Key state lawmaker calls for property tax cap overhaul

A state lawmaker who helps set tax policy is calling for an overhaul of Maryland's property tax cap law, after a Baltimore Sun investigation documented how the costly program has resulted in homeowners across Baltimore paying vastly different amounts for similarly valued houses.

Del. Samuel I. "Sandy" Rosenberg says he will begin crafting legislation Monday to cap property tax increases based on homeowners' incomes, substantially changing an entrenched system now based only on the time people have lived in their homes. As it exists today, the Homestead Property Tax Credit allows wealthier residents who have owned their homes for years to pay just a fraction of their annual tax bill.

Rosenberg, vice chairman of the House Ways and Means Committee, said Sunday he would seek a sliding scale that would create higher caps for owners in higher income brackets — similar to the federal income tax system.

While that wouldn't erase the disparities caused by the homestead credit, he said, it would link owners' tax bills to their ability to pay. And he said it would mean more money for the cash-strapped city government, which this year alone is missing out on $120 million in property taxes because of the homestead credit.

"People are not going to have faith in a system that is unfair," the Baltimore Democrat said, adding: "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."

Mayor Stephanie Rawlings-Blake signaled on Sunday that she is open to having the law modified.

"Mayor Rawlings-Blake looks forward to seeing the details of Del. Rosenberg's proposed state legislation and could support an update to state law to address some of the unintended consequences of the decades-old state homestead tax credit program," spokesman Ryan O'Doherty said in a statement.

Rosenberg's proposal would face some hurdles. Robert E. Young, director of the state Department of Assessments and Taxation, said a sliding scale would make the homestead credit much harder to administer. It would turn a one-time application process into an annual affair involving hundreds of thousands of properties. About one million Maryland homeowners received the credit last year, he said.

"With those kinds of numbers, you might have to have maybe as many as 50 people to process that statewide," Young said. And that's assuming only a basic check, he said.

Rosenberg said it's too early to get into details, noting that he needed to consult with policy staffers. But he wants to jump-start the process so lawmakers can take up the issue during the annual General Assembly session that begins next month.

"I think it's pretty certain I will wind up introducing a bill," he said. "You've got fairness issues, you have fraud issues and you have enforcement issues."

The Sun's investigation, published Sunday, found that hundreds of outsized property tax breaks in the city were caused by typographical errors, unnoticed property improvements and people receiving credits they weren't eligible for under the tax law. Seventeen owners improperly received credits on three or four houses, the investigation found, and hundreds more are getting two credits.

A person or a married couple qualifies for just one credit — on their principal residence.

The homestead credit limits how much a home's taxable value can rise from one year to the next. In Baltimore the cap is 4 percent. The statewide cap is 10 percent, although many counties have adopted lower ceilings. The credit became highly valuable to homeowners during the last decade's real estate boom, and many still see benefits even with the recent drop in home values.

The program's supporters, including Rawlings-Blake, say it gives city residents an incentive to stay in their homes rather than sell because of rising tax bills. Critics say it discourages newcomers from moving to Baltimore. The cap is lifted when a home is sold, meaning a buyer does not inherit the discounted rate paid by the former owner and must pay the full property tax rate.

Begun in the late 1970s as a temporary measure to shield homeowners from the tax impact of spiking home values, the homestead program has morphed into a huge subsidy. Today the program lops off at least 50 percent of the annual tax bills for more than 13,000 city homes, The Sun found.

About 98,000 homes in the city get some reduction in their tax bills because of the credit, while about 25,000 owner-occupied homes see no benefit.

Baltimore economist Anirban Basu said a more "fundamental problem" with the city's property-tax structure is that its rate is easily the highest in Maryland: $2.268 per $100 of assessed value.

With a lower rate "we would not require Band-Aid type solutions like the homestead tax credit," said Basu, chief executive of Sage Policy Group, an economic consulting firm.

"The homestead tax credit is critical in maintaining homeownership in the city, and in the context of the city's high tax rate is probably to be considered good public policy," Basu said. "But the overall tax code itself is not good public policy in part because it creates massive disparities."

Like others, Basu suggests raising the tax cap while at the same time lowering the overall rate.

"I suspect that many taxpayers would exchange a 5 or 6 percent limit on the annual increase in taxes in exchange for a lower property tax rate," he said. "The point is, you could reduce the city's property tax rate and be revenue neutral."

Rosenberg doesn't want to scrap the cap. He said it's been a life-saver for retirees in gentrified neighborhoods such as Locust Point, where home values shot up during the last decade. "You don't want a reform that is harmful to people who, very legitimately, the cap was designed to protect," he said.

Rosenberg acknowledged the political challenge of passing any changes in Annapolis that would require some owners to pay higher taxes. "There will be people who are benefiting from the current system who will oppose it," he said.

Then there are the logistical issues raised by Young, the state assessments chief.

Part of the problem with an income-based program is that homeowners would have to wait to apply until they filed their income tax returns, and his agency would need to process all that paperwork before property tax bills go out in July.

The state would also have to spend more to print and mail application forms to homeowners, such as senior citizens, who aren't able to access them online, he said. And some homeowners might balk at sending in a copy of their tax return in order to receive a property tax credit, he said.

On the other hand, Young 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.

"The courts have ruled that if you bring an income component into a tax-credit program, it's constitutional," Young said. "In other words, you don't have to worry about Maryland's uniformity clause."

Joan Youngman, a senior fellow at the Lincoln Institute of Land Policy in Cambridge, Mass., said Maryland's homestead credit and its effects in Baltimore offer a classic example of how fixing one problem can lead to others.

"You put in things with the best intentions and it can lead to so many unintended and perverse consequences," she said.

It's not just that the homestead credit pits longer-term homeowners against newcomers. It also pushes more of the tax burden onto renters, who live in properties that aren't eligible for the tax break.

Massachusetts offers an alternative way to temper tax increases. The state's Proposition 2½ — approved by voters in 1980 during a tax revolt — caps the amount that local governments can raise from property taxes, by limiting the total increase in revenue drawn from the existing property base to 2½ percent a year. Local governments can override the limit only if voters agree.

It's a workable system, Youngman said, one "definitely worth considering."

"The property tax is always such a target that I would never say people are happy or even satisfied," she said. "But I would say people understand it, and we have been able to deal with it."