Category Archives: taxes

A Reply to Nancy Floreen on MCPS Funding

By Adam Pagnucco.

Thanks to Council Member Nancy Floreen for writing about MCPS funding in recent years in response to my blog post.  First, a note of appreciation.  While we may disagree about MCPS, we agree wholeheartedly on the issue of economic growth, which is the anchor for the county budget.  The political winds on growth shift back and forth in county politics over the decades, but Floreen has consistently pushed an economic development agenda.  She was for jobs before jobs were cool!  All the things the county has done right in economic development – and there have been a few of them – have Floreen’s fingerprints all over them.  It’s one reason why your author admires her and is sad to see her leave the County Council.

Let’s begin with areas of agreement.  First, Floreen is absolutely right about the terrible days of the Great Recession.  The county had not faced anything like it since the 1930s.  Everything had to go on the table in those days – spending cuts, layoffs, furloughs, broken collective bargaining agreements and an energy tax hike – because the alternative was default.  Floreen was Council President in 2010, the worst year of the recession.  She, the County Executive and her colleagues saved the county from fiscal disaster.  That achievement should not be forgotten.

Second, Floreen mentions the state’s teacher pension shift as a stress point on county finances.  Again, she’s absolutely right.  For many years, the state’s payment of teacher pension benefits was the one state program that disproportionately benefited Montgomery County.  That’s because our high cost of living as well as our prioritization of schools leads us to pay higher teacher salaries than the rest of the state, which results in higher pensions.  In 2010, nearly all of MoCo’s state legislators running for election promised not to shift pension costs to the counties.  But in 2012, Governor Martin O’Malley pushed a plan to do exactly that and most of our state legislators voted for it.  The result is that Montgomery County pays roughly $60 million a year for teacher pensions now, more than any jurisdiction in the state.  Compare that to the size of last year’s property tax hike, which was $140 million a year.  No matter what is said about the county, the state should not be let off the hook.

Now to the areas of disagreement.  It’s interesting that Floreen says our blog post is misleading but does not actually refute any of the data on which we rely.  She simply picks other data and disagrees with our characterizations.  We are sympathetic to her problem: it’s hard to refute data that happens to be true!  One thing she contests is our choice of FY10 as a base year for comparison.  We picked FY10 because it was the peak year of overall county spending before the Great Recession fully kicked in.  So comparing FY10 to FY16, the year before the tax hike, is valid because it’s a peak-to-peak comparison that includes both the cuts to departments in the early part of the period as well as the restoration that occurred afterwards.

She also disagrees repeatedly with our referring to MCPS as going through austerity.  Our basis for doing so was the county’s local dollar spending per pupil, which comes from county budget documents and was not contested by Floreen.  In nominal terms, here is the county’s local spending per pupil from FY06 through FY17.

The data shows that the county cut its local per pupil contribution to MCPS for three straight years and froze it for four straight years.  This period greatly exceeds the length of the Great Recession.  The local per pupil contribution went up after last year’s property tax increase.

Last year’s per pupil bump looks significant, but here is the same data adjusted by the Washington-Baltimore CPI and presented in real terms using 2017 dollars.  (We estimated 2017 inflation at 2.02%, the average rate of the preceding years in the chart.)  Clearly, even with the tax hike, the county’s local-dollar commitment to schools is not what it once was.  And the CPI underestimates major cost drivers for the schools, such as the costs of serving rising numbers of students who live in poverty and need language services.

Floreen then talks about the county departments that were cut during the recession.  She’s right: they were cut.  But after the recession ended, most of them were restored to levels exceeding what they were before the recession.  Meanwhile, county dollars for MCPS were cut by $33 million between FY10 and FY16.  Floreen doesn’t deny that, but she notes that local dollars aren’t the only source for MCPS’s budget.  The schools get plenty of state money too.  Floreen says this:

What really matters is the total MCPS budget, not the State share versus the local share. The higher State spending for MCPS in recent years reflects that the State’s funding formulas, at long last, are starting to recognize our students’ actual needs, as shown in our higher ESOL and FARMS populations. The State aid increases, which were long overdue, enabled us to provide continued strong support for MCPS during the Great Recession without further decimating every other function of government.  Why is that not a good thing?

Floreen is conceding a central point of our original post which is reinforced in the per pupil data above: the county depended on state aid to keep MCPS afloat while it restricted its own contributions to the school system.  Meanwhile, MCPS enrollment grew from 140,500 to 156,514 between FY10 and FY16, an 11% increase.  The Great Recession by itself can’t be cited as a justification for restricting county dollars for schools because the restrictions continued long after the trough of the recession had passed.  Indeed, fifteen other counties increased their local per pupil contributions after the recession ended, including nine controlled by Republicans.  The message here is, “The state was paying for our schools so we didn’t have to increase county per pupil spending on them.”  Is that “continued strong support for MCPS” as claimed above?  Is it satisfactory for parents and voters?  Let the readers decide.

Finally, Floreen repeats her longstanding point that last year’s 9% property tax hike was intended to support MCPS.  That’s true: MCPS did get a big share of that money.  But so did the rest of the government.  Last year, we laid out how the county could have cut the tax hike in half, still given MCPS all the money requested in the County Executive’s budget and done it without spending cuts to other agencies.  County Executive Ike Leggett, who originally proposed the tax hike, asked the council to cut the rate increase in half after the General Assembly passed a law easing the county’s liability from a U.S. Supreme Court decision on income taxes.  But the council chose to keep every penny of the original tax hike and spread it across every agency instead.  That’s not an Education First budget – it’s an Everything First budget.  The result of the tax hike was a tremendous boost for the 40-point triumph of term limits at the ballot box.  Even the council’s own spokesman at the time now says the tax hike was unnecessary and is vowing to stop another one if he is elected to Floreen’s open seat.

Look folks.  We get this is tough medicine.  We understand that elected officials don’t like to be criticized, especially around election time.  And we understand that Nancy Floreen, a Council Member we respect, would like to go out on top.  But it’s important to understand the past to prepare for the future.  The schools need small, steady increases in per pupil funding to deal with their challenges.  There can no longer be wild swings between extended periods of per pupil cuts and freezes followed by huge tax hikes intended to undo the effects of those cuts and freezes.  To fund MCPS fairly without raising taxes, the county will have to restrain the overall growth of the rest of the budget to pay for it.  There cannot be any more Everything First budgets.  With four Council Members leaving and the Executive race wide open, it will be up to the next generation of county officials to chart a better way forward.

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Setting the Record Straight on MCPS Funding

By Council Member Nancy Floreen.

Adam Pagnucco’s recent post on the County Council’s budgeting work made an astoundingly misleading claim: “The County imposed seven years of austerity on MCPS [in FY10-16] while lavishing double-digit increases on nearly every other function of government.”  While I ordinarily ignore this kind of online misrepresentation of Council activity, this goes too far over the top to let pass.

As Council President in 2016, I plead guilty to leading the charge for two tax hikes to support MCPS.  The FY17 property tax hike enabled us to reduce class size and focus on the achievement gap; we exceeded the State-required Maintenance of Effort level (MOE) for the MCPS operating budget by $89 million.  The recordation tax hike enabled us to fund key school construction projects that would otherwise have languished.  We did this in a historic partnership with the Board of Education, which agreed to channel more of its funds to the classroom, and, bravely, less to employee compensation.

Were the preceding seven years really a period of “austerity” for MCPS and “lavish” times for others?  Consider the facts.

1. The choice of base years matters. FY10 was an anomaly. From FY01-09, we had funded MCPS at a total of $576 million ABOVE the MOE level, thus creating a much higher required spending base.  But no good deed goes unpunished.  When revenues sank like a stone during the Great Recession, this higher base became an impossible burden, even after we approved a property tax increase in FY09.

2. During the worst years of the recession, FY09-12, only two agencies – MCPS and Montgomery College – saw increased funding. To be sure, the increases were small (1.8 and 3.2 percent, respectively) and relied on higher State aid. But during this same period, vital County functions like Police, Fire and Rescue, and HHS were down 3.4, 5.0, and 14.7 percent, respectively.  Recreation was down 23.5 percent, and Libraries was down 29.2 percent.  These deep cuts were without precedent.  The new spending base we were forced to create was so low that any later increase seemed disproportionately large.  We consistently prioritized funding for MCPS and the College during this period.  As the Rolling Stones would say, they didn’t get what they wanted, but they got what they needed. This we could not do for the rest of County government.  I was Council President in that awful time.  There were furloughs for all County employees, including first responders.  MCPS furloughed no one.

3. The “austerity” claim fails to account for massive additional County funding for MCPS that is not included in the MCPS budget or in MOE.  So, for example, in FY18, we approved total expenditures for MCPS that include $2.37 billion for the MCPS operating budget PLUS $317.5 million more in the County budget.  This pays for debt service on school construction bonds, pre-funding MCPS retiree health benefits, support services ranging from Linkages to Learning to crossing guards, and MCPS technology modernization.  In FY13-16 alone, this additional County support totaled $1.08 billion.  These dollars are not technically included in the MCPS budget, but they should be. To put the FY18 additional County support in perspective, this amount is larger than the total FY18 budget for Police, Fire and Rescue, or HHS.  Again, this massive support for MCPS is all ABOVE the MOE level. And not counted.

4. Is the flip side of this alleged “austerity” for MCPS in FY10-16 really “lavishing double-digit increases on nearly every other function of government”?  Tell that to one of our most important and beloved departments, Public Libraries.  The libraries provide our one million-plus residents of all ages (including students from MCPS) with an ever-growing wealth of materials and technology.  But the department’s budget of $40.3 million in FY09 did not reach that level again until FY16, seven years later, even in nominal dollars.  The FY18 level, $42.7 million, is barely equal to FY09 in real dollars. “Lavish” indeed!

5. One key fact is that 90 percent of the MCPS budget is for the salaries and benefits of active and retired employees. MCPS’ benefits cost much more than the County’s. If MCPS’ employee share of health insurance costs was the same as the County’s, the savings would be $24 million.  Add to this the fact we alone in the State fund a supplement to MCPS employees’ State pension benefit. This alone cost $25.3 million last year.  The regular pension cost in FY18 is another $71.8 million, plus $56.8 million more for the State’s shift of teacher pension costs.  We also pick up the tab for pre-funding MCPS retiree health benefits (paid from the County budget, not the MCPS budget).  This set us back $74.2 million in FY18 and is now projected to cost $547.8 million in FY18-23.  Is that what you call “austerity”?

6. What really matters is the total MCPS budget, not the State share versus the local share. The higher State spending for MCPS in recent years reflects that the State’s funding formulas, at long last, are starting to recognize our students’ actual needs, as shown in our higher ESOL and FARMS populations. The State aid increases, which were long overdue, enabled us to provide continued strong support for MCPS during the Great Recession without further decimating every other function of government.  Why is that not a good thing?

7. In fact, a more complete and accurate comparison of FY10-16 tax supported operating budgets by agency shows that MCPS received a 12.9 percent funding increase compared to 13.0 percent for Montgomery County Government, 15.9 percent for Montgomery College, and 8.3 percent for Park and Planning. In addition, a significant portion of the FY10-16 increase of 803.9 percent in pre-funding retiree health benefits and 41.5 percent in debt service benefited MCPS!

As we go into an election year of hyperbole and catchy phrases, know that the Council, on which I have been so privileged to serve, is committed to thoughtful fact and policy based budgets, responsive to ALL our residents’ needs. We are also constantly mindful of the burden that our decisions place on our residents’ pocketbooks.  MCPS will always need more support.  Has it been singled out for unfair treatment – “austerity” for MCPS and “lavish” increases for everyone else?  The facts say otherwise.

Nancy Floreen has served on the Montgomery County Council since 2002.  She was Council President in 2010, during the Great Recession, and again in 2016.

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Random Bits, October 2017

By Adam Pagnucco.

Chris Wilhelm is Winning the Sign Wars

MCPS teacher and progressive at-large council candidate Chris Wilhelm has covered parts of Georgia Avenue and University Boulevard with his campaign signs.  (It helps to speak Spanish!)  Yes, we know signs don’t vote.  But it shows that Wilhelm is working and that’s good for perceptions of his campaign.

Who Has Momentum in Council District 1?

Council District 1, which covers Bethesda, Chevy Chase, Potomac, Poolesville and a large part of Kensington, has more regularly voting Democrats and more political contributors than any other council district by far.  It’s a prime seat.  Right now, there are nine candidates in the race and there might be more on the way.  Many good candidates in this district, like Bill Conway, Gabe Albornoz, Emily Shetty, Samir Paul and Sara Love, are instead running for council at-large or the General Assembly.  There are lots of openings to choose from these days!

So who has the momentum right now?  You could say Delegate Ana Sol Gutierrez, who is the only sitting elected official who is running.  Or Reggie Oldak, who has qualified for matching funds in public financing.  Former Planning Board Member Meredith Wellington should appeal to land use voters oriented towards Marc Elrich.  Former Kensington Mayor Pete Fosselman was just endorsed by former Governor Martin O’Malley.

But we’re going with Andrew Friedson, who just had his kickoff boasting endorsements from his former employer, Comptroller Peter Franchot, along with Senators Brian Feldman (D-15) and Craig Zucker (D-14) and former long-time DNC member Susan Turnbull.  Feldman is an old hand in the Potomac portion of the district and has not been seriously challenged in 15 years.  Turnbull doesn’t usually play in local races but she has a national network in both the Democratic Party and the Jewish community.  If she is all in for Friedson, that’s a big deal.  Friedson, who is killing the field in social media, is feeling pumped up right now with good reason.

Where’s Duchy?

It’s unusual to see a large field of MoCo candidates without Duchy Trachtenberg among them.  She has a long electoral history, losing a District 1 County Council race in 2002 by a hair, winning an at-large council seat in 2006, losing reelection in 2010, briefly running for Congressional District 6 in 2012 and getting annihilated in a challenge to District 1 council incumbent Roger Berliner in 2014.  Now she has a full table of races to pick from, including council at-large, council District 1 and the District 16 General Assembly seats.  Say what you will about Duchy – and we’ve said plenty – but she can raise money, she has a network and she has campaign experience.  Is she done or is she just waiting to file at the last minute, as she has done before?

Can Greenberger’s Strategy Work?

Former County Council spokesman Neil Greenberger is torching his old bosses, saying they treat voters like ATMs and guaranteeing that if he is elected, there will be no property tax hikes.  This is a new strategy for a Democratic council candidate made possible by the 2008 passage of the Ficker amendment, which requires votes from all nine Council Members to go over the property tax charter limit.  Furthermore, it’s an unusual strategy from a historical perspective.  Most council candidates over the last few decades have emphasized schools, transportation, development (pro or con) and a handful of other left-leaning issues but have not been explicitly anti-tax.  That sentiment has mostly come from Republicans.

But two things have changed in Greenberger’s favor.  First, the passage of term limits was rooted partly in opposition to last year’s 9% property tax hike.  But it wasn’t just the increase alone that annoyed residents.  Unlike the 2010 energy tax hike, last year’s property tax increase was not driven by the catastrophic effects of a recession, but was a policy choice by the council that could easily have been much lower.  Voters didn’t see the tax hike as truly necessary, which increased their frustration with it.

Second, the number of votes needed to win an at-large seat could be much lower in this cycle than in the past.  Over the last four cycles, at-large candidates have needed around 40,000 votes to have a shot at victory.  (Incumbent Blair Ewing far exceeded that total in 2002 and still lost.)

That number may no longer hold.  No one knows what the turnout will be next year; informed observers disagree about that.  But the candidate field will be two to three times larger than in any other recent cycle and only one incumbent is running.  That could mean a very fractured electorate yielding a low win threshold and tight margins.  That favors candidates with medium-sized but intense bases, whether geographic, demographic or ideological.  In Greenberger’s case, if 100,000 Democrats vote, and 30,000 of them are sick of tax hikes, and Greenberger can actually communicate with them, he could win.  And so could anyone else who can put together 30,000 votes.

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Greenberger Guarantees No Property Tax Hikes

By Adam Pagnucco.

Former County Council spokesman Neil Greenberger, who is running for an at-large seat, has released a campaign video guaranteeing that if he is elected, there will be no property tax hikes in the next term.  Greenberger cites a section of the Montgomery County charter that prevents property tax hikes above the rate of inflation unless all nine Council Members vote to do so.  If only one member votes no, the tax hike would fail.  The nine vote requirement is the result of a ballot question submitted by Robin Ficker which was approved by voters in 2008.

While other at-large candidates have been skeptical of further tax hikes, none of them so far have taken as hard a line against them as Greenberger.

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Lessons Learned from the Giant Tax Hike, Part Three

By Adam Pagnucco.

If the next County Executive and County Council want to prevent another Giant Tax Hike, they will have to do something that has not been done for years: seriously improve the county’s economy.  Otherwise, no budget reforms will be enough to pay for the county’s needs.

There are many ways to assess a local economy, but for the purposes of this column, let’s look at two big measures: jobs and income.  From 2001 through 2016, the U.S. Bureau of Labor Statistics (BLS) calculates that total employment in the Washington metro area grew by 393,048 jobs, a growth rate of 14.6%.  In Montgomery County, total employment grew by 14,086, a growth rate of 3.1%.  Of 24 local jurisdictions measured by BLS, Montgomery’s job performance ranked 20th.  Among the large jurisdictions, only Prince George’s County fared worse.

Montgomery fared well in federal employment over this period, growing its federal jobs base by 18.9%.  That beat the metro area’s federal employment growth rate of 13.2%.  The county’s employment problems are concentrated in its private sector, which grew by just 1.0% between 2001 and 2016.  Montgomery’s private sector had 374,115 jobs in 2016, below its peak of 386,626 ten years before.  Over the last fifteen years, Montgomery’s private sector employment growth ranked 19th of 24 local jurisdictions.

In terms of real per capita personal income, the Washington region enjoyed a long period of growth that peaked in 2007, the year before the Great Recession hit.  In the eight years since, the region’s per capita income has struggled to increase for the first time in more than three decades.  Montgomery has a higher per capita income than the regional average, but it has suffered from a similar pattern.

Of 19 local jurisdictions tracked by the U.S. Bureau of Economic Analysis (BEA), twelve had real per capita personal income gains between 2007 and 2015.  Montgomery was one of the seven jurisdictions that did not.  Its 1.7% drop is below the regional total of -0.2% and ranks 14th of 19 jurisdictions in the region.

In broad terms, the employment data and the income data agree: Montgomery County has still not recovered from the Great Recession.

The fragile state of the economy acts like a steel cage on the county’s budget.  The county’s needs in public schools, public safety, transportation, health and human services and countless other areas will not go away.  But unlike days past, the economy currently cannot generate the tax revenues to finance everything desired by those in office – and their constituents.  The county has passed four tax hikes since the Great Recession started – two property tax increases (FY09 and FY16), an energy tax hike (FY11) and a recordation tax hike (FY16).  Added to this is a series of recent laws imposing rising costs on employers.  While some local jurisdictions in the region (especially in Virginia) have passed tax hikes and the District of Columbia and Prince George’s have passed new employment laws, Montgomery County is the only local government that has passed both in significant magnitude.  There may be reason for that, but it has contributed to enormous competitive challenges for the county.

Progressive policies such as those favored by Montgomery County politicians cost lots of money.  That money can only be obtained over the long term through a robust economy.  Economic growth is affected by the totality of what the county does – its investments in education and transportation, its fiscal and taxation policies, its planning decisions and the nature of new laws and regulations it imposes on employers.  If any of these things negatively impacts economic growth, marketing programs, slogans and massive incentives for large businesses will not by themselves make up for it.

The Number One lesson from the Giant Tax Hike is that the next generation of county elected officials must prioritize job creation and income growth.  Failure to do so will result in more tax hikes and further long-term decline.

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Lessons Learned from the Giant Tax Hike, Part Two

By Adam Pagnucco.

The untold story of last year’s 9% property tax hike is that it was not merely the product of needed funding for public schools or the adverse consequences of a U.S. Supreme Court decision on income taxes.  It was also the product of an innate bias towards more spending built into the County Council’s budget process.  That bias created mounting pressure to fund ever-growing spending programs accumulated over many years which contributed to the tax increase.  The next generation of county elected officials must reform this process or they too will eventually feel compelled to raise taxes.

All state and local operating budgets must be balanced each year as a matter of law.  At the state level, the General Assembly may cut spending items in the Governor’s budget but they generally cannot add to them.  (The legislature can and does pass laws mandating spending on certain items in future years.)  Several counties with Executives follow the state’s model, as does the City of Baltimore.  But the Montgomery County charter grants all final budgetary authority to the County Council, which can do almost anything it wants to the Executive’s recommended budget.  It can add, subtract or rearrange spending items subject only to requirements in state law, such as mandatory minimum funding levels for public schools and the college.  Other than that, the only constraint on the council’s power is that the budget it passes must be balanced for the fiscal year.

Every March 15, the Executive is required by the charter to send a recommended budget to the council.  The council then begins its process for reviewing and changing the budget that lasts roughly two months.  The council’s vehicle for altering the Executive’s recommended budget is the reconciliation list (commonly called the rec list), which is a ledger of spending additions and deductions.  Each council committee, and the full council itself, can post additions or deductions to the rec list.  The last step in the process is figuring out how to finance some portion of the additions since they always exceed the deductions.

In theory, there are two sound places to go to fund additions to the Executive’s budget: new tax revenues or offsetting spending cuts.  In practice, the council’s use of these resources is limited.  Tax increases are typically proposed by the Executive, who distributes the revenues they generate across spending items in the recommended budget.  In such cases, the new revenue is not available for further spending desired by the council unless it alters the Executive’s choices.  The council could also cut the Executive’s spending items and use the money for its own items.  But the Executive’s spending proposals have constituencies who will squeal if they are diverted or cut.  No one likes to be the bad guy at budget time!

Page one of the council’s final draft reconciliation list for FY18.  These are some of the new spending items the council wanted to fund last spring.  The challenge was how to pay for them.

If new taxes and spending cuts are insufficient to pay for new spending desired by the council, other funding sources must be identified.  In the past, favorite sources for funding included setting aside less reserve money than proposed by the Executive, setting aside less money for retiree health benefits, occasional transfers of cash from the capital budget and other one-time fixes.  In FY12, the Executive proposed $10 million for snow removal and the council redirected $4.1 million of that for new spending on the reconciliation list.  Snow removal costs must be paid, so if they were to ultimately prove larger than budgeted funds, the council’s action would be tantamount to a backdoor drawdown of the reserve.

Since FY05, the council has added a combined $245 million to the Executive’s budgets through its reconciliation lists.  One does not have to be a certified public accountant to see what the effect of these additions will be over time.  Many spending items added by the council are ongoing, such as hires of new employees and expansions of programs expected to continue indefinitely.  But some of the funding sources for the new spending are one-time in nature, like capital budget transfers and reserve drawdowns.  Repeated use of one-time funding sources for ongoing spending creates enormous long-term pressure on the budget.  Eventually, especially when a downturn comes, the new spending must be trimmed or taxes must be raised.  Guess which is more likely to occur?

Why does this happen?  It’s not because elected officials are stupid.  It’s because of the incentives they face.  From mid-March through mid-May every year, Council Members are besieged by requests for more spending from the community.  Every year, there are three nights of hearings jam-packed with constituents wanting more money for their favored programs.  They are followed by dozens of meetings with groups who want even more than that.  Aside from occasional admonishments from council administrator Steve Farber and Executive Branch budget officials, there are almost no voices for moderation in the budget process.  And here’s the thing: whether it’s hiring social workers, funding more childcare assistance, deploying more police officers in communities that need them, removing more tree stumps or much, much more, almost all the new spending proposals have merit.  Given the incredible pressure brought to bear by groups with genuine funding needs, it’s kind of a miracle that the budget gets balanced at all.

All of this creates serious problems for the County Executive.  The charter grants the Executive a line item veto over spending items, but this is never used because the council would simply override it.  The Executive could abstain from including the council’s new spending in next year’s budget, but again, the council could just put it back in.  For the most part, the Executive and his top aides grumble in private and put on a happy face for Wall Street, but they did go public in objecting to a $10 million draw from the reserve two years ago.  Instead of fighting the council, the Executive’s staff simply tries to figure out how to retain and pay for the council’s new spending in next year’s budget.  And each year, the job gets a little harder without new revenue.

This process is a big reason why the county has had seven major tax hikes in the last sixteen fiscal years.

Next year, a new County Executive and at least four new Council Members will take office.  This new generation of officials will have a choice.  They can keep the existing budget process and eventually come under pressure for yet another tax hike, as happened last year.  Or they can reform it by requiring that new ongoing spending be offset by actual ongoing spending cuts, not one-time measures.  Failure to learn this lesson will mean repeating history.

We will conclude with one last lesson from the Giant Tax Hike in Part Three.

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Lessons Learned from the Giant Tax Hike, Part One

By Adam Pagnucco.

Unfortunately for those Council Members who voted in its favor, last year’s 9% property tax hike won’t go away.  The issue came up at the first County Executive forum, at which the three Council Members who voted for it defended it under heavy criticism from their Republican rival, Robin Ficker.  It is sure to be mentioned again as several County Council candidates, including some Democrats, are openly wary of more tax hikes.  And there is a general sense that the 40-point passage of term limits last year was driven at least partially by the tax increase.  All local politicians have taken notice.

There is no question that the Giant Tax Hike is widely unpopular, but it cannot be undone, so let’s learn from it.  Next year, the county will have a new Executive and at least four new Council Members.  All candidates taking office will assume responsibility for a county with needs that have not abated and a budget that remains challenging.  What lessons can these new office holders learn from the Giant Tax Hike?  In this series, we present three of them.

Let’s start with Montgomery County Public Schools (MCPS).  Tax hike supporters point to MCPS’s needs as a reason for the increase and they have a point.  MCPS has enormous and permanent needs.  The school system is a huge asset that requires continuous large investments to maintain.  But while all of that is true, the sad fact is that the county imposed seven years of austerity on MCPS while lavishing double-digit increases on nearly every other function of government.  Once MCPS’s problems became too large to ignore, then and only then was the tax hike passed.

MCPS’s funding issues began when the Great Recession started impacting the county’s budget in 2009.  The County Council has significant power to cut most parts of the budget but the school system is an exception.  MCPS is covered by the state’s Maintenance of Effort (MOE) law, which establishes local per pupil contributions to school districts as a floor for funding levels in future years.  The intent of the law is to prevent counties from supplanting state aid for schools by cutting their own local school funding and moving that money to other functions.  Under the old MOE law, when a county wanted to cut its own local per pupil contribution, it needed a waiver from the State Board of Education or it would forfeit any increase in state aid for public schools.  This penalty did not deter several counties from cutting local per pupil spending during the recession.

In Montgomery’s case, the county cut its per pupil contribution three times.  In FY10, the county’s cut was forgiven by legislation passed in the General Assembly.  In FY11, the county obtained a waiver for a cut from the State Board of Education, who warned the county not to cut again.  In FY12, the county cut its local per pupil contribution for a third time without even asking for a waiver.  Egged on by the teachers union, the General Assembly got fed up and changed the MOE law.  From now on, if a county tries to cut its per pupil contribution without a waiver, the state would send the county’s income tax revenues directly to its school system to make it whole.  There would be no more messing around with MOE.

This presented a budgetary challenge for counties.  From now on, increases to local per pupil contributions would be almost locked in and very difficult to escape without the cooperation of local school boards.  The new law was a risk factor that had to be managed.  MoCo’s County Council reacted by freezing the county’s per pupil contribution for four straight years after three years of cuts.  By FY16, the county’s per pupil contribution was $9,759 – well below the prior peak of $11,249 in FY09.  Factoring in inflation, in real terms, the county’s per pupil investment in MCPS was 24% lower.  That caused huge budgetary strain in the public schools.

The budget was only one reason for the county’s behavior.  There was also politics.  Over the years, former Superintendent Jerry Weast had constructed a machine combining the school unions, the PTAs and the Washington Post editorial board to aid him in obtaining budget increases.  Increasingly, the council viewed him as going too far.  That perception became more acute when he held a meeting with union leaders at his home in 2008 and directed them to endorse Nancy Navarro in the District 4 special election.  Further strains appeared when Weast threatened to sue the county over MOE and the council accused the school board of lying about its budgetary needs in Weast’s last year.  Weast’s successor, Josh Starr, was caught in the aftermath.  He was unlucky enough to serve during MCPS’s austerity years and the budget squeeze effectively sabotaged his tenure.

While MCPS starved, the rest of the county government was well fed.  Between FY10 and FY16, the county cut local funding for MCPS but increased it by double digits for most other government functions.  The police department, the fire department, the libraries and almost every other department recovered nicely from the recession.  The council itself enjoyed a 19% increase for its own operations.  MCPS was almost alone in austerity.  (Housing had a significant decline only because of a one-time large expenditure to the Housing Investment Fund in FY10).  This profligacy throughout county government made it harder to afford an increase for MCPS without raising taxes later on.

MCPS might have collapsed if it were not for state aid increases.  Over the FY10-16 period, the county cut local operating funds for the schools by $33 million, but state operating aid went up by $192 million.

Meanwhile, many other counties reacted to the new MOE law differently.  While MoCo froze its local per pupil contribution to its schools, fifteen other counties increased their contributions during the first three years of the new law.  Nine of these counties were controlled by Republicans.  That’s right, folks – supposedly progressive MoCo lagged Republican counties in increasing local support for schools.

After seven years of squeezing MCPS, the county finally relented and increased its per pupil contribution, but it did so with a 9% property tax increase.  And it wasn’t just the schools that got more money – once again, nearly every other department got a bump.  There’s a lesson here for the next generation of county leaders.  MOE does indeed present a risk for the county budget, but it’s a risk that can and should be managed.  Seven years of austerity for MCPS cannot be imposed without major strains on public school operations.  A far better approach is to implement small but steady increases to per pupil funding while moderating growth in the rest of the government to pay for it.  That’s the best way to maintain one of the county’s greatest assets without imposing giant tax hikes.

In Part Two, we will look at another lesson to be learned.

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Trump-Ryan Tax Plan Screws Marylanders, Especially in Anne Arundel, HoCo & MoCo

We only know so much about the Republican tax cut plan. As now seems to be the Republican way from healthcare to widening I-495, I-270 and the BW Parkway, plans have only gauzy outlines. However, the little presented is enough to know that tax “reform” would screw many Marylanders. Big Time.

The central idea of tax reform is that the elimination of various special interest tax breaks allows for a reduction in rates without reducing revenue. This plan reduces income tax rates, primarily at the top end, along with corporate tax rates but does virtually nothing to attack special interest tax breaks, so it will result in a massive reduction in revenue. It’s a yuge tax cut for the wealthy being presented in the guise of tax reform.

Indeed, the only eliminated tax break is the state and local tax deduction for taxpayers that itemize. This change is transparently designed to screw blue states that provide high levels of services and thus have higher state and local taxes, as this chart from the Wall St. Journal reveals:

Anne Arundel, Howard and Montgomery Counties will be among the biggest losers. Upper-middle class households that earn more than $100,000 are more likely to itemize because the current tax code makes it worth the bother. In 2015, over one-half of households earned more than $110,000 in Howard, $98,000 in Montgomery, $90,000 in Anne Arundel, and $75,000 in Maryland as a whole. These figures are even higher now.

As a result, Maryland, especially Anne Arundel, Howard, and Montgomery Counties, will take a big hit. Indeed, many upper-middle class taxpayers may well end up paying more in taxes under the Trump-Ryan plan than they do now because the elimination of this deduction will wipe out any gains that they would otherwise make.

There are some “good” nuggets of news in Trump-Ryan tax plan. While the administration is employing its standard tactic of the big lie by saying that this plan will not help the wealthy, including Donald Trump. Since Donald Trump said “believe me” when making this case, we know from experience that it’s extra big lie.

And indeed, it is. If you’re among the most extremely wealthy, you’ll make out very well. Trump wants to eliminate the estate tax, so that he—oops Freudian slip—other very wealthy people can leave massive money to their heirs tax free. Annually, only around 5000 estates are subject to the estate tax in any year but Maryland probably has more than its fair share as the most affluent state in the country.

Other prominent features in the proposal will also aid the wealthy enormously, especially the reduction in the top income tax bracket and pass-through S-corporations. The graph presented at the top of this post, developed by the Tax Policy Center, shows just how much the top 1%, and especially the top 0.1%, will gain.

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House of Delegates Tax Bill Vastly Superior

The Maryland Senate has passed a tax cut that is directed at the top 11.1% of taxpayers. It would reduce marginal tax rates for individual taxpayers who make more than $100,000 and joint taxpayers who make more than $150,000, while the people who earn less than this receive no cut in their rates and get peanuts – or more specifically, money enough to buy a meal at Chipotle.

In contrast, the House of Delegates has passed far superior tax legislation. Instead of focusing the benefits on wealthy Marylanders, the House bill would lower the marginal rates on income earned between $3001 and $100,000 (and up to $150,000 for joint taxpayers). The wealthy would still get a break but this bill, appropriately, directs far more of the benefit to the much-squeezed working and middle classes. Like the Senate bill, the House bill also expands the Earned Income Tax Credit (EITC).

Politically, it should be a no brainer to junk the Senate bill and adopt the House legislation, particularly for Democrats. While maintaining the EITC changes much needed by the working poor, the House bill distributes the tax cut far more widely and equitably. Let’s hope that the House and the Speaker stand firm.

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Who Supports the Senate’s Tax Cut for the Wealthy? Bueller? Bueller?

The Maryland Senate passed a cut in marginal tax rates that will only benefit the top 11.1% of Maryland taxpayers. It’s a tax cut that literally gives the wealthy enough to buy a nice iPad but leaves the middle class with barely enough to buy a meal for one at Chipotle (but they only get even that if they have exemptions).

The bill has crossed over to the House of Delegates. Lots of people and groups testified against the bill at the hearing before the House Ways and Means Committee, including:

Maryland CASH Campaign
Maryland Center on Economic Policy
Maryland Nonprofits
Health Care for the Homeless
Maryland State Education Association
Advocates of Children and Youth
Maryland Alliance for the Poor
League of Women Voters of Maryland
MD/DC State Council of SEIU
Maryland Working Families
AFSCME

The following groups also signed on to a letter protesting holding the increase in the Earned Income Tax Credit (EITC) hostage to a tax cut for high earners:

Advocates for Children and Youth
AFSCME Council 3
Baltimore CASH Campaign
Baltimore County Arts Guild
Baltimore Neighborhoods, Inc.
CAFÉ Montgomery
CASA of Baltimore County
Council for Bile Acid Deficiency Diseases
Fuel Fund of Maryland
Health Care for the Homeless
Job Opportunities Task Force
Laurel Advocacy and Referral Services
League of Women Voters of Maryland
Maryland CASH Campaign
Maryland Center on Economic Policy
Maryland Disability Law Center
Maryland Education Coalition
Maryland Nonprofits
Maryland PTA
Maryland State Education Association
Maryland Working Families
NAMI Maryland
National Association of Social Workers, Maryland Chapter
Pain Connection-Chronic Pain Outreach Center, Inc.
Public Justice Center
Progressive Maryland
SEIU Maryland Council
The Way Out Program

So who testified on the bill at the House Ways and Means Committee hearing?

Not Governor Larry Hogan. His office didn’t even bother to send anyone to support the tax cut for the wealthy.

In fact, no one testified in favor of the tax cut. Maybe the House should take that as a hint and shelve it.

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