The average taxpayer should be fuming over the recent legislative audit of the Maryland Department of Assessments and Taxation. Not because of the various oversights or recordkeeping problems the auditors uncovered. Those are correctable. Not so the legal loophole that has allowed owners of multimillion-dollar commercial properties to dodge taxes that the rest of us routinely pay. And the problem is getting worse.
Here's how it works. Back in the 1990s, lawmakers decided to allow commercial property to be held in limited liability partnerships or corporations as a way to protect individual investors from personal liability in the event of civil actions. That made a lot of sense, particularly in the increasingly litigious times. But it opened an opportunity for tax evasion that has gotten out of hand.
That's because the law allows property to be sold through a transfer of "controlling interest" rather than a straightforward sale recorded at the local courthouse. The result? A company can avoid real estate recordation and transfer taxes, which can amount to up to 2 percent of the sales price. That may not sound like much, but when $100 million in downtown buildings are sold, it's a $2 million loss for the rest of us.
But wait, it's far worse than that. The loophole has grown so popular that it's now rare for valuable commercial real estate to be sold any other way, making the assessment process nearly impossible. A tax assessor relies on comparisons of recent sales to judge the value of real estate - that's the core of how the assessment process works.
This is no mere inconvenience for government; it has helped keep commercial property underassessed, in some cases dramatically so. Take the City Crescent building on Howard Street. It sold this past summer for $75 million but was assessed last year for about half that amount. Had the assessment met the sales price, the city would have been collecting about $721,000 more each year.
You can bet average taxpayers will never get a break that sweet. Instead, they will be paying more in property taxes each year so the owners of strip malls and medical office parks can pocket millions. Talk about adding insult to injury.
Gov. Martin O'Malley says he wants to close the loophole, and the House of Delegates has voted to do so in the past. The chief obstacle is the state Senate, where members seem to prefer racetrack owners to homeowners.
It's time those who own the state's most valuable commercial properties paid their fair share. Before the legislature raises any taxes or fees to close the state's projected $1.5 billion deficit, it should make sure the existing ones are being applied equitably.