Opinion | Will Maryland Democrats “tax the wind”?

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  Opinion |  Will Maryland Democrats

This guideline was passed down as on tablets by the most influential economist of the 20th century, John Maynard Keynes. He developed his “General Theory” during the Great Depression, preaching how to mitigate downturns and face future macroeconomic disasters. Republicans have been more skeptical over the years, grumbling that this approach is often ineffective or seldom necessary, but in really bad times they even go along with it. There are no deficit hawks in a recession.

For this reason, it was clear that federal spending should and should increase in order to mitigate the economic damage caused by the coronavirus and the associated lockdown. Arguing on Capitol Hill was less about whether to stimulate than how much and when. Since Uncle Sam can run into budget deficits, he will have no difficulty administering the Keynesian medicine once these issues are resolved.

Not so for many civil servants. They now place demands on a balanced budget between the proverbial rocks and the hard place. As the recession depresses their revenues, they know that cutting programs quickly will worsen the downturn. The same is true if they maintain their spending through tax increases, exacerbating the already painful loss of income for households and businesses.

In Maryland, the problem is even more complex: lawmakers are under heavy pressure from the state’s most powerful interest groups – the teachers unions and bureaucrats who dominate public education – to break Keynes’ rules.

In last year’s term, the Democrat-dominated legislature promised to increase school spending by at least $ 32 billion over the next decade in order to implement the Kirwan Commission-praised “Maryland Future.” Though it was built on several false narratives – that the state underfunds its public schools, for example (it spends 17 percent more per student than the national average) and underpaids its teachers (they are paid 25 percent more per student than the national average)) – The political power of the public school monopoly was sufficient to pass the blueprint.

Where the money would come from was never clarified. Then came the pandemic, the budget imploded and Governor Larry Hogan (R) vetoed the bill. He had no choice: with revenues falling, committing to massive new spending seemed untenable, and beating the private sector with a tax hike would have deepened the recession.

But with the start of a new legislative term, it appears that the Democrats’ top priority is to override this veto. Blueprint beneficiaries will argue that this would be stimulating – unless of course, in a balanced budget world, more money for public schools means less for everyone else, so no net stimulation. In addition, Keynesians know that the pumps that need to be primed here stopped working during the recession – and teachers and education bureaucrats never missed paychecks while teleworking, but many others, particularly in the service and hospitality industries, saw theirs Jobs are disappearing.

To get out of that box, Blueprint advocates are ready to break Keynesian law by “taxing the wind”. With nearly a quarter of a million Marylanders out of work, four tax increases can be proposed at this meeting. Although a bill to massively expand the state’s sales tax crashed and burned down in March, we’ll likely see attempts to override Hogan’s vetoes of a more modest expansion of sales tax to digital products and a statewide tax on digital products. Proposals to impose a higher rate of income tax on wealthy one percent corporations and big business by withdrawing various loans and passing a corporate income tax law with “combined reporting” are also likely.

If Keynes isn’t spinning in his grave, at least his mind shakes his head miserably. While these tax hikes are aimed at minimizing political opposition by avoiding explicit burdens on the “average Marylander,” it is not economically important. Reducing the purchasing power of people or businesses everywhere is contractive; This reduces demand and ultimately spreads negative effects everywhere thanks to what Keynes calls the “multiplier effect”.

At the state level there is of course another problem: the flight risk. Federal tax hikes can be hard to circumvent, but states with unfriendly tax climates find that those who want to milk them sometimes seek greener pastures. In 2016, a commission appointed by Maryland’s former Senate President and Speaker of the House of Representatives concluded that “the state’s tax structure is a disadvantage for them [its] Competitiveness in attracting and retaining businesses, as well as job creation and expanding the government’s own revenue base. ”She recommended reforms to reduce the tax burden, specifically excluding things like the combined reporting law (which studies have shown that investment and Employment growth in high-tax countries can be reduced).

And then times were good. At times like these, it is not only unwise to ignore this advice but also not to justify it.