When it comes to shaping the Maryland state budget Gov. Larry Hogan Jr. is the pre-determined winner.

Gov. Larry Hogan Jr.

Maryland Gov. Larry Hogan Jr.

Think of the budget as a balloon. The governor decides how much air gets pumped into the balloon ($40 billion). Once this is done, the legislature can let out some air — but it can’t expand the size of the balloon at all.

This year the new Republican governor embarked on a truth-in-budgeting drive, eliminating much of Maryland’s underlying structural deficit with $1.3 billion in cuts.

In other words, Hogan presented the legislature with a dramatically smaller balloon to play with. And there’s nothing lawmakers can do to create a bigger budget balloon short of raising taxes — pretty much of a non-starter this year.

Hogan’s ‘Deflategate’

By taking a considerable amount of air out of former Democratic Gov. Martin O’Malley’s overinflated budget balloon of last year, Hogan created his own “deflategate” controversy.

While Maryland’s gregarious governor can’t be compared to the frowning Bill Belichick of the NFL’s “deflategate” kerfuffle, Hogan isn’t making Democrats in the General Assembly happy.

'Deflategate' Novelty

‘Deflategate’ Novelty

The Black Caucus wants Hogan to reconsider his cuts to education in key aid categories that overwhelmingly impact two of the state’s worst-performing school districts — Baltimore City and Prince George’s County. A number of smaller, rural counties received education cuts as well, angering local educators.

Even Senate President Mike Miller, who is attempting to remain on good terms with Hogan, said, “We’ve got to try to get more money in the classroom.”

Easier said than done, as the cagey Miller well knows.

New Reality for Democrats

Democrats are facing a new playing field. Hogan brings to the table decades of experience as a real estate salesman. He’s got definite ideas on how to run the state in a business-like manner. That begins with keeping spending under control.

Thus, his first budget contains fewer transfers and gimmicks than during the O’Malley years, or even the Ehrlich years. Hogan spread his budget cuts around, though education and health care — the top spending drivers — took the biggest hits.

Hogan also is seeking legislative approval to weaken the state spending mandates on education, health care and the environment, among others. He wants those mandates changed so that required funding grows at a slower rate than the state’s annual spending plan.

This is straight out of Economics 101 — make sure you don’t pay out more than you take in, and build in a cushion.

If Democrats follow Hogan’s request, Maryland’s underlying structural deficit could be on the road to elimination for a few years.

No Free Ride

But Hogan isn’t going to be given a free ride. Compromises on both sides are inevitable. The hit to education will be moderated and some other cuts will be, too.

With guidance from the Department of Legislative Services, lawmakers will make $100 million or more in budget cuts in other areas. They also could juggle fund accounts and transfers in a manner that creates more cash in the state’s general fund budget.

Budget Secretary David Brinkley

Maryland Budget Secretary David Brinkley

Give-and-take discussions with Hogan and Budget Secretary David Brinkley will likely lead to common ground. In the end, the hit to education won’t be as severe.

Lower Spending Mandates?

As to Hogan’s request to lower on-going spending mandates, the General Assembly may decide to take a firmer stand.

Democrats cannot totally rebuff Hogan’s request to re-write the spending mandates because they then would have to find the money to pay for this new funding — an impossibility without raising taxes.

More likely, lawmakers will meet Hogan halfway — reduce the annual, mandated growth contained in these spending formulas, but not as much as the governor wants.

The sad reality for lawmakers is that Hogan doesn’t need a permanent change in the spending mandates to carry out his fiscal belt-tightening.

Same Script, Same Results 

If necessary, he can follow the same budget script in 2016 and beyond as this year, leaving lawmakers with little recourse but to go along with Hogan after hammering out concessions.

Hogan wins either way.

Adjusting to this new playing field isn’t comfortable for Democrats, who are used to having the Democratic governor tack on a few more tax increases to pay for ever-growing, mandated payments to local governments and social programs.

Yet Hogan’s budget adjustments are far from Draconian. He’s practicing traditional, conservative economics without being vindictive or mean-spirited.

Democrats in Annapolis have little choice but to adapt. Their only weapons: Political negotiation and compromise.

Barry Rascovar’s blog can be found at www.politicalmaryland.com. He can be reached at brascovar@hotmail.com.

 

Hogan’s Placeholder Budget

By Barry Rascovar

Jan. 26, 2015 — Gov. Larry Hogan Jr. must be doing something right in his first few days in office because he’s got nearly everyone upset about his $40 billion budget.

Gov. Harry Hogan Jr.

Gov. Harry Hogan Jr.

Republicans and Democrats, liberals and conservatives, lobbying groups of all shapes and sizes are griping about parts of the new governor’s spending plan.

That’s a good thing: Hogan needed to dispassionately cut $1.25 billion to present a balanced budget, which meant making everyone uncomfortable.

In reality, this is a placeholder budget for Hogan. The more substantive and important task of analyzing Maryland spending and eliminating or paring down non-essential expenditures will be reflected in Hogan’s  budget a year from now.

‘Just a Start’

The new governor laid this out clearly on Friday:

“The presentation of this budget is just a start. We will have much more to do in the days ahead to redirect our state’s fiscal course. Programs must be examined. New debt must be managed prudently. Agencies must be consolidated. Mandates must become affordable. In short, the government must become efficient and practice fiscal integrity.”

Think about the sweeping nature of what Hogan is saying.

  • A top-down deconstruction and reconstruction of every nook and cranny of the state budget.
  • A major downsizing of Maryland’s overly ambitious — and ruinously expensive — bond and construction program.
  • Elimination of some agencies or departments as separate entities.
  • A major debate on changing existing spending mandates so they are affordable.

Plenty of dust-ups and angry disagreements are inevitable. It will start in the current General Assembly session with Hogan’s “mandate relief legislation.”

There are dozens of requests in this budget for legislative changes to reduce mandatory state spending. That will test the limits of Democratic cooperation with the new Republican governor. Budget balancing Hogan’s immediate challenge was to whip up a patch-work budget that repaired the fiscal damage outgoing Gov. Martin O’Malley left behind — a budgetary river of red ink.

Thanks to the wizardry of gubernatorial adviser Bobby Neall — an acknowledged master of the state’s budgeting process — Hogan was able to balance to state’s books without causing extreme harm to any needy group.

Instead, Neall and Hogan found ways to nip and tuck throughout state government and rein in aid to localities. Neall and Hogan ratcheted down state spending from 5 percent growth to 1.5 percent growth — a full two percentage points below slowing revenue forecasts.

Keeping growth well under the tax money flowing in will be a hallmark of the Hogan years.

Former Sen. Bobby Neall

Former State Sen. Bobby Neall

To balance the books, state employees will lose their 2 percent pay increase that started in January but which now will end in July. The workers’ unions aren’t happy.

Neither are environmentalists with Hogan’s bid to take $50 million from Program Open Space and not pay it back later. The Big Three jurisdictions — Baltimore City, Montgomery County and Prince George’s County — got hit hard with cuts to education aid. Yet so did smaller jurisdictions.

The counties also were upset with Hogan’s failure to increase local highway aid, which ended up getting cut. Hogan was an equal-opportunity, bipartisan budget-cutter.

Tough Road Ahead

The governor’s spending blueprint is, as he indicated, a starting point. Tough negotiations lie ahead with legislative budget leaders on ways to re-arrange some of the pieces to this fiscal puzzle.

With luck, there will be an upward revenue revision in March to ease some of the pain that Hogan imposed to get Maryland’s budget back in structural balance.

As Hogan noted, Maryland has been following “an unsustainable fiscal path” for a long time.

Even under Republican Gov. Bob Ehrlich, no lasting attempt was made to keep the general fund budget structurally balanced. In recent years under O’Malley, no attempt was made to reform out-of-control borrowing that is now leading to out-of-sight debt costs.

Fixing messy budget situations is never pleasant or easy.

It took an outsider with no elective government experience to bite the bullet.

Hogan has his work cut out to find middle-ground agreement on his budget fixes — but he is off to a solid start.

###

Hogan’s Era of Good Feeling

By Barry Rascovar

Jan. 21, 2015 — At least for a brief moment, Gov. Larry Hogan Jr.’s Era of Good Feeling ruled Annapolis.

Hogan Inauguration

We’ll soon learn if his strong message of bipartisan harmony and mutual respect can survive the harsh reality of Hogan’s first, greatly diminished budget, which he’ll release Thursday.

Hogan’s inaugural, with snow flakes falling faster and faster as the event progressed, struck all the right chords.

“Dignity, respect and camaraderie” is what we expect from our public servants, said Jim Brady, who presided over the outdoor ceremonies on the State House steps and also ran Hogan’s transition team.

“Focus on things that unite us” and “work across party lines,” was how Lt. Gov. Boyd Rutherford put it.

“Compromise and consensus are not dirty words,” emphasized New Jersey Gov. Chris Christie, who introduced the new Maryland governor and championed Hogan’s election.

Hogan’s Themes

“A rebirth of our spirit and common purposes,” is how the 62nd governor of the Free State expressed it. No more “wedge politics and petty rhetoric.” A “new beginning.” A “sense of optimism.” “Limitless possibilities.” “An environment of trust and cooperation” where ideas are acted upon “based on merit.”

All the right words. It was a typical inaugural, full of positives and good wishes.

Hogan came across as he always does: a down-to-earth fellow who wants to run government with the focus on efficiency and effectiveness, not political ideology. He repeatedly used the term “common sense” to describe how he will govern.

He quoted a Democrat (John F. Kennedy) and a Republican (Abraham Lincoln) to stress the need for a new approach in political Annapolis that sets aside differences and finds “middle ground.”

A Little Red Meat

There were a few digs sprinkled among the words of comity, especially when Hogan spoke of “rebuilding the forgotten middle class” and getting government “off our backs and out of our pockets” — red-meat Republican applause lines straight from his campaign monologue.

Once the celebrations are over late tonight, the real work begins. It won’t be pretty and it won’t be met with unified applause.

Hogan promised to set Maryland on a different course, one that re-shapes the bloated state budget in ways Democrats are likely to resist.

The Inauguration Scene

The Inauguration Scene

There is growing agreement even on the Democratic side that Maryland has been living beyond its means, that spending on programs is expanding faster than the tax receipts coming in.

But will lawmakers stand by idly as cuts are made to education and health care? Are they willing to forego mass transit lines? These are the kinds of questions intentionally left out of inaugural speeches.

Putting Maryland on a more sustainable fiscal footing is an admirable goal that could help Hogan meet his pledge to lower taxes. Yet it will be difficult to achieve in the short term and possibly even in the long term unless Hogan gets  a boost from the national economy.

On another front, Hogan can take early, unilateral steps to cut red-tape and bureaucratic regulations. It’s been needed for a long time. The push-back from special interests could be intense, though.

For a day, Larry Hogan’s vision of a less partisan, more practical state government in Annapolis held sway.

The Hogans and Rutherfords in the State House.

The Hogans and Rutherfords in the State House.

His unfailing optimism and ability to search for areas of agreement are his greatest assets. He’s taking a more accommodating track than Maryland’s last Republican governor, Bob Ehrlich.

So far, Hogan is off to a cheery and encouraging start.

###