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Double dose of tax fun


Joel Schlanger, the director for the Baltimore County Office of Budget and Finance, is ready this time.

Thousands of property tax bills were sent out Friday, and Schlanger and his office are expecting "a lot of phone calls by July 5."

But that's OK. Schlanger and other county officials in similar positions have been battle-tested since the General Assembly passed legislation last year that changed the method of paying property taxes on primary residences from an annual to semiannual basis.

Beginning with this tax season, approximately 1.3 million Maryland homeowners will automatically be switched to the semiannual basis. By law, the first payment will be due Sept. 30 and the second Dec. 31. Most homeowners with mortgage escrow accounts - which will carry a cash surplus - should see a one-time rebate check from their lender by Christmastime.

"We think we are well-prepared for it," Schlanger said. "We have a feel for what is going to happen. But it is always interesting to go through a new cycle."

In 1995, the legislature gave homeowners the option of switching from annual property tax payments to semiannual, but only 2 percent to 3 percent of Maryland homeowners made the change.

It wasn't until last year that the Maryland Association of Realtors and the Greater Baltimore Board of Realtors convinced lawmakers that making semiannual collection the preferred method would reduce closing costs for buyers. And, they pointed out, a byproduct would be a one-time rebate to homeowners with mortgage escrow accounts, amounting to almost half a billion dollars.

Now, property owners are required to pay twice a year, but the legislature retained the option - if the homeowner preferred - of switching back to one annual payment. To do so, homeowners had to notify their lender in writing by May 1. Homeowners without mortgages can pay the full tax bill if they choose.

To satisfy county governments, which bemoaned the loss of interest, the General Assembly also allowed them to charge a service fee not to exceed 1.65 percent of the second installment of a homeowner's tax bill.

But the lure of an average escrow account rebate of $500 prompted homeowners to get the jump on the legislation and make the switch earlier than July 1, 2000, when the full legislation would take effect. That caused mass confusion among taxing jurisdictions, lenders and mortgage servicers.

According to Schlanger, 7,000 Baltimore County homeowners switched for fiscal 1999 and 29,000 for fiscal 2000. Now, approximately 200,000 will be automatically switched for the 2001 fiscal year.

"It is unavoidable that when you have a change of this magnitude that during the transition period you are not going to have some glitches in the system," said Alan P. Ingraham, vice president of MNC Mortgage Corp. and treasurer for the GBBR. "We had to walk people through quite a bit of that.

"But, having said that, I think it has definitely had the kind of impact we thought it would when we supported the bill in Annapolis relative to inducing first-time buyers to buy houses. When you reduce by six months the pre-paid property taxes they would have to come up with for their escrow accounts, it just makes housing more affordable - especially in the city."

Under the old system, a lender would usually require 12 months worth of property taxes - plus a two-month cushion - to be paid up front by a borrower and placed in an escrow account. Now, lenders will be asking for six months, in addition to the two-month cushion.

"I believe the General Assembly did the right thing," said Ronald W. Wineholt, director of the Department of State Assessment and Taxation. "This law is going to put back in the hands of property owners nearly a half-billion dollars in refund escrows, and will reduce for homebuyers by hundreds of dollars the amount of cash they have to bring to the settlement table."

Wineholt said those taxpayers with escrow accounts who will be moving to semiannual payments this year should receive from three to five months of property taxes as a one-time rebate from their lender. The variation depends on when a lender disburses the first payment to the county.

According to Ingraham, lenders are required by federal law to analyze escrow accounts once a year and are required to return to borrowers any cash above the two-month cushion.

Wineholt also said that if a county or taxing jurisdiction offers a discount for early payment, the discount will apply only to the amount due in the first installment. Wineholt added that six counties - Baltimore, Howard, Montgomery, Prince George's, Allegany and Frederick - decided not to implement the service fee. Baltimore City and Carroll County will charge the maximum 1.65 percent; Anne Arundel County will charge 1.52 percent; and Harford County will charge a 1.43 percent service fee.

The Maryland Association of Realtors calculated that for a property owner with a $1,600 tax bill, the maximum fee would be $13.20 annually.

"Even though those property owners [are] concerned about having to pay the service charge, I've calculated it through," said Wineholt. "The amount of money they would get back in their escrow refund typically would pay their service charge anywhere from 30 to 50 years. Even allowing for the service charge, this law is a good deal for homeowners."

Schlanger fears that older property owners who have long ago paid off their mortgages and religiously pay their taxes the first week of July may not understand why their tax bills were cut in half. "I'm just worried about the guy who doesn't pay because he doesn't remember that he has to pay twice," said Schlanger, who added that a second bill will go out to Baltimore County homeowners in October for the Dec. 31 payment.

"You have to remember that the mindset for years is that it has been an annual tax, and so many people have paid it annually that they are just used to doing it that way," Schlanger said. "Now they have to elect to do it that way. So, I am just a little bit concerned."

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