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As Long as We Remember...

December 11, 2012

Kicking the Can, Shifting the Burden

Earl 'Rocky' Mackintosh

The Frederick News-Post reported last week that Frederick County’s commissioners are proposing a merger of fire taxes with property taxes to make up shortfalls in emergency services funding.


The resulting increase in property taxes would not be a terribly substantial one – rates would be bumped in suburban districts by 4.8 cents per $100 of assessed property value. But it does beg the question: is this just the beginning of a series of incremental increases in property taxes to offset the cutbacks in state and federal funds that Maryland counties municipalities have long depended upon?


With the passing of the Budget Reconciliation and Financing Act of 2012, the State of Maryland made the very controversial decision to shift $710 million worth of the cost of teacher pensions to county governments between 2013 and 2016 – not an insignificant burden by any means. (This was in addition to a $260 million income tax increase.)


The pass-the-buck scenario is no doubt replaying all over the U.S. as state governments struggle to meet funding shortfalls during the prolonged economic malaise. (Maryland was, in fact, one of only three other states that had not already shifted a share of teacher pension liabilities to local governments.)


And there is no help to come from federal coffers. Democrats and Republicans are locked in a mighty struggle to find a nonexistent magic solution to the budget deficit that does not appear to involve meaningful spending cuts or burdening the middle class with higher income taxes.


The reality is that whatever solution (no matter how ineffectual) Congress undertakes to resolve the U.S. budget deficit, it is going to be painful, and that pain is going to trickle down to state and local budgets. Much like Frederick County, local municipalities throughout the U.S. have been belt-tightening for years as the recession ate away at state and local revenues – there isn’t much fat left to cut at the local level.


That leaves revenues to save the day. The bulk of revenue collected by local governments comes from property taxes – in 2012 real estate property taxes are expected to make up 37% and 55% of total revenue collected by the City of Frederick and Frederick County, respectively.


In turn, the largest expense of Frederick County’s budget is the public school system.


Given that local politicians are no more eager to raise income taxes on the middle class than their peers in Congress, and that the state is in the process of passing school-related expenditures on to the counties, real estate property taxes start to look like a sitting duck.


While it would appear counter-intuitive for local politicians to take any action that risks further depressing the struggling real estate market, the money has to come from somewhere and real estate property taxes are at least still offset by federal tax deductions. (Although real estate related tax deductions may be on the chopping block as well.)


For some time now, the Federal Reserve has been artificially holding down interest rates at jaw-dropping levels in an effort to stimulate the housing market, and at last there are green shoots pointing to a steady recovery in that sector.


If housing does, in fact, bring some much-needed traction to the U.S. economic “recovery,” it would be logical for local governments to explore property-related taxes and fees as a source of additional revenue that is less likely to get them fired than say a substantial increase in income taxes. In the case of Frederick County, that controversial leaner-look that Blaine Young and his fellow commissioners has forced upon the government the last 24 months may turn out to be able to absorb these burdens better than most.


In the unlikely event that the housing market really heats up fast, homeowners in Maryland are somewhat insulated from real estate property tax increases on their primary residences. The Maryland Homestead Tax Credit limits the amount that real estate property taxes can be increased annually due to rising property assessments. However, the deadline to make application for the credit is December 31 of this year – any homeowner who hasn’t applied by the deadline will lose that buffer and could potentially face higher real estate property taxes.


The Homestead Tax Credit won’t protect property owners in Maryland from an increase in tax rates, however.


So, let’s pray that Congress gets smart and finds a way to balance the budget that doesn’t involve treating taxpayers like ATM machines.


All I want for Christmas is a miracle on at both ends of Pennsylvania Avenue.


Rocky Mackintosh is the owner of a land and commercial real estate firm based in Frederick. He is also the editor of the MacRo Report Blog.


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