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Debt capitals

"Debt capitals" Continued...

"We are in a death spiral," state Sen. E.J. Pipkin, a Republican from the state's Eastern Shore, warned his colleagues in the session's final days. Only two Republicans voted for the budget.

Former Republican Gov. Robert Ehrlich, who is trying to regain his post this fall, accused the lawmakers of "kicking the can down the proverbial alley . . . waiting for the monumental tax increases everyone knows is coming."

This state budget seems designed to get Democrats through to the next election without raising taxes. O'Malley held back his tax increase urges: In 2007, his first year in office, he raised taxes, including boosting the sales tax from 5 percent to 6 percent. But three years later the budget problems remain.

Why? Unintended consequences often follow tax increases. When Maryland raised its top tax rate to 6.25 percent, the state lost $1 billion of its net tax base in 2008 due to migration. "You don't enact tax increases inside of a vacuum," said ALEC's Williams, also an author of Rich States, Poor States.

This time around, state legislators relied on a heavy dose of budget bailouts from Uncle Sam. Federal stimulus dollars account for almost $1.3 billion, or more than 8 percent, of the budget. Rather than stimulate, Maryland is using federal taxpayers' dollars to fund normal expenses. So when Washington's welfare for states disappears next year, Maryland will be facing a fall.

"Maryland has not been reining in spending at all," Gabriel Michael with the Maryland Public Policy Institute told me. "This is an extra billion dollars we will have to come up with. There will be a scramble to come up with the money." -Edward Lee Pitts

New Jersey & New York: Buried in debt

Jeff Scheininger is one of the millionaires whose tax return is at stake in New Jersey's budget battle.

"We're in the hose business," he says, barreling through his warehouse to show where his 18 employees manufacture stainless steel, Teflon, and silicone hoses for Flexline, the small business his father started in 1950. In the last eight years, he's seen his customers leave New Jersey and his business shift to Pennsylvania and overseas. "It's crushing. It's just crushing. I don't have anyone left to sell to," he said. Then he saw his taxes go up with the "millionaire tax," a surcharge on anyone, including small businesses, making over $400,000. In New Jersey's fight to close an $11 billion budget gap, the battle is coming down to the teachers versus the so-called millionaires. Republican Gov. Chris Christie wants the surcharge out. The teachers unions want it in.

Christie proposes cutting $820 million from school aid. He's enticing teachers to take a wage freeze to offset the cost, promising he'll give their districts the money the state will save on the teachers' Medicare and Social Security tax withholdings. So far, administrative staffs in 145 districts and teachers in 20 districts have agreed to the deal. Other union leaders aren't as open. A Bergen County (New Jersey) Education Association leader sent out a memo that joked, "Dear Lord this year you have taken away my favorite actor, Patrick Swayze, my favorite actress, Farrah Fawcett, my favorite singer, Michael Jackson, and my favorite salesman, Billy Mays. I just wanted to let you know that Chris Christie is my favorite governor." The governor wants the union leader fired. The union apologized but refused to fire the leader: just one more battle between the two.

Michael Riccards, executive director of the Hall Institute for Public Policy-New Jersey, said unions usually like to make friends with public officials instead of enemies, but this time the unions early on have gone after Christie: "He returns their fire in kind." While Democrats control both the Senate and Assembly, Riccards said they haven't gone out of their way to defend the teachers unions: "I think they're a little fed up too."

Democrats are, however, pushing to restore the "millionaire tax"-a surcharge of 10.25 percent on incomes over $500,000 and an 8 percent bracket for those making between $400,000 and $500,000. This was supposed to be temporary and Christie proposed discontinuing it, to an outcry. So far he has held his ground but also broken a campaign promise, suspending a property tax rebate program in a move his opponents say will hurt suburban and middle-class families. Because of a deal former Gov. Jon Corzine cut with the unions, Christie will have to wait until January to lay off 1,300 state workers. So for now, state payrolls stay bloated.

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