Maryland can help heal financial woes by legalizing marijuana, report says

Originally published in the Baltimore Business Journal

MPPI in the News Holden Wilen | Baltimore Business Journal Jan 26, 2017

Paying off debt and legalizing marijuana are among the solutions a new report from the Maryland Public Policy Institute recommends for the state to fix its budget gap and address long-running financial problems.

The budget is a huge area of disagreement for Gov. Larry Hogan, a Republican, and Democratic leaders in the General Assembly. Together, they must figure out how to overcome a structural deficit exceeding $500 million.

Both sides have already deflected blame to the other one. When Hogan announced his $17.1 billion budget last week, his proposal included using money from the state's Rainy Day fund and cuts to services. The debate will undoubtedly continue as both sides reconcile with where to make cuts.

Maryland has an unsustainable budget model because growth in mandated expenditures has exceeded revenue growth for several years, the Maryland Public Policy Institute found in its report. In addition, the state has accumulated $17.21 billion in debt, 30 percent higher than the U.S. state average, the report says.

"Programs have become more and more difficult to sustain, and the Governor’s Office has reached a point where creating a balanced budget is nearly impossible without new taxes or high-impact expenditure cuts," the report said.

One way to help fix the problem, the Maryland Public Policy Institute says, would be legalizing marijuana. The legal cannabis market in Colorado generated nearly $1 billion in total sales and $135 million in tax revenue for the state last year.

Over the past two years Maryland has decriminalized the possession of marijuana and paraphernalia. If the state were to take the next step and legalize and tax the drug, it "could easily equal or exceed those in Colorado" and use the money to support its public safety expenditures.

Paying down the state's debt should also be a priority before increasing spending in other areas, the Maryland Public Policy institute said. Budget woes diminish as debt interest payments shrink, according to the report. Hogan acknowledged the problem when he announced his budget, saying he will put more money toward paying off the state's debt.

Christopher B. Summers, president of the Maryland Public Policy Institute, said the mandates have caused the budget to balloon by 39 percent in 10 years. Of the state's $16.6 billion general fund, which largely comes from income and sales taxes, only $5 billion can be allocated at the discretion of the governor and state legislature. About 83 percent the total budget is mandated spending.

"We encourage Maryland legislators to turn off autopilot and exercise greater discretion over taxpayer money," Summers said in a statement.

The Maryland Public Policy Institute recommends adjusting mandatory expenditure growth to be equal to the growth in total state revenue.

Here are some of the other solutions the Maryland Public Policy Institute offered to help the state balance its budget and address its long-run fiscal problems. Although they probably won't satisfy all taxpayers or elected officials in the state, as the Maryland Public Policy Institute says in its report: "Medicine is not known for its taste."

  • Treat federal grants as a partial substitution for revenue generated by the state where possible.
  • Freeze the quantity or percentage of mandatory expenditures: The Governor’s office proposed a policy in which any new mandatory expenditure must be countered with a repeal or reduction of existing mandates.
  • Enact structural tax reform: Maryland can reform its regulation and tax structure to increase revenues without dramatically increasing the burden to its citizens, the report says. Specifically, the Maryland Public Policy Institute recommends broadening the state’s tax base to become more business friendly, eliminating targeted tax incentives that fail to deliver economic development and legalizing and taxing consumption no longer considered to be illegal.
Holden reports on money, public companies, politics and more.