• Synopsis of the Senate's budget

By Rolando Garcia
Capital News Service
Friday, March 19, 2004

ANNAPOLIS - The Maryland Senate passed a $23.7 billion spending plan Friday despite Republican opposition to an accompanying tax and fee package totaling $227 million.

The budget is similar to the one submitted by Republican Gov. Robert Ehrlich, although the Senate cut an extra $170 million to build a surplus to cover unexpected expenses in Medicaid and mental health programs.

The budget closes an $800 million shortfall mostly through tapping one-time revenue sources, reducing spending, closing tax loopholes and hiking fees.

"The budget was well-received considering the history of some of the discussions on the floor," said Sen. Ulysses Currie, D-Prince George's, chairman of the Budget and Taxation Committee.

The House is tentatively scheduled to take up its version of the budget next week, and it may include a much larger tax package than the Senate's.

"It could be as simple as just balancing the budget, or trying to find a funding source for education," Busch said.

The House leadership will decide next week which revenue measures to support, Busch said.

The possibilities include a 1-cent sales tax increase, raising income taxes for the wealthy and closing business tax loopholes.

Support for the budget was unanimous, but some of the revenue measures to balance the budget, including one backed by Ehrlich to close a corporate tax loophole, were opposed by GOP lawmakers.

"This started as an effort to catch sham companies, but (the bill) goes far beyond that," said Sen. J. Lowell Stoltzfus, R-Somerset, the Senate GOP leader. "Legitimate companies will get hit by this, and we're going to have to revisit this when companies start fleeing the state."

The so-called Delaware loophole allows corporations to avoid state business taxes by setting up subsidiaries in Delaware to which they sell patents, trademarks and copyrights. The parent company then pays its own subsidiary hefty fees for the use of this intellectual property, reducing its taxable Maryland income. Because Delaware does not tax intellectual property, that income is not taxed there either.

Ehrlich proposed a bill to close the loophole, but Stoltzfus said the version of the bill to reach the floor was too broad and needed reworking.

Supporters said the revisions, such as waiving back taxes on Delaware income owed before 1995, were business-friendly.

"This is an administration bill, from an administration you would think is most sensitive to Maryland businesses," said Sen. Edward Kasemeyer, D-Howard.

The bill was approved 37-10.

Closing the loophole will yield more than $90 million in new revenue annually, but there may be more tinkering with the bill before it is enacted.

"There's a different version (of the bill) from the House so we'll have another look at this," said Senate President Thomas V. Mike Miller Jr. D-Calvert.

The Senate also voted to impose a state sales tax on snack foods, such as potato chips, nuts and pretzels, which had been exempt since 1997.

Sen. Nancy Jacobs, R-Harford said the tax could devastate Frito-Lay, which has a plant in her district employing nearly 400 people.

Ehrlich opposes the tax, which is expected to raise $17 million in new revenue.

Four Democrats - Sen. John Astle, D-Anne Arundel; Sen. Roy Dyson, D-St. Mary's; Sen. Robert Garagiola, D-Montgomery; and Sen. Philip Jimeno, D-Anne Arundel - voted against the budget-balancing tax and fee package and one Republican, Sen. Robert Kittleman, R-Howard, supported it.

Although the Senate approved a balanced 2005 budget, the state will be facing a $1.2 billion shortfall next year, which could balloon to $2.2 billion by 2009.