Phony ‘Rain Tax’ War

By Barry Rascovar

March 24, 2015 — Opponents, especially Gov. Larry Hogan Jr., deceptively call it the “rain tax.” But the name and the issue are about as phony as a three-dollar bill.

Hogan used his mischaracterization of the stormwater remediation fee to great effect in winning the governorship. “Why they’re even taxing the rain!” he exclaimed in a highly effective TV ad.

Gov. Larry Hogan Jr.

Governor Larry Hogan Jr.

It’s actually a broad user fee based on how much stormwater pollution flows from roofs and parking surfaces — runoff that can cause great harm if it ends up in the Chesapeake Bay.

Hogan turned this into a political anti-tax, anti-government crusade. For him, this unconscionable levy showed the overreach of the O’Malley administration, which taxed anything that moved to fund an ever-growing list of do-gooder social programs.

Hidden Facts

His propaganda pitch worked; now Hogan is governor.

He pledged to eliminate the “rain tax.” but It isn’t working out that way.

Here’s a fact Hogan never told voters: Even if he could eliminate the “rain tax,” that step wouldn’t lower state or county spending by a penny.

Indeed, wiping out the “rain tax” would have zero impact on Hogan’s state budget. Repeat: zero impact.

It would affect some county taxpayers who now are assessed a stormwater remediation fee on their annual property tax bill. They could see their county taxes lowered minimally.

Another Catch

Here’s another catch: In each of the 10 jurisdictions affected by the “rain tax,” eliminating the levy could force county officials to make cuts in other programs like schools and public works.

It would be a lose-lose scenario.

That’s because these counties and Baltimore City are under a federal mandate to reduce polluted stormwater pouring into the bay. With or without the “rain tax,” they are required to continue paying for costly stream restoration and other cleanup efforts.

For example, Baltimore County spends $22 million a year on its remediation work. That money comes from the “rain tax.”

Eliminate the levy and the county still must come up with $22 million for those environmental-protection projects. That’s about the cost of a new elementary school.

In other words, it’s a zero-sum game.

If Hogan were to get his way, county governments would be squeezed to find money for those mandated environmental activities. Other programs financed by the counties would take the hit, be it schools, government-worker pay raises, road repairs or social programs.

Symbolic Reduction

Baltimore County Executive Kevin Kamenetz already has made a symbolic reduction in his county’s stormwater remediation fee, lowering the levy by one-third. He found roughly $8 million of savings in his budget that now will be used for these anti-pollution projects.

Stream restoration

Stream restoration project in Baltimore County

The county’s stormwater remediation work continues unimpeded. In future years, though, it could become increasingly difficult to find that extra money without cutting back in other areas.

 

Miller’s Plan

On the state level, symbolism is the name of the game, too.

Senate President Mike Miller, the most astute political mind in Annapolis, came up with the ideal Democratic response to Republican Hogan’s “no rain tax” demand.

Miller won unanimous Senate approval for his bill that makes the county remediation fee optional.

If Frederick County, Harford County or Carroll County wants to get rid of the fee totally, they are free to do so. But they still have to ante up millions to finance a long list of remediation projects.

That burden remains.

Indeed, Miller’s bill requires those counties to specify their remediation efforts and identify how they will be funded. Failure to do so could lead to a loss of state dollars.

Smarter county officials, who understand the value of spreading the tax burden for these anti-pollution efforts, could continue their fees under Miller’s bill. They won’t have to limit other county programs to make room for mandated remediation projects.

Curious Debate

Whether Miller’s “rain tax” option makes it through the House of Delegates is in doubt. Some Democrats there want to keep the current fee in place, despite the political advantage it gives Hogan and his conservative allies.

It’s one of the more curious debates to grip Annapolis in years.

No state taxes are involved.

No county saves a penny if Hogan gets his way.

The stormwater anti-pollution programs must continue — unless a county wants to get sued by the federal Environmental Protection Agency.

Miller’s compromise bill offers a sensible way out for everyone. That’s why Hogan has thrown his support behind it.

Regardless of the outcome, this phony “rain tax” war will continue. Hogan will milk it for all it is worth — even if the facts aren’t on his side.

###

Betraying State Workers

By Barry Rascovar

March 23, 2015 — Once again, the House of Delegate took the easy way out of its budget bind — and in the process stuck it to future state workers, teachers and taxpayers.

The Senate is on a glide path that follows that same flawed approach.

Instead of facing up to its fiduciary pension obligations, Annapolis delegates opted to play games, placing at risk the safety of state retirement programs.

Budget balancing

In the process, the delegates are leaving the next generation of taxpayers a monster-sized unpaid pension bill totaling in the billions.

If Maryland loses its prestigious triple-A bond rating, you’ll know who to blame.

Thanks to the intellectually dishonest proposal by the Department of Legislative Services, the delegates found a way to save $75 million this year to pay for K-12 education and a salary increase for state employees — if the governor goes along with those suggestions.

How It Started

Back in 2011, the state agreed to supplement its annual pension contribution by $300 million a year. This was the quid pro quo for forcing state employees and teachers to contribute more out of their own paychecks to the pension program.

But lawmakers reneged on the bargain, eventually cutting their supplemental payments to $150 million a year — or to zero when times got tough.

Now the House wants to reduce the state’s supplemental payment to just $75 million each year — a far cry from the original $300 million commitment. Meanwhile, state employees and teachers get no relief in their enlarged pension payments.

A major part of the rationale for this irresponsible move by lawmakers is the fast-rising value of the retirement agency’s stock portfolio. Last June 30, the state pension program topped $45.4 billion — a rise of $5.2 billion in just one year.

Its investment return for the fiscal year was a strong 14.4 percent. Fund managers have exceeded their target of 7.7% growth in four of the past five years.

Roller Coaster Ride

Sounds wonderful, doesn’t it?

It certainly entranced the legislature’s budget analysts, who cited the stock market rise as a key factor in recommending that the state slash its supplement payments by 75 percent.

But a funny thing is happening on Wall Street.

In the first 75 days of 2015, stocks ran out of gas. The long rally stalled. Prices are about where they were on Jan. 1.

If Wall Street’s prices fail to rise, or even fall, for the rest of this year, Maryland’s pension managers won’t come anywhere near their 7.7 percent growth target.

The retirement agency’s unfunded liabilities could jump substantially — and the heat will be on state legislators and the governor next year to make up the difference.

Inevitable Downturn 

That’s why the legislature’s quest for immediate gratification is so misguided. This is not the time to monkey around with reduced pension contributions.

When the bulls rule Wall Street, Maryland politicians start thinking they can cut back on the state’s pension appropriations. But that ignores the inevitability of the economic roller coaster. Prosperity only lasts so long.

If lawmakers don’t prepare for the lean years they will put Maryland’s pension program — already nearly $20 billion in the hole — in an even worse bind.

###

A Republican MD Senator?

By Barry Rascovar

March 16, 2015 — Did Republican Larry Hogan Jr.’s surprisingly large victory for governor last year blaze the path for a GOP upset in next year’s open seat for the U.S. Senate?

Gov. Larry Hogan Jr.

Gov. Larry Hogan Jr.

Probably not. Then again, politics is a mercurial business. Given the right circumstances, a longshot scenario might come true.

No Hogan Clones

Here’s the problem: The presumptive GOP candidates aren’t following the winning Hogan formula.

They are very much right of center and outspoken in their conservatism. In liberal Maryland, that’s a distinct turn-off for general election voters.

To understand the state GOP’s dilemma, look at the reasons Hogan won:

  • He stuck to a narrow, economic-driven campaign pitch — high taxes, overreaching government and politics as usual — with virtually no details.
  • He ignored bitterly divisive social issues, much to the discomfort of hard-nosed conservatives, and charted a moderate course.
  • He came across as Maryland’s “Happy Warrior” with a winning smile and demeanor.
  • His opponent, Lt. Gov. Anthony Brown, ran a dysfunctional campaign and turned off voters with his arrogance and aura of entitlement. His voters stayed home.

It’s no secret that for a Republican to win statewide in Maryland, the Democrats really have to mess up. Did they ever in 2014.

It is entirely plausible Maryland Democrats once more will eat their own and wind up with a far-left candidate who turns off a large chunk of the state’s moderately liberal electorate.

Right-Wing Believers

That would set the stage for a strong Republican Senate challenge, backed by tens of millions of national GOP donor dollars.

But none of the names being floated are likely to resonate with dissatisfied Democratic voters and independents. They are angry, right-wing true believers who denigrate the kind of middle-road, non-ideological, problem-solving Maryland voters tend to favor.

Consider the individuals being mentioned as possible Senate candidates:

Bob Ehrlich. The former governor would win the primary in a cakewalk, but since he left office he’s moved more and more rightward into knee-jerk, pessimistic anti-Obamaism. His four years as governor disappointed Democrats and Republicans, he lost reelection and his attempt to recapture the office in 2010 proved an embarrassing flop, losing by nearly 15 percentage points. Portraying Ehrlich this time as a moderate Republican would be a stretch.

Andy Harris. The First District congressman is as far right ideologically as you can get and still be elected in Maryland. He can come across as arrogant and stridently sure of himself on just about any issue. A former state senator, Harris’ vocal and energetic conservatism might generate a backlash that results in a heavy Democratic turnout on Election Day. He’s far from an ideal statewide candidate in Maryland. Besides, he’s got a lifetime seat in his House district that he’d have to give up.

Dan Bongino. The almost-congressman nearly upset Democratic Rep. John Delaney in a gerrymandered district that includes Western Maryland and portions of Montgomery County. He lost by less than 3,000 votes. Bongino also ran against U.S. Sen. Ben Cardin in 2012 and got clobbered, winning just a quarter of the votes. He’s charismatic and a former Secret Service agent. But he’s all conservative all the time. He’d have little drawing power outside rural and exurban areas.

Michael Steele. The former lieutenant governor and GOP national chairman doesn’t have much to crow about other than espousing traditional conservative Republican themes. He lost badly when he ran for the Senate in 2006, losing to Cardin by 10 percentage points. He has no base beyond traditional GOP precincts and no credibility in Democratic strongholds.

Kendel Ehrlich. The other half of the Ehrlich team, she considered running for judge in Anne Arundel County and is not bashful about expressing her hard-edged conservative views. She’s never held elective office and has few credentials to promote. She’s much farther to the right in her political thinking than her husband.

That’s hardly an exciting list of GOP contenders. Too many retreads or not-ready-for-prime-time players. None of them fits the winning Hogan mold.

Still, the fate of the GOP primary winner may lie more in the hands of Democratic primary voters. Should Dems select another dud like Anthony Brown last year (or Kathleen Kennedy Townsend in 2002), anything would be possible for Maryland Republicans.

###

Rating MD’s Senate Contenders

March 9, 2015 — The stampede began almost immediately — just as retiring Sen. Barbara Mikulski predicted.

The savvy senior U.S. senator knew her announcement last week would shake up political Maryland and give ambitious younger officials an opportunity to consider entering the race to succeed her next year.

Sen. Barbara A. Mikulski

Sen. Barbara A. Mikulski

Many are mulling the possibilities, but in the end most will choose to remain in their present jobs.

After all, running for Mikulski’s seat is no sure thing. These contenders have to weigh the risks, which are considerable.

Do you give up a prestigious, hard-won seat and gamble your entire career that you can win a difficult, crowded Senate contest?

Can you put together a statewide operation in a little over a year after only running far smaller district campaigns?

Can you raise $5 million or more in the next 12 months when others are likely to hit up the same donors with similar requests?

Can you run a campaign with statewide appeal? That’s no easy feat. Washington-area officials and Baltimore-area officials are looking at this race but none has appeal outside his or her parochial boundaries.

Given those imposing caveats, let’s look at the early list of wannabes.

Most Likely to Run

Chris Van Hollen, Jr. — He’s popular in heavy-voting Montgomery County. He’s been tabbed as a rising star in both the Maryland General Assembly and U.S. House of Representatives. His ambitions always included ascending to the U.S. Senate.

Unlike the others, he’s had phenomenal success raising tens of millions of dollars for Democratic congressional candidates across the country. He will tap those same sources for a Senate race. He starts with $1.7 million already in his campaign account.

Giving up his seat was’t be easy because he’s a member of leadership and a potential future speaker of the House. But he’s crossed the Senate Rubicon.

Van Hollen, 56, is likeable, an excellent speaker and telegenic. He’s a typical Montgomery County liberal, which puts him in the mainstream of today’s left-leaning state Democratic Party. He’s also gained enormous expertise on federal budget issues.

He could be the class of the field.

Donna Edwards — The most liberal of Maryland’s congressional Democrats, she owes her political career to her strong ties to organized labor, which could go the extra mile for her.

She has decided to risk her prominent role in Congress as an outspoken voice for labor, civil rights and women’s issues.

Edward, 56, is not beloved by her colleagues and she is not wildly popular among constituents, who have found her lacking on constituent service. She would rather speak out loudly on national issues she cares about.

If she is the lone African-American in the race and the lone woman, Edwards might squeak through in a crowded Democratic primary. But her far-left liberalism would make it difficult for her to win in a general election if Republicans nominate a moderate Senate candidate.

John Delaney —  He used his self-made multi-millions to finance a successful run for the House in 2012, thanks to a gerrymandered district that favored a Montgomery County Democrat. Yet he barely won reelection last year.

Still, he’s got burning ambition and he considered running for governor last year. Given his shaky performance in last year’s congressional race, Delaney, 51, may figure it is time to move up or out.

He’d have no trouble financing a Senate race but he is unknown in much of the state. His campaign also is likely to be run by the same individual who put together such a dreadful political operation last year for former Lt. Gov. Anthony Brown.

Delaney has carved out a moderate, pro-business posture in Congress focusing on his sensible infrastructure-funding bill that has drawn support from both sides of the aisle. That’s not a good campaign sound-bite, though. He may well run (since he’s not a career politician) but he won’t be the favorite in a Democratic primary where a heavy turnout among liberal voters is expected.

John Sarbanes — The son of a popular retired U.S. senator who has been in Congress three terms, he’s a chip off the block — quiet, publicity-shy, intelligent, diligent and super-cautious.

At age 52 he’s got to determine if he wants a long career in the House of Representatives or is he willing to roll the dice and possibly sacrifice his political future. His father, Paul, did but this time the odds are much steeper.

John Sarbanes could tap into the affluent Greek-American community for campaign funds. Still, does he want to spend all year begging donors to contribute and flying around the country to line up financial support?

His father’s name is well known in the Baltimore region but not so much elsewhere.  John Sarbanes is a solid liberal vote in Congress and he’s a down-the-line Democrat but his bland personality and cautious disposition aren’t ideal in a crowded race.

Less Likely to Run

Stephanie Rawlings-Blake — Baltimore’s mayor has a big decision to make. Does she abandon her so-far successful effort to resurrect Baltimore’s fortune or does she set her eyes on a career in Washington?

Rawlings-Blake, who is only 44, has been an elected Baltimore official for 20 year. She would roll up a big vote in Baltimore and in parts of the metro region but she’s an unknown in the D.C. suburbs and rural Maryland.

She’d also start with zero funds in the bank — none of the dollars she has raised for her reelection bid next year can be used in a federal campaign. That’s a huge detriment.

Running a complex and troubled city like Baltimore while simultaneously mounting a statewide Senate campaign could be a bridge too far.

Compounding her decision is that there is no highly competent successor waiting in the wings to succeed her as mayor. Apres moi, le deluge?

Dutch Ruppersberger — If he were 10 years younger, the Baltimore County congressmen would be in the “likely” category. But at age 69, with a succession of surgeries over the years, taking on a grueling statewide campaign while maintaining his normal congressional schedule might not be his cup of tea.

Ruppersberger’s huge popularity in Baltimore County and his district’s reach into key parts of the Baltimore metro area would give him a solid vote base. How he would fare in the Washington suburbs — where he’s not a familiar face — is a tougher question.

Raising such a huge amount of campaign dollars isn’t something Ruppersberger would relish, either.

He’d also have to give up his House seat, where he is one of the leading experts on cyber security. Chances are he opts to remain where he is.

Elijah Cummings — The Baltimore congressman has never ventured beyond district races but he is a fiery speaker and determined fighter for Democratic Party ideals. If he were the only African-American considering the Senate race, he’d be tempted.

Putting together a statewide operation and raising such sums of money could be distasteful and difficult. Cummings, 64, is unfamiliar with much of the heavy-voting Washington suburbs but he’d do exceptionally well in Baltimore.

He’s a national spokesman on liberal and civil rights issues in the House and often in the national spotlight. Why give that up?

Tom Perez — The Obama administration’s labor secretary and former high-ranking Justice Department official wanted to run for attorney general but couldn’t because he hadn’t practiced law in Maryland.

He is ambitious and well-liked in his home base, Montgomery County, but in a large field his support could be too narrow. He also might have trouble raising enough dollars.

Will he give up two more years in a national Cabinet position for a longshot bid? It’s possible but unlikely.

Kweisi Mfume — The former congressman and former head of the NAACP tried once before to win a Senate race, narrowly losing the primary to current incumbent Ben Cardin nine years ago.

Mfume, 66, might jump at a second chance to start a Senate career were he a bit younger. He’s eloquent and has a riveting life story to tell. But fund-raising was a problem in his last Senate attempt and he’s not been part of Maryland’s political dialogue since then.

Already Out

Martin O’Malley — The former governor and Baltimore mayor would have been a favorite but instead opted to run for president (really!). He loves the executive role and knows he would chafe in the Senate with its snail’s pace and bitter partisan gridlock.

If he plays his cards right, O’Malley, 52, could gain a high executive post in a Democratic administration and build his credentials for a future run for the country’s top post.

Steny Hoyer — At age 75, it makes sense for the No. 2 Democrat in the House of Representatives to stay put. He ran once on a statewide ticket, in 1978 as lieutenant governor, and lost. He knows how tough it would be.

Besides, Hoyer is far too valuable to Maryland in the House. With Mikulski’s departure from the Senate, he’ll be the only “go-to” guy in Congress in prime position to secure funds and advantages for the Free State.

You’ve Got to Be Kidding

Heather Mizeur — Yes, the former delegate ran an impressive and respectable race for governor last year as an ultra-liberal but now she’s supposedly farming on the Eastern Shore.

Her appeal is to the gay/environmental/feminist community. That proved not nearly enough for her last year (roughly 20 percent of the primary vote). Does she want to spend 12 more months trekking through Maryland on a crusade going nowhere?

Ben Jealous – Another former leader of the NAACP, he is considering jumping into the race. It would be primarily ego-driven. Jealous has no political roots in Maryland and the most tenuous of ties to the Free State. He’s not well known in any part of the state.

Even if he is the only African-American in the race, Jealous is unlikely to prove a big draw among his own constituents. In other communities, he’d barely register on Election Day.

Doug Gansler — Yes, he still wants to run statewide again — though he was embarrassed in last year’s race for governor, getting embroiled in pointless controversies.

The two-term former attorney general is just starting a career with a Washington law firm. Jumping back into fund-raising mode and 24/7 campaigning so soon may not be his best option.

Ken Ulman — The former Howard County Executive gave up his gubernatorial dreams last year in part because of the fund-raising challenge.

Running for the Senate would pose a far more daunting financing obstacle. Besides, he’s just beginning his new job trying to juice up College Park’s economic development efforts.

Kathleen Kennedy Townsend — Whaaa?? She says she’s considering a run. It sounds preposterous given her pathetic run for governor in 2002 and the lack of political sympathy for her poor performance. Still, politics is in the Kennedy family’s DNA.

Townsend, 63, may want to redeem herself, but she has been absent from Maryland politics for over a dozen years. It would be a Quixotic effort that almost certainly would end in a humiliating second defeat.

That takes care of the likely Democrats considering the Senate primary. As for the Republican wannabes, that is grist for another column.

###

Reneging on a Promise – Again

By Barry Rascovar

March 2, 2015 — The legislature’s fiscal leaders, in a truly bizarre move, are considering reneging — once again — on a commitment to state workers and the public by pulling the plug on supplemental state contributions to Maryland’s severely underfunded pension program.

It would save $71 million this year, $179 million next year and $233 million the third year. But, over a 25-year span this action would cost taxpayers a staggering $2.5 billion.

This suggestion from the legislature’s own analysts didn’t come out of the blue. The Department of Legislative Services was told by Democratic leaders in the legislature to find mounds of money that could be cut from the budget for later redistribution to their priorities — education and health care.

‘Deja Vu’

The result is an incredible prostitution of DLS’ fiscal stewardship. It is as though these analysts and legislative leaders learned nothing from the pension debacle of the past decade.

If approved, this proposal would be, as Yogi Berra once said, “Deja vu all over again.”

Solving a short-term budget problem would seriously threaten the state’s long-term fiscal viability — and its triple-AA bond rating.

Legislators would be gambling that a booming stock market continues over the next decade without let-up. This would easily erase the need for supplemental pension payments by the state to help close a whopping $19 billion unfunded liability.

But what if economic good times fade? What if — as is almost inevitable — the stock market suffers setbacks during that time?

Irresponsible Plan

Unfunded liabilities in the state worker and teacher pension accounts would soar, just as they did during the recent Great Recession.

It is a foolish and fiscally irresponsible proposal that never should have been presented to the legislature. It could make a bad situation worse and set off alarm bells at bond-rating agencies.

Interestingly, the Hogan administration considered this proposal and rejected it — even though it would have helped close a $1 billion budget gap.

Budget Secretary David Brinkley

Budget Secretary David Brinkley

David Brinkley, Hogan’s budget chief, said the decision was made to honor the state’s commitment to its employees.

In 2011, lawmakers approved reforms that raised employee payments to the pension system, reduced benefits for new workers and committed the state to increasing its annual payments.

Reneging on that agreement would be a terribly crass and unwise step, a slap in the face to state workers and public school teachers. They still must ante up additional paycheck dollars to fortify the pension system.

Moral Obligation

Why should state legislators walk away from their end of the bargain?

“What duty do we have to employees,” said Del. Tony McConkey of Anne Arundel County. “What moral obligation do we have”?

Del. Tony McConkey

Del. Tony McConkey

“A promise made is a promise kept,” noted Del. Mike McKay of Allegheny County.

Indeed.

Short-sighted illogic got Maryland into deep trouble the first time. Will lawmakers be foolish enough to go down that road again?

Glendening Started It

Back in the early 2000s, Gov. Parris Glendening intentionally underfunded state payments to the pension program so he could increase education aid. The legislature not only went along but came up with a flawed accounting gimmick to justify lower payments.

Known as the “corridor funding method,” this scam lets the state cut its pension allocations when times are good and stock market returns are strong.

But when the recession hit in the late-2000s that corridor became a dead end. The state’s pension liabilities skyrocketed. Tough, painful reforms had to be instituted.

Eventually, the state pension board agreed to phase out the corridor funding method that had caused all the trouble.

Walking Away

Now, DLS is proposing that Maryland repeat its actions of the early 2000s, but without calling it “corridor funding.” The state would walk away from its pledge to state workers and teachers and stop its supplemental payments.

Sure, there would be short-term benefits, enabling legislators to allocate more money for other priorities. Over the next 11 years, the state would save $2 billion that could be spread around to worthy programs.

But here’s the catch: In the subsequent 14 years, the state would have to shell out a staggering $4.5 billion in extra payments to make the pension fund whole.

Even worse, that calculation doesn’t consider what happens to the pension fund in the next two or three recessions. After all, economic downturns are inevitable and an integral part of the economic cycle.

Nightmare on State Circle

What a nightmare this could turn into.

As Brinkley told the House Appropriations Committee on Friday, if the pension fund’s earnings performance turns south over the next 10 years, “this will be a disastrous decision.”

The legislature’s fiscal leaders, especially Del. Maggie McIntosh of Baltimore and Sen. Ed Kasemeyer of Howard County, need to think hard about the dire consequences that could ensue by taking such a dangerous step.

They should remember what writer-philosopher George Santayana said:

“Those who cannot remember the past are condemned to repeat it.”

###

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.

###