A server at the Wine Kitchen waits on the lone customers on Dec. 9 inside a tent set up outside the restaurant in Frederick. (Katherine Frey/The Washington Post)
Will Maryland Democrats 'tax into the wind'?
Originally published in the Washington Post
Democrats have long obeyed what might be termed the First Commandment of economic policy: When the economy stalls, government should “spend into the wind,” stimulating employment and income growth with more generous social programs, tax cuts that fuel private-sector demand or both.
This directive was handed down, as if on tablets, by the most influential economist of the 20th century, John Maynard Keynes, who developed his “General Theory” during the Great Depression and preached how to temper downturns and head off future macroeconomic disasters. Republicans have been more skeptical over the years, grumbling that this approach is often ineffective or that it is rarely necessary, but in truly bad times, even they go along. In a recession, there are no deficit hawks.
That’s why it was clear that federal spending would and should balloon to help mitigate the economic damage arising from the coronavirus and associated lockdown. Wrangling on Capitol Hill has been less about whether to stimulate than about how much and when. Because Uncle Sam can run budget deficits, he has no difficulty administering the Keynesian medicine once those issues get hashed out.
Not so for many state officials, however. Balanced-budget requirements now put them between the proverbial rock and hard place. As the recession depresses their revenue, they know that cutting programs apace will make the downturn worse. Ditto if they maintain spending by raising taxes, thus exacerbating households’ and firms’ already painful losses of income.
In Maryland, the problem is even more complicated: Lawmakers are under heavy pressure from the state’s most powerful special interest group — the teachers unions and bureaucrats who dominate public education — to violate Keynes’s precepts.
In last year’s legislative session, the legislature, dominated by Democrats, promised to increase school spending by at least $32 billion over the next decade to implement the vaunted Kirwan Commission’s “Blueprint for Maryland’s Future.” Though it was built on multiple false narratives — that, e.g., the state underfunds its public schools (it spends 17 percent more per pupil than the national average) and underpays its teachers (they’re paid 25 percent more per pupil than the national average) — the political power of the public school monopoly was sufficient to get the Blueprint passed.
Where the money would come from was never resolved. Then the pandemic arrived, the budget imploded, and Gov. Larry Hogan (R) vetoed the bill. He had little choice: With revenue plunging, committing to massive new spending seemed untenable, and whacking the private sector with a tax hike would have deepened the recession.
But with a new legislative session about to begin, overriding that veto seems to be Democrats’ top priority. Blueprint beneficiaries will claim that doing so would be stimulative — except, of course, in a balanced-budget world, more money for public schools just means less for everyone else, so no net stimulus. In addition, Keynesians know that the pumps that need priming here are those that stopped working during the recession — and teachers and education bureaucrats haven’t missed any paychecks while teleworking, but many others, especially in the service and hospitality industries, have seen their jobs disappear.
To get out of this box, Blueprint advocates are poised to break Keynesian law by “taxing into the wind.” With almost a quarter-million Marylanders unemployed, four tax hikes may be proposed this session. Though a bill to massively expand the state’s sales tax crashed and burned in March, we’ll probably see attempts to override Hogan vetoes of a more modest extension of the sales tax to digital products and a first-in-the-nation tax on digital advertising. Also likely are proposals to slap a higher income tax rate on wealthy one-percenters and ding Big Business by withdrawing various credits and adopting a “combined reporting” corporate income tax law.
If Keynes is not spinning in his grave, his ghost is at least shaking his head ruefully. Though these tax increases are engineered to minimize political resistance by avoiding explicit burdens on “the average Marylander,” this matters not economically. Reducing the spending power of people or firms anywhere is contractionary; this diminishes demand and, thanks to what Keynes dubbed a “multiplier effect,” ultimately spreads negative effects everywhere.
At the state level, of course, there’s another problem: flight risk. Tax hikes at the federal level can be tough to evade, but states with unfriendly tax climates find that those they plan to milk sometimes seek greener pastures. In 2016, a commission set up by Maryland’s former Senate president and House speaker concluded that the state’s “tax structure is a detriment to [its] competitiveness in attracting and retaining businesses as well as in creating jobs and expanding the revenue base of the government itself.” It recommended reforms to reduce tax burdens, specifically ruling out things such as the combined reporting law (which, studies have shown, can reduce investment and job growth in high-tax states).
And that was when times were good. In times like these, ignoring that advice is not just unwise — it’s indefensible.
Stephen J.K. Walters is chief economist at the Maryland Public Policy Institute and the author of “Boom Towns: Restoring the Urban American Dream.”