Bill would impose civil penalties on homestead credit scofflaws

Maryland homeowners who are caught getting unwarranted homestead credits on their property tax bills would face fines equal to 25 percent of any undeserved break, under a bill introduced Friday in the General Assembly.

Meanwhile, Del. Samuel I. Rosenberg, the bill's sponsor, has abandoned an ambitious idea to revamp Maryland's 35-year-old homestead credit — which rewards longtime residency — with a tiered system tied to homeowners' incomes. Though he earlier called that a fairer system, he says he has concluded such an overhaul lacks public support and would be too complicated.

He does, however, think greater punishment is warranted for those who violate the property tax laws.

Last month, state officials revoked more than 550 homestead credits in Baltimore after a Baltimore Sun analysis showed that hundreds of owners were receiving breaks on multiple homes in violation of state law. The owners now owe back taxes, and the city can also charge interest and penalties.

Many of the double-dipping homeowners told The Sun they didn't know they were getting an inappropriate credit, though it is extended only to properties that owners declare in writing as their principal residence.

Rosenberg's proposal would stiffen penalties for future scofflaws, adding a 25 percent penalty to newly owed taxes. For example, the revocation of the 550-plus credits means those owners owe $730,000 more in property tax for the current year. If his plan were law, they would have been charged an additional $183,000, money that would go into city coffers.

"The purpose is to deter people from improperly claiming a homestead," said Rosenberg, a Baltimore Democrat who is vice chairman of the tax-writing House Ways and Means Committee.

Ryan O'Doherty, a spokesman for Mayor Stephanie Rawlings-Blake, said the proposal seems like a "thoughtful approach" to dealing with abuse.

The homestead credit program limits the amount a home's taxable value can rise year to year. In Baltimore the cap for all owner-occupants is 4 percent. The statewide cap is 10 percent, although many counties have adopted lower ceilings.

Because of the program's structure, many long-term owners enjoy steep discounts on their tax bills, while recent buyers pay the full cost, the recent Sun investigation documented. One result is that wealthier residents who have owned their homes for years pay just a fraction of their annual tax bill.

Critics say the program discourages newcomers from moving to Baltimore while depriving the city of money to help finance a meaningful cut in the overall tax rate. The cap is taken off when a home is sold, so a buyer does not inherit the former owner's discounted rate and must pay on the full assessed value.

Rosenberg's legislation contains a provision aimed at making sure buyers understand this. Sellers would have to make clear to prospective buyers how much they would actually pay in property tax.

Homestead credit supporters, including Rawlings-Blake, say the program encourages city residents to stay in their homes rather than sell because of rising tax bills. The city's property tax rate — $2.268 per $100 of assessed value — is the highest in Maryland and more than double the rates of nearby counties.

At the city level, Councilman Carl Stokes wants to raise Baltimore's homestead cap to 10 percent, leave it there for five years, then drop it back to 4 percent. He says the extra money would help pay for a 50 percent cut in the tax rate by 2016, arguing that that would draw people to Baltimore and raise property values.

Rawlings-Blake calls Stokes' plan unrealistic and has proposed a more modest tax-rate reduction of 9 percent over eight years.

In December, Rosenberg called the homestead credit inequitable because it allowed people in virtually identical houses to pay vastly different tax bills, simply based on how long they've lived there.

At the time, he told The Sun: "People are not going to have faith in a system that is unfair. Are neighbors paying the same? If they're not, there has to be a justification for it. If one is wealthier than the other, that is a justification. That is a progressive system."

His solution was to create different caps, similar to the graduated income tax system in the United States. Higher income groups would be subject to a higher cap, meaning their property tax bills would rise proportionally faster than those of owners in lower income groups.

This week Rosenberg said he's come to believe the proposed overhaul was unpopular and would pose big logistical challenges. He also said he was won over by the arguments of those who emphasize that the program, in its present form, significantly eases the tax burden on entrenched residents.

"I was persuaded the cap's incentive for people to buy and remain in the city outweighs the disparity, the differences," he said.

After details of his now-abandoned overhaul idea were published in The Sun in December, Rosenberg said he began hearing concerns about the proposal from "homeowners in the city and people involved in trying to get people back to the city."

He said he also met with the mayor's staff, who described the city's efforts to crack down on tax credit abuse under a "billing integrity" program launched last year.

Robert E. Young, director of the state Department of Assessments and Taxation, said an income requirement would have substantially increased the workload for his agency, which administers property tax credits statewide. He estimated when Rosenberg proposed the idea that he might need 50 additional employees.

"That would have been a massive effort," Young said Friday. He said it would have posed "significant administrative difficulties" for his staff to process applications in a timely manner, something he communicated to Rosenberg.

On the other hand, Young has said tying the homestead credit to income could resolve long-standing questions about its legality. The state attorney general's office has consistently said the current structure of the homestead program violates the state constitution, which promises "uniform" taxation.

Young believes a new application requirement for the homestead will slash the number of invalid credits. Homeowners have until the end of the year to apply or they won't receive the credit in the 2013-2014 tax year. The assessments agency is planning a campaign this spring to publicize the deadline.

Baltimore Sun reporter Jamie Smith Hopkins contributed to this article.