Tax credit for homeowners means big break for some, nothing for thousands

Jeff Burdick and his next-door neighbors have nearly identical two-story rowhouses, on the same block of East Clement Street with the same public schools and the same city trash pickup. But one striking difference is the $5,300 he pays in yearly property taxes — more than both his neighbors combined.

The reason behind Burdick's disproportionate tax bill is Maryland's Homestead Property Tax Credit, which caps his neighbors' taxes but not his, because he moved to Riverside many years after they did.

"I don't think it's fair," said Burdick, 37, who works in accounting. "Regardless of whether someone's been there 30 years or two years, I'm paying for the same services they are — but I'm basically paying more."

The huge tax disparity is not just a result of how the homestead credit works, however. It's also an example of how it doesn't work. One of the houses next to Burdick's is getting a two-thirds discount, even though it doesn't qualify for the program because the owners are renting it to someone else.

The situation on Clement Street is playing out on block after block across Baltimore, an investigation by The Baltimore Sun has found. Since the late 1970s, when it was devised as a low-cost way to keep a lid on tax increases, the homestead credit has morphed into a massive subsidy fueling widespread inequality — a problem made worse by errors in billing and inadequate oversight.

Today the program lops off at least 50 percent of the annual tax bills for more than 13,000 city homes. Some of those large breaks are a consequence of the wild real estate market of recent years, which let homeowners lock-in low tax levels even as the value of their homes soared. Many are still paying well below full freight several years after the housing boom turned to bust.

But the city's property tax rolls also contain discounts so high that statisticians call them obvious mistakes. Thirty homes even have had their taxes reduced to nothing — mathematically impossible for a program designed only to limit increases.

The Sun's investigation found that hundreds of outsized tax breaks were caused by typographical errors, unnoticed property improvements and people receiving credits they aren't eligible for under the tax law. In many cases, state or city officials could have uncovered the errors simply by looking at their own records. In other cases they uncovered problems but didn't correct them until The Sun inquired.

The homestead credit's cost has ballooned to a degree never imagined by the state lawmakers who passed it in 1977, as a two-year measure to insulate homeowners from spiking home values. It was projected to cost less than $7 million statewide for both years combined, which comes to about $25 million in today's dollars. Now it's keeping $120 million out of the budget-strapped city's coffers just this year alone, according to The Sun's analysis and budget documents.

Although these problems don't end at Baltimore's borders, the investigation focused on the city because its tax rate is far and away the highest in Maryland. That gap is frequently cited as a significant drag on the city's efforts to lure businesses and stem population loss. Mayoral challengers campaigned this year on promises to cut the rate by as much as half.

And the credit is one reason Baltimore's tax rate remains stubbornly high — at least double that of any other jurisdiction in Maryland. Without the cap, or with a higher one, the city could take in millions of additional tax dollars each year, giving it the fiscal means to reduce the rate citywide.

How substantial is the credit's cost? If it vanished overnight, the city could slash its tax rate 13 percent and pull in the same amount of money this year.

The Sun's findings reinforce the argument made repeatedly by Maryland attorneys general since the law passed 34 years ago that the homestead credit is likely at odds with the state constitution, which guarantees "uniform" taxation of property.

The owners of 98,000 homes in Baltimore receive at least some benefit from the homestead credit this year. The remaining 25,000 get nothing, either because their home values have plummeted or, like Burdick, they bought within the past few years and have had no increases to cap. Renters are also on the losing end of the homestead equation — landlords aren't eligible for the break and pass the cost of their higher tax bills on to their tenants.

U.S. Sen. Benjamin L. Cardin said The Sun's analysis shows that the tax cap has warped the property-tax system to an extent he didn't envision when he helped design the limit as a high-ranking state delegate in 1977.

"It does distort the fairness of the tax code when you have two people living side by side with the exact same homes, one paying higher property tax than the other," he said.

The program's supporters, including Baltimore Mayor Stephanie Rawlings-Blake, say it serves as an important incentive for city residents to stay in their homes rather than sell because of rising tax bills. Critics say the credit discourages newcomers from moving to Baltimore, where they must pay the full cost of the highest property tax rate in Maryland.

"The whole system is broken," said former city councilman Joseph T. "Jody" Landers III, who ran for mayor this year and considers the tax rate one of the biggest challenges facing the city. Of the homestead credit, he said: "It's very inequitable."

The consequences are evident on Clement Street, where one of Burdick's next-door neighbors pays only half his gross property tax bill thanks to the credit. Now in his 70s, the man has lived in the house for half a century, and retired after 43 years at the nearby Domino Sugar plant, visible from his front steps.

Without his nearly $2,500 credit this year, he says he couldn't afford to keep his home: "If they ever got rid of it, everybody would be gone," said the man, who insisted that he not be quoted by name discussing his finances. He acknowledged it's not fair for Burdick to pay so much more, but then added, "He should've moved here 50 years ago."

Burdick says he never seriously considered purchasing outside Baltimore, because he and his wife like city living. But the high tax rate did force him to buy a less expensive house than he otherwise would have picked. He paid $255,000 for the home in 2008. It's now valued at $222,000.

He's sympathetic to his retired neighbor, but says the problem with the city's property tax system is the high rate itself. If the goal is to help homeowners avoid being swamped by taxes, he said, "lower tax rates in general would do the same thing."

A concentration of benefits

Here's a simplified example of how the city's 4 percent homestead cap works: Say you buy a home worth $100,000. At the city's current tax rate of $2.268 per $100 of value, you pay $2,268 in annual property taxes. Next year the house is reassessed at $120,000, but instead of paying 20 percent more your tax bill rises only 4 percent.

If you had owed taxes on the full $120,000, you'd be paying an extra $363. That untaxed amount is the homestead credit, money forgone by the city.

And if the home's value keeps rising more than 4 percent a year, the size of the credit keeps growing too. During the middle of the last decade, annual property values rose at a double-digit pace. As a result, many owners saw the size of their credit snowball.

But the homestead credit disappears after a home is sold. The new buyer pays the full bill and only begins accruing his or her own credit after the first year — assuming values rise fast enough.

To understand the effects of the homestead break, The Sun requested information from the city showing the net tax bill and any tax credits for every property in the city. Baltimore's Finance Department said it couldn't provide that level of detail because the information was essentially trapped inside an aging mainframe computer.

Using an automated process called "data scraping," The Sun instead created its own database of all 237,000 city property tax records by copying the information, one record at a time, from the individual tax records publicly available on the city's website.

In addition to revealing errors and widespread disparities, the analysis found that wealthy homeowners reap large benefits from the credit.

Nobody in the city has a larger homestead credit, in dollar terms, than John and Angelina Guerriero, who own an urban palazzo in Little Italy.

Their property tax bill this year would have been $61,700 if they had to pay on their home's entire assessed value of $2.6 million. Thanks to the cumulative power of the 4 percent tax cap over two decades, they owed $12,900 instead.

Their $48,800 tax break works out to a 79 percent discount.

State assessors say the Guerrieros' credit was computed correctly, based on a starting assessment of $240,000 two decades ago, when the couple turned a South Exeter Street commercial garage into a residence the size of five ordinary rowhouses.

John Guerriero, who grew wealthy by building Continental Foods into a $100 million family empire, makes no apologies for the discount. "Everybody looks at things differently," he said. "I feel like I'm entitled to the credit. I put a lot of money into the house, into the area."

Without the cap to keep a lid on taxes, Guerriero said, "I'd have to find a way to get out of it or sell the house, if it's possible." Noting that a new owner would be required to pay the full tab, he added, "I don't think anybody else would want to assume that kind of tax bill."

Harold F. Graul Jr. and his wife Mary have a 61 percent homestead discount on their 4,000-square-foot condo at the Towers at Harbor Court near downtown. This year they owed around $12,000 of the $31,000 property tax bill for the home, which the state says is worth $1.3 million.

Harold Graul, whose family operates the Graul's supermarket chain, thinks he pays a fair share considering the limited city services he uses. He pointed out that Harbor Court owners pay for private trash hauling and very few have children in public schools.

"I've never asked the city for anything from my taxes," he said, "other than I drive on the streets in my car."

One of the largest credits goes to Constellation Energy Chief Executive Mayo A. Shattuck III and his wife Molly, whose home in the Blythewood neighborhood is valued at $2.3 million. This year they're receiving a homestead break of more than $22,000, lowering their bill by two-fifths. Shattuck, who was paid $15.7 million last year, said through a spokesman he had no comment on the credit.

While there's no doubt many retirees on fixed incomes also benefit, assessment caps are generally a "regressive" form of taxation that tend to shift more of the burden onto owners of less valuable homes, according to Jane Malme, a fellow at the Lincoln Institute of Land Policy in Massachusetts.

This year in Baltimore, one-quarter of the homeowners who benefit from the credit account for nearly half the credit's total value, the Sun's analysis found. Those are the owners with properties worth $175,000 or more, a group that accounts for nearly half the city's total assessed value as well.

"The problem with an assessment-increase limit," Malme said, "is it's the very properties that are increasing in value — and maybe therefore have the wealthiest people living in them — that … get the cut. It has to be paid for by somebody else. That's paid for by people with lesser increases, that either don't qualify or their properties are losing value."

Errors fuel some credits

In addition to documenting large property-tax discounts that were calculated correctly, The Sun's analysis uncovered huge breaks that were apparent errors.

First, some context: The average price of a home in Baltimore doubled from 1990 to 2010, largely because of rapid increases during the housing bubble of the last decade that weren't fully erased by the bust that has followed.

With that average increase, and accounting for how the state's three-year assessment cycle can cause some values to lag the market, a typical homestead credit for a long-time homeowner in the city would reduce the property tax bill by about one-third.

Yet the owners of nearly 1,000 city homes are receiving a homestead credit covering at least 80 percent of their taxes for the fiscal year that began July 1. To amass such a big credit, a homeowner who moved in two decades ago would've needed to see that home's value soar at least sevenfold.

About 220 of those homes are getting a tax break of 90 percent or more — requiring a jump in value of at least fifteenfold over the same period. That's the equivalent of a home appreciating from $30,000 to $450,000 in 20 years.

Ting Zhang, a statistician at the University of Baltimore's Jacob France Institute, said the odd one or two homes getting a credit that massive might be believable, especially if the assessed value was very low to start. But 1,000 city properties getting 80 percent tax credits strikes her as mathematically implausible.

"I definitely don't think that's possible," she said.

In most of the cases investigated by The Sun, it wasn't.

The Sun forwarded a sample of 20 homes with large homestead breaks to the state Department of Assessments and Taxation, which oversees the homestead program, and asked whether they were correct.

Assessors said 15 of the 20 were not. Several problems inflated the credits, including:

Miscalculation. Some of the homes had a tax credit that was larger than the total amount of tax they owed, which is impossible under the rules of the program. In each case the error occurred because the credit was misapplied in connection with a separate tax break for blind homeowners, which knocks $15,000 off a home's assessed value.

Ineligibility. One credit, covering 87 percent of the taxes on a property on Howard Street in Remington, violated the homestead rules because the home is owned by a company — and has been for more than four years. It shouldn't have any credit, let alone one so big. Corporations aren't eligible for the homestead tax break, except when farmers opt to put their home and land into a limited liability company.

Data-entry error. Typos created two massive credits. In one case, a property's entire tax bill was wiped out because someone incorrectly keyed in the amount of assessed value covered by the credit. For another home, on East Montgomery Street in Federal Hill, a state worker left off a single digit when updating its value, causing the bill to plummet from $4,121 last year to $474 this year.

Missed renovations. Five properties had homestead credits inflated after they were purchased by real estate investors during the housing bubble, rehabbed and then resold for significantly more money. The tax cap isn't supposed to shield owners from paying tax on substantial improvements — those worth more than $50,000 during the period in question. But sometimes assessors don't realize the renovations happened.

Beyond such errors, there has been a long-standing problem of people receiving the tax break on houses they don't occupy — including owners who don't understand the rules or had no idea they were getting a credit.

In August The Sun reported that 465 houses were receiving homestead breaks even though they had been identified by the city as vacant and unlivable or unsafe. Credits to those owners this tax year totaled $325,000.

And the homestead program has for years been plagued by owners — including some politicians — "double-dipping" by improperly collecting credits on more than one home. A Sun analysis found more than 450 property owners receiving credits on two, three or four homes.

Both the city and state say they have done computerized searches to zero in on double-dipping this year, but neither took action until The Sun inquired.

Some property owners are collecting only one credit but still aren't eligible for it. That's the case on Clement Street — Burdick's other next-door neighbor is a tenant. Property owner Christina Roby confirmed by phone that she and her husband moved out around 2008, after more than 25 years, and are renting out the house.

She said she didn't realize they were no longer entitled to the credit, which this year knocks $4,170 off their original $6,400 bill. And she emphasized that she and her husband don't collect any credit on their true residence, in the city's Ten Hills neighborhood.

"We don't understand," she said. "We do not know all the detailed regulations."

Actions and inactions

State and city officials say they are working to fix problems with the homestead credit, including those identified by The Sun.

The city's Finance Department began auditing tax credits over the summer to search for recipients getting undeserved breaks, particularly landlords. While the state determines property values and applies credits, the city collects the tax dollars.

The state assessments agency, meanwhile, has been processing tens of thousands of applications for the homestead credit over the past few years, cross-checking addresses on tax returns and drivers' licenses to cut down on people collecting the credit on homes they don't live in. Owners will automatically lose the break if they don't submit their Social Security numbers to the state agency by the end of 2012 to make that check possible.

Both efforts are aimed at weeding out people who shouldn't be getting the homestead credit at all, not finding those whose break is larger than they deserve.

"It's always been a question of available staff and resources," said Robert E. Young, director of the state Department of Assessments and Taxation, who noted that the average assessor today has nearly three times as many properties to reassess as in 1977. "What you often have to do in government is pick which audits or which checks will be the most productive."

So far the state's review has stripped thousands of unwarranted credits statewide, said Young.

"We have a great deal of confidence because of the way the system is designed, the checks we've instituted, [that] the homestead credits we've granted are properly being received," Young said.

Still, The Sun's investigation found red flags contained in the government's own files that have long gone unaddressed, costing the city money year after year.

Unassessed renovations are an example. The five renovated homes The Sun submitted to state officials — homes with taxes incorrectly pegged to their pre-rehab values — all had construction permits on file with the city describing substantial improvements the owners planned to make. Yet the city and state never connected the dots.

A house on Wyeth Street in Pigtown, for instance, sold for just over $10,000 five years ago and changed hands the very next spring for $293,000. In between, a rehabber got permits from the city to give the house an overhaul, from the drywall to the bathrooms and kitchen.

But the state didn't take that change into account, so 92 percent of the owners' bill this year — all but about $500 of the nearly $6,300 tab — was forgiven by the homestead credit.

Permits are supposed to trigger a review by the state. Owen C. Charles, deputy director of the assessments agency, said he couldn't tell whether the city had given his staff permit information on the five homes, but he says the local government's system for forwarding permits is usually reliable.

The city, for its part, could sort through its permit files to see if properties overhauled in recent years are getting unusually large credits. But finance officials argue that only the state has the records to show whether those credits are right or wrong.

"We have to try and figure out how we slice and dice the data to get the biggest bang for the buck — what we should go after first," said William Voorhees, director of revenue and tax analysis for Baltimore's Finance Department. "And that's not an easy thing."

'Temporary' fix

The homestead program wasn't pitched as a permanent tax break. It was supposed to be temporary — and much less generous.

As home prices soared and anti-tax sentiment rose nationwide in the 1970s, the Maryland General Assembly passed a law to put a ceiling on taxable assessment increases for two years. As long as counties didn't increase their rates, that would cap the rise in homeowners' tax bills at 15 percent for each year.

Lawmakers said they were in crisis mode, looking for an emergency fix. A 1977 Sun story quoted then-Sen. Jerome F. Connell of Anne Arundel County saying, "We're really at the point with assessments that we're literally putting people out of their homes."

Francis B. Burch, Maryland's attorney general at the time, said a short-lived cap would probably avoid running afoul of the state constitution's requirement to tax homeowners uniformly, but "any statutory scheme to place a percentage limitation on assessment increases over a long duration would become unconstitutional," he warned in an opinion.

But legislators kept passing extensions to the credit, and the attorney general kept cautioning the General Assembly. When the program crossed the 11-year mark, the attorney general's office flatly concluded that it violated the state's constitution.

In 1990, facing an election and homeowners agitated after another run-up in home prices, state legislators made the program more generous, dropping the cap from 15 percent to 10 percent. They allowed local governments to set ceilings even lower, and Baltimore's has been 4 percent ever since.

University of Maryland law professor William Reynolds said he is "amazed" no one has challenged the homestead credit in court, if only for ideological reasons. He said the state constitution's requirement for uniform tax rates "seems to provide a strong case for new home buyers," because they see no immediate benefit from the credit.

But Reynolds declined to speculate on whether a legal challenge would succeed. "The question," he said, "is whether the Court of Appeals will upset a third-of-a-century tax break, which will severely inconvenience many people, in order to satisfy the apparent plain language of the law."

Eighteen other states and the District of Columbia have assessment caps, though their approaches vary, according to the Lincoln Institute. Oregon, for instance, has a 3 percent statewide cap that applies to both commercial and residential property, and it remains in place when a parcel is sold.

In Maryland, some legislators warned years ago that the homestead credit would create unintended consequences.

When the City Council lowered Baltimore's cap to 4 percent, then-Councilman Anthony J. Ambridge was the lone council member to vote against the reduction. At the time he argued that 4 percent was too low, a view he still holds two decades later.

Keeping such a tight lid on taxes for longtime homeowners has deprived the city of revenue it would need to finance a meaningful cut in the citywide property tax rate, he says. And that high overall rate, he argues, has hurt many local businesses, which don't qualify for property tax breaks unless they can afford to expand or make new investments.

"Long-term it's had an adverse effect for the city as a whole," Ambridge said of the 4 percent cap.

'I'm just stuck'

The credit also creates dilemmas for some of its beneficiaries.

Baltimore homeowner Tracy Gosson has a homestead credit that covers nearly $3,600 of the taxes on her home in Butchers Hill, almost two-thirds of the total. She'd like to sell and buy another city home, but she'd lose the break she spent 16 years accumulating. She paid $40,000; now it's assessed at $235,000.

"I'm just stuck in a place where I don't want to sell my house," said Gosson, who heads a consulting company and formerly ran Live Baltimore, a nonprofit organization that encourages city living.

But she likes the homestead program. Her solution is to expand it rather than scrap it — allow residents to take their credits with them if they buy a more expensive home in Baltimore.

The city has to do something, she said, because the high tax rate is a tremendous problem. But Gosson said it has proved politically easier to do little or nothing.

"It's such a monster of an issue that nobody really attacks it in earnest," she said.

City leaders couldn't eliminate the homestead credit themselves — even if they wanted to — because the program is state law. The city could push the cap to 10 percent, a move recommended by a property-tax commission in 2007 as part of a strategy for lowering the city's tax rate, but a spokesman for Baltimore's mayor says such a change would not by itself allow for a significant rate drop, and might push current homeowners out of the city.

None of the counties in the Baltimore region have caps above 5 percent. Anne Arundel — the only county in the state that forgoes more taxes than Baltimore as a result of the homestead — has a 2 percent cap.

"Every day, people are making decisions about whether or not they're going to stay or leave the city," said Ryan O'Doherty, Rawlings-Blake's spokesman. "I don't think that increasing property taxes on people who have lived here for a long time is going to help us grow."

The mayor recently announced a goal of attracting 10,000 new families to Baltimore over the next decade, though she has offered no details. She has also proposed a relatively modest plan to cut the tax rate on owner-occupied homes by 9 percent over eight years, to $2.068 per $100 of assessed value.

Elected leaders and political candidates in the city often talk of lowering the rate, but little has been done on that front. It was cut just six cents for every $100 in assessed value over the last 10 years, starting under then-Mayor Martin O'Malley and ending during Sheila Dixon's administration.

Over that same period, the homestead break has kept roughly $700 million out of city coffers. Early in the last decade, its value to homeowners — and thus, its cost to the city — amounted to less than $8 million a year. Once the real estate market took off, it rocketed to a peak of nearly $150 million two years ago.

Falling values mean less money shielded from taxation by homestead breaks. But the state estimates the credit will still shave $100 million off city tax bills next year.

Even so, the credit has a certain appeal to city budget officials. It has kept revenue out of the coffers, but it has also cushioned the blow of the housing bust. That's because many homeowners are still catching up to their full assessments, paying 4 percent more each year than the year before. So the city's property-tax revenues haven't yet dropped despite several years of falling home values, O'Doherty said. He anticipates next tax year will be the first since the downturn to register a decline in that revenue source.

The mayor supports the homestead program, O'Doherty said. "Should this credit exist? Absolutely."

Brett Theodos, a housing and development specialist at the Urban Institute, says he understands why owners would want to know their property taxes won't rise much for the indefinite future. But awarding tax breaks based on the homeowner's income makes more sense to him. Maryland does that as well, offering a "homeowners' credit" to households with $60,000 or less a year.

Under the current system of homestead credits, it could take years for many homeowners to pay full freight. Decades, in some cases. And that's assuming home values never rise again.

"Seems like a long time to get back to normal," Theodos said.

Tribune Interactive programmer Kit Mobley contributed to this article.

About this series

Today The Baltimore Sun begins a series of occasional articles on property taxes in Baltimore, whose highest-in-Maryland rate is seen by many as a major drag on the city. Future articles will explore who pays what and tax breaks available to owners. Today's article shows how the homestead credit has ballooned into a huge subsidy, fueling broad disparities in how the city's tax burden is shared.

To report the series, The Sun asked the city for the net tax bill and any credits for each of the city's 236,000 properties. After officials said they lacked the technical means to produce that level of detail, The Sun built its own database, using an automated process called "data scraping." Information was copied, one record at a time, from individual tax records publicly available on the city's website.


Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the housing market and runs the Real Estate Wonk blog. Her coverage has won national awards, including a "Best in Business" recognition this year from the Society of American Business Editors and Writers.

Reporter Scott Calvert joined The Sun in 2000. He was the newspaper's Africa correspondent from 2005 to late 2007, and last year his investigation of a Baltimore mental health clinic prompted state health officials to develop new oversight measures.

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