Where the $ Is: Modern Maryland's Ancient Revenue

WHERE THE $ IS: MODERN MARYLAND’S ANCIENT REVENUE

March 21, 2011

Dear Citizens and Elected Officials:

We are writing this post in the wake of the monumental union rally held in Annapolis on Monday evening, March 14, which drew some 15,000 people. Given the tremors the turnout set off, perhaps now it’s clearer why there is no legislative push to restore train service to the state capital.

Once again, as we reported in an earlier posting about the more tepid February 26th rally, there were no legislators who spoke, and, according to the Maryland State Education Association, none were invited. Governor O’Malley did manage to get in a brief speech near the end of the rally, following AFL-CIO President Trumka’s. Our translation of the Governor’s message is this: unlike Wisconsin, he’s not going to put public workers on the rack, or strip them of their bargaining rights, just give them a regrettable but necessary financial squeeze, because we all have to sacrifice and where else can we find the money?

Yes indeed, that seems to be the question of the day, nationally, and at the state budget tables: where, oh where, could the money have gone, other than to the pockets of public workers and their too generous pensions? Of course, as many on the left have said, we are not broke; we are a very wealthy nation, and Maryland is one of the very wealthiest states of that nation, standing 4th in median income, with Gov. Chris Christie’s New Jersey ranking second. In other words, we know perfectly well where the money has gone. Over the past 30 years, money and wealth has defied the old notion of gravity and flowed uphill to those who were already well situated near the crest of the slope.

Governor O’Malley likes to use the theme of One Maryland, the implication being, as he said Monday evening, that no one group is going to bear the brunt of the sacrifices, although the crowd at Lawyers Mall didn’t sound entirely convinced, chanting “Tax the Rich!” and “Keep the Promise.” They have a right to be skeptical, even as it’s true that Maryland is not Wisconsin and O’Malley is no Governor Walker. That’s because he, like the President, is not operating with a fully developed public philosophy and consequently their version of the political economy still overlaps in too many critical places with that of the fundamentalist Right. After all, the Center (think back to President Clinton) and the Right (Republicans and all the business lobbies except those for manufacturing) pushed neo-liberalism (another term for economic fundamentalism) down the throats of protesting labor, as Thomas Palley has reminded us all in his fine little essay America’s Exhausted Economic Paradigm (June, 2009). As if to rub salt into the wound of our very immediate troubles, Palley wrote that workers were trapped inside a four sided “policy box,” the four sides being “globalization, small government, labor market flexibility, and retreat from full employment.” Although they would probably protest, there is no doubt in our minds that Governor O’Malley and President Obama are still pushing in on workers from all four of the sides Palley has noted. Here’s the link to Palley’s work at http://www.newamerica.net/publications/policy/america_s_exhausted_paradi...

Because the Republican Right is always reading from a fundamentalist text (Friedrich Hayek’s The Road to Serfdom, 1944) they had no problem pivoting on the wreckage of the financial crisis to launch right into an attack on Keynesian economics, the role of the state and anything that looked like generosity towards public workers, the only unionized workers left standing after their decades of assaults on private workforce unions. As attentive readers also might have noticed, the Right is nothing if not comprehensive: they’ve gone after every possible leverage point the left might have used to turn the public discussion in a more progressive direction: gone after Van Jones and the Green Jobs response to Global Warming; gone after “Cap and Trade” even as it tried to please Goldman Sachs and the Wall Street banks’ derivative trading platforms; gone after ACORN and its inner city help to and voter registration of the poor; gone after Planned Parenthood and reproductive rights, again, especially those for the young and poor; gone after Public Broadcasting, the already greatly intimidated, meek voice trying to balance out Right Wing Talk Radio…there’s not much left standing, therefore, besides public unions…

But the Right still has a list of public functions they would like to privatize, and we’ve seen press accounts over the past year of a Maryland company that even specializes in privatizing public libraries. Topping the list of targets though, is public education, which plays out on so many planes to assist the Right: hedge fund honchos get to push private charter schools, break unions, reduce public pensions and therefore taxes, and attack job security and tenure, all at the same time. It all pushes in a conservative direction, aided and abetted by defensive liberals: who can be against excellence, defend incompetence hiding behind tenure, and merit pay? Who could deny that our schools and teachers could do better, especially in the inner cities? But wait a minute. Behind this whole line of reasoning is the assumption that failing teachers are the prime cause of failing schools, even under ghetto conditions, and we do mean ghetto, the Newark’s and the West Baltimore’s… Why aren’t schools seen as a reflection of society’s failings with race and poverty and the old crises of the inner cities, and as a mirror of America’s broader economic decline? Oh come now, the Right answers….these problems must reflect the failures of the liberalism, line item by line item, even if it was Albert Shanker, the AFT president from 1974 to 1997, who started the idea of charter schools, according to Diane Ravitch’s fine answer to the Right, The Myth of Charter Schools, (New York Review of Books, November 11, 2010.).

Ravitch’s article was a response to the documentary film Waiting for Superman, but her defense of public education and the role of teachers mirrors the chasms of the broader left-right fault lines in our society, now made so apparent by “Wisconsin.” She reminds us that “about 60 percent of achievement is explained by nonschool factors, such as family income…teachers can have a profound effect on students, but it would be foolish to believe that teachers alone can undo the damage caused by poverty and its associated burdens.” Yet that is precisely what we heard one of the national founders of “Teach for America” maintaining on the Charlie Rose show a month or so ago: that inspired teachers and administrators can overcome it all…all the destructive forces so ably laid out for us by David Simon and Edward burns in their tale of West Baltimore’s streets in The Corner…

Here’s how Ravitch maps it out for us: “There is a clash of ideas occurring in education right now between those who believe that public education is not only a fundamental right but a vital public service, akin to the public provision of police, fire protection, parks, and public libraries, and those who believe that the private sector is always superior to the pubic sector. Waiting for Superman is a powerful weapon on behalf of those championing the ‘free market’ and privatization.”

We ask our readers to, again, stop for a moment, pause as each of these individual state funding crises builds towards the grand one looming in Washington this April; stop and consider that every accountability thrust now directed at public school teachers could, just as well, and indeed, even more justly, be directed at America’s national business leaders, who, along with 99% of the economics profession, have presided over our nation’s economic decline, outlined above so succinctly by Thomas Palley. Accountability for failures? Which failures and whose accountabilities are the most significant? Teachers and their unions or Bill Clinton’s and Robert Rubin’s – to go along with Reagan’s, the Bushes’, Angelo Mozilo’s and Alan Greenspan’s?

Needless to say, we think the failures in the national schools (and Maryland should be the last state to take it out on their teachers and their schools) are reflections, rather, of the national economic failures over 30 years, and those failures can also be tracked by the transformations in the Democratic Party: from the party of the New Deal to its current manifestation as America’s second, and self-contradictory business party, one that puts the needs of upper middle class professionals and their view of the political economy far ahead of labor’s rank and file and the average, unorganized citizen, especially the 35.8 percent of the adult population who are no longer participants in the work force. That’s why this party’s President immediately placed a debt and deficit balancing commission on the nation’s agenda, even before he had adequately addressed the nation’s number one problem: tens of millions of missing jobs. He failed to realize, like most Democratic local and state elected officials who are required to balance budgets, that, given the very conservative bias in local fiscal proceedings, there had to be a deep and profound Washington Keynesian offset to what was inevitably to take place locally. There would be no other way to correct the deflationary downdraft unless citizens were to go to leaders like Maryland House Speaker Michael Busch in January of 2008, as we did, and ask him about the possibility of waiving balanced budget requirements under the duress of an economic emergency. Barring that, it was bound to be budget cuts versus revenue increases, where the Right has a 30 years “head start” and standing…and bound to be a wave of austerity instead of a wave of job creation, especially public job creation. This is political terrain that the Right has been licking their chops over for decades now. If you doubt that, please visit Bruce Bartlett’s ‘Starve the Beast’ essay from 2007, which covers the ground all the way back to Reagan, and opens its concluding paragraph this way: “Perhaps a future fiscal crisis will provide political cover for massive cuts in entitlement programs that would be politically impossible except in such dire circumstances.” (Here at http://www.independent.org/publications/tir/article.asp?a=641).

But it gets worse, given Maryland’s democrats’ participation in these trends, and intensified by their proximity to the “Beltway” Insiders’ influence, as Christopher Hayes fine piece in The Nation, “Why Washington Doesn’t Care About Jobs,” shows. Hayes tells us that college graduates have a much lower unemployment rate than the rest of the nation, and that the DC metropolitan area, in turn, being a vast gathering of professionals and college graduates, has the lowest in the nation. He goes on to make another crucial linkage, crucial for that evolution of the Democratic Party away from its New Deal days: “…our system is responsive only to voices at the top of the social pyramid – the bankers and businessmen who are raking in record bonuses and the professional upper middle class, which is recovering much faster than the nation as a whole…” Going further, he cites a political scientist’s finding that “‘when Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear little relationship to the preferences of poor or middle income Americans.’” Following some of the same reasoning, and going after the same indifference, Paul Krugman reminded us of the consequences in his column from March 18th, “The Forgotten Millions” Here they are at http://www.thenation.com/article/158992/why-washington-doesnt-care-about... and

http://www.nytimes.com/2011/03/18/opinion/18krugman.html?partner=rss&emc...

And that is the background, and the Introduction, to the subject line of our posting, why it is that Maryland can’t raise the revenue to balance its budget and meet its pension obligations, obligations which George Lakoff has reminded us are “deferred payments for work done,” by bringing its ancient (1947) sales tax up into the modern era. That year of the sales tax’s origin, the year of “reigning in” labor with the Taft-Hartley Act, after the greatest strike wave in American history in 1946, was a signature year for the old industrial economy that was based on making things, and not the rise of the service economy that would famously follow its fall, dating, arguably, from the mid-1970’s.

How out of touch is Maryland’s ancient sales tax? So out of touch that out of 168 categories of services which might be included in a sales tax – Maryland taxes only 39 of them – less than a quarter. And which services does Maryland leave out, according to the Puddester Commission findings from 2002? Why it leaves out precisely those professional, modern services that stand in such close proximity to the upper middle class profile of the New Democrats and New Democratic Party made by Bill Clinton & Company: Business Services, Information Services, Professional Services, Transportation, Financial Services…trailing off into the more mundane “Personal” and Repair Services….add them together and the Puddester Commission found missing annual tax revenues to be $1.6 billion to $2.2 billion. And let’s not be coy here; hiding amidst the Commission’s more generic categories are the hints as to why the legislature has so much trouble expanding its reach: these are accounting, engineering, legal, advertising and political “consulting” services, aren’t they?

Yet these would also be the very tax categories that would help make what is a currently a regressive tax much more progressive, because, even though they would be used occasionally by citizens from the lower and middle portions of society, they are used on a much more frequent basis by the participants in the upper middle stretches of our economy.

Indeed, we had a very high ranking legislative leader tell us, after we posed the question in a meeting in January of 2008, that these categories would never even be brought up, never put on the table – the implied, but unstated reason being the professional and business composition of the legislature itself. And there you have it: a very succinct, yet very instructive lesson in the basics of political economy, circa early 21st century.

And is that perhaps why Governor O’Malley’s signature legislation for 2011 is not a bill to bring the Maryland sales tax into the 21st century, but one rather to create yet another Maryland “venture capital fund,” one he hopes, yes, fairly, to create jobs, and replenish the already existing but depleted ones, but one that is quite convoluted and pitched towards the same upper middle class professionals that now tilt the Democratic Party towards the Republicans, and not their own traditional base. Once again, it’s Biotech! and IT!, not WPA and CCC.

So below, please find our little report, submitted to a Progressive Neighbors working committee back in July of 2008, but never really put on the table by progressive groups in Maryland. We urge our readers to share it with you own representatives in Annapolis. And please don’t misunderstand us. We fully support the push for Combined Reporting, but note that even at its most optimistic projections, that’s not a game changer in scope, although it is a good lesson in political economy and how wealth and income is hidden. And we also fully support the efforts of the Fund our Communities groups, with the caveat that abandoning futile Empire maintenance efforts is only the beginning; money not spent on military-industrial Keynesianism doesn’t mean that the Republican Right nor Democratic Center will necessarily agree to spend it on better alternatives…as the current “austerity” debates in Washington amply demonstrate.

That’s hard to believe, given the unemployment situation, but there it is. Progressives have a new political economy to build, and need to construct a philosophy to stand behind it. Even when some of them come together over the right direction, such as at The Campaign for America’s Future’s “Summit on Jobs,” (March 10, 2011, at the National Press Club), it’s pretty clear that they don’t have a common text or even texts (please understand that this is very different from elevating something to be “The Text.”); they’re all about organizing a movement, all urgency and alarm and energized by the Wisconsin moment, but it’s not matched by clarity in philosophy or political economy – not yet, anyhow. The best of the conference, we thought, were: the speech by Leo Hindery, Jr., a Democratic private equity fund investor who called for, among other things, a new WPA for jobs and putting America’s workers first (reminding us that for every person “officially” listed as unemployed, there is another ignored by the statistics, bringing the total to 30 million, and the rate to 20%, not the official 8.9% or so…); the Rev. Paul H. Sherry’s reference to FDR’s “Second Bill of Rights,” from 1944 and last, but not least, Van Jones’ call for a combination of individual hard work, of the “bootstrapping” he learned from his father – but – and a very crucial Social Democratic “but” it is – bootstrapping that’s met with a social “ladder,” the means of ascent to meet the will to ascend – the only way to get out of the very deep economic hole our nation’s economic leaders (not the teachers or other public employees) have dug for us. Right now, without a massive commitment to jobs, including public jobs, there is no meaningful ladder. We also like the way he addressed the Tea Party and their values, their definition of “Liberty” which leaves out “…and justice for all.” Here’s the pathway to the speeches we heard, at
http://ourfuturedotorg.blip.tv/?sort=date;date=;view=archive;user=ourfut...

And, as a proper lead-in to what we wrote almost three years ago, here is the New York Times’ front page article from just a few weeks ago, “Majority in Poll Back Employees in Public Unions.” Aside from that headline finding, the Times/CBS poll also found that “those polled preferred tax increases over benefit cuts for state workers by nearly two to one.” Here at http://www.nytimes.com/2011/03/01/us/01poll.html

MAKING MD’S SALES TAX MORE PROGRESSIVE
Bill Neil
July 2008

In the complex budget maneuvering of 2007-2008, the Maryland Legislature chose to raise the sales tax from 5% to 6% with the expected revenue increase to be $687 million in FY 2009. Based on 2007 numbers, the MD sales tax raised 3.62 billion dollars, 27% of the state’s general revenue, second compared to the 7.04 billion and 52.4% raised by the personal income tax (and just $598 million and 4.5% raised by corporate income taxes) Although Governor O’Malley extended the services taxed to four new categories, it was not a very bold effort and ended up targeting a “weak lobbying link” – computer services – which then rallied to repeal its inclusion. The significant thing here was the potential revenue raised by just this one category of service: $207 million. It is suggestive of Maryland’s deeper failure, to extend the sales tax base from its 1947 starting point of taxing only tangible goods, to capture the vast changes since then in an economy which has become more and more service oriented.

National tax studies indicate about 168 categories of services which might be included in a sales tax – and Maryland taxes only 39 of them. In the fall of 2007, the Center on Budget and Policy Priorities proposed taxing services such as cable and satellite TV, auto repairs, interior decorating, pet grooming, and country club memberships, which they say would have raised an additional $163 million. The list again hints at the unwillingness to take on the tough lobbies and therefore the big numbers: accounting, engineering, legal services, advertising. As a matter of fact, I have been unable to find even studies which would tell us what each of these services would generate if included in the sales tax. The closest we have, using broader categories which don’t highlight these services, comes from the Puddester Commission from November of 2002: Its list of revenue to be raised by “Taxation of Services” reads as follows:

“Business Services” - 600-700 million
“Information Services” – 325-385 million
“Professional Services” – 200-260
“Transportation” - 200-250
“Financial Services” - 150-230
“Personal” - 75-115
“Repair Services” - 50-80
_______________
Total Revenue from taxing “these” services: $1.6-2.2 Billion

House Bill 448 from 2007 started to head down this path. It proposed 30 new services to be included under MD’s existing 5% sales tax, and the revenue generated would have been an additional $657 million – without raising the rate to 6%. A sampling of the new services in the bill: auto repair and services, parking, barber and beauty salons, docking and boat services, engineering, storage, (shoe repair!), tax preparation and locker and storage facilities…..personnel and temp. Agencies….the numbers raised on certain services are impressive: engineering: $82.8 million; personnel and temp. $65.7 million.

This leads me to the conclusion that Progressives should keep the impressive categories from House Bill 448, drop the silly ones like shoe repair, and add advertising, accounting, legal, management and p.r

The obstacle is political: to get a legislature full of lawyers and accountants and sensitive to the lobbying power of the other big services named above (real estate-advertising), to even consider producing a study showing what the excluded services would raise in revenue. (Personal note: I’ve heard a high ranking state leader say these categories would never even be brought up, never put on the table, in answer to me directly raising the question in January of 2008).

Who has pushed in the Past: Progressive Maryland listed the same list as I have above from the Puddester Commission in their “Fiscal Crisis Briefing Book” from 2008, but it was near the end of a long document and did not seem to be a high priority.

Another Approach: There has been some discussion in Annapolis of enacting a Gross Receipts Tax, which 7 states have some variation of: Del., Kent., Mich., New Mexico, Ohio, Texas and Wash. – which functions almost like a sales tax on the purchasers of services as well as goods. Economists don’t like the pyramiding effect: many of our “hollowed out” business entities purchase accounting, advertising, etc. services from outside firms and each time they bought them, they would be hit by this tax…so this is a big obstacle…and progressives don’t seem too high on this approach, nor many economists. In a phone conversation I had with Neil Bergsman of the Maryland Budget and Tax Policy Institute (July 10) he favors, if we want to head down this route of taxing services, that the legislature bring all services under its sales tax – a kind of grand House Bill 448, and then enumerate which categories and exemptions it feels would be necessary to make it function well. I might add that part of the political trade-off in Annapolis might well be to reduce other corporate taxes if either this grand inclusion of services or the Gross Receipts Tax is enacted. Illinois considered the GRT approach – 1-2% would raise 6-8 billion…but it was not enacted.

Until the next post, all the best to our readers…

Bill Neil
Rockville, MD

PS Although it’s very late in the current (March, 2011) budget negotiations in Maryland, another pathway which leads directly from the answer to the question “Where did the money go?” is that the maldistributions of the past 30 years can’t be reached by just taxing income, you have to look at the different forms and places where wealth is stored (and hidden). That leads to the consideration of a surcharge on wealth, broadly defined, not income. An obscure “redistributionist” named Donald Trump suggested that a few years ago, at the national level. His is not the greatest recommendation we can think of, but The Donald just might have some idea of where “it is stored.”

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future