City warily eyes likely property tax hit from next recession

The Baltimore Sun

Next time the Maryland economy hits the skids, Baltimore City’s property tax revenue could fall more rapidly than it did after the housing bust a decade ago, officials say, a worrying prospect for the cash-strapped city.

When the housing bubble burst in 2007, the city quickly felt the pain. That summer, quarterly transfer and recordation taxes on property sales plummeted to $6.3 million from $10.2 million just a quarter earlier.

But property tax revenue didn’t fall until three years after the trough of the recession, the city says. One factor was that properties in Maryland are reassessed every three years, creating a lag.

Another factor was the huge store of assessed housing value walled off by the state’s homestead tax credit. The credit acts as a cap, preventing the amount of assessed value on which Baltimore homeowners are taxed on primary residences from rising more than 4 percent a year. During the housing boom, the size of those credits soared along with housing values and assessments.

When the crash came, assessments fell and homestead credits shrank, but many people’s property tax bills didn’t drop initially because of the homestead tax credit.

The situation is different now. Homestead credits citywide total just over $28 million, the lowest level in over a decade and a fraction of the $147 million in 2010. City officials note that assessments have been rising lately, but at well under 4 percent a year.

While the current dynamic means less foregone tax revenue for the city, officials say the downside is the city has a far thinner cushion in the event home values go south again. That raises the prospect that a decline in assessments, rather than just reducing credits, would cut tax bills for homeowners and reduce badly needed tax revenue for the city.

City finance officials flagged the risk in a May budget report.

“The fact we’ve listed it in the report means it is on our radar,” Deputy Finance Director Steve Kraus said in an interview. “We’re not in panic mode.”

While the economy continues to hum, 59 percent of private-sector economists surveyed in May by The Wall Street Journal said the current expansion was most likely to end in 2020.

The city is always concerned about property tax revenue because it accounts for roughly half of the city’s $1.9 billion general fund, Finance Director Henry Raymond said.

Officials in several other Maryland counties say they also have thinner homestead tax credit cushions. Every county and municipality in the state is required to set its property tax cap at 10 percent or less.

Kraus noted that the local housing market appears to be more sustainable than it was before the crash.

Still, city officials say they are preparing for a recession by working to rein in costs in areas such as health care and pensions. City Councilman Eric T. Costello, who chairs the budget committee, lauded those efforts. But, he added, “there’s always more.”

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