Rough justice on tax credit errors [Editorial]

We applaud Mayor Stephanie Rawlings-Blake's decision to help homeowners whose property tax bills suddenly jumped after the city corrected errors in how their historic tax credits had been calculated. These people made decisions about whether to buy their homes based on assurances from the state about what their tax bills would be, and although the city was under no obligation to honor those mistaken promises, it was the right — and strategically wise — thing to do. If the mayor wants more people to live and invest in Baltimore, she should be going out of her way to treat people fairly, and on balance, that's what she did here.

We say "on balance," though, because of the maddeningly bizarre way she's going about it. Rather than finding a way to reduce the property tax bills of the approximately 300 residents who are affected by the miscalculation, she plans to cut them checks for the entire anticipated amount of the credit for however many years of eligibility the property owners have remaining. In all, it's going to cost the city about $3 million. There are several things that are less than ideal about that plan, both for the homeowners and for the city.

For the homeowners, chiefly, the problem is that the city's largesse will be, from the IRS' perspective, taxable income. Depending on what tax bracket the homeowners are in, they may find that the city is making them considerably less than whole. And rather than simplifying matters, this will create additional paperwork headaches around tax filing season. Theoretically, a homeowner could mitigate his loss to the taxman by investing the money now and parceling it out over the remaining years of his tax credit, but that involves a great deal of hassle and uncertainty.

From the city's perspective, this solution offers a great many down-sides. For starters, Baltimore would be taking a budget hit in one year that might otherwise be spread across 10. (And whether the city is really responsible for this situation in the first place is unclear; Baltimore's finance department and the state Department of Assessments and Taxation have been pointing fingers at each other for months.) There is no guarantee that the people receiving these checks will actually stay in their properties for the duration of their credits; in fact, one might argue that this gives them some incentive not to. Finally, there's no telling whether the value the city assigns to the credits now would be borne out over time. If the mayor follows through on her plan to reduce property tax rates over the next decade, the value of these credits would actually shrink.

In fairness, untangling this mess isn't simple. The manner of calculating historic property tax credits is spelled out in state law, and city officials are right that, now that they've been alerted to the errors in the way the Department of Assessments and Taxation calculated the benefits in these cases, they can't just ignore the truth. The way the program works is that an owner who makes significant improvements to a designated historic property is entitled to a credit for 10 years that covers all of the property taxes stemming from the increase in assessed value caused by those improvements. He or she is still on the hook for taxes for the base assessment level of the property before improvements and for any general increase in the value of the property after the improvements. In most cases, the errors were the result of the state declaring too much of the property's value tax-exempt.

State law provides no obvious mechanism for holding the property owners harmless for the government's mistake in this instance. But as it happens, the General Assembly just returned to Annapolis for the 2014 legislative session. The mayor could seek some sort of corrective legislation to give the city the power to adjust the property tax credits in these cases. So long as she is willing to pay for it out of city funds, it's unlikely that lawmakers from the rest of the state would stand in her way.

The city has chosen not to attempt it both because of the difficulty of crafting and passing such a piece of legislation and for fear that putting a law on the books could create the impression that the relief for these taxpayers is not just a one-time thing. Still, given the sub-optimal nature of the relief being offered, the mayor ought at least to try. If after the 90-day legislative session is over, no better plan can be devised, neither the city nor the homeowners will be any worse off.

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