THE BIG SQUEEZE

The Baltimore Sun

When George Waldmann bought a Washington Village home four years ago, he knew his property taxes would be higher than if he had settled in the suburbs. Now he's beginning to wonder if all those tax payments are worth it.

Waldmann, 38, who commutes every day to a government job in Washington, isn't sure city services justify the taxes. After giving Baltimore a try, he's thinking seriously about moving out.

"If I'm paying that much in property taxes, where is my money going?" he said, adding that many of his neighbors share the sentiment. "If things stay as they are now, probably seven plus myself will be packing up the U-Haul."

In Baltimore - as in cities and states across the country - officials are under renewed pressure to reduce property taxes to attract and retain residents and businesses.

Mayor Sheila Dixon's administration is studying a task force report that recommends fundamentally changing property tax collection - though some of its ideas have drawn criticism. Meanwhile, governors in Indiana, Florida and New York have sought to significantly reduce property tax bills.

But elected leaders are running up against what budget-makers have known for years: As unpopular as the property tax may be, it is one of the most viable ways to fund local government.

Replacing a significant portion of the revenue generated by the property tax would require substantial increases in other taxes. Slashing spending enough to allow a large reduction in the property tax would have a major impact on police, public works and other local government services.

The issue's complexity was illustrated by the report of Dixon's task force on property taxes. Recommendations that would have the greatest impact on the property tax rate include weakening a popular tax credit, imposing a local sales tax and relying on $46 million a year in gambling revenue.

"The bottom line on this issue is that people hate the property tax and have hated it forever," said David Brunori, a professor of public policy at George Washington University. "Everybody believes the property tax is horrible, except for a small minority of the population. At the end of the day, however, the property tax is the best tax to fund local government."

Part of the reason for that line of thinking is that small increases in the property tax rate bring in larger sums of money to government than other types of tax increases. A 1 percent increase in property tax revenue, for instance, nets the city an additional $5 million. A 1 percent increase in local income tax revenue yields less than $2 million.

Property tax revenue also grows more consistently than other taxes, making it easier for government officials to estimate how much they can spend. In Maryland and many other states, it is tied to a home's market value so if tax bills rise it's ostensibly because the home is worth more. And it pays for services that are tied to property, such as police and fire protection and garbage collection.

"It is very visible and so it's always been the one that got attacked the most," said Anne Spray Kinney, director of research and consulting for the Government Finance Officers Association. "If you look at tax theory, though, it's a tax that works well because it reflects market values."

Baltimore's property tax rate is by far the highest in the state and is more than double Baltimore County's. At $2.268 per $100 of assessed value, the city rate equates to a $5,670 annual tax bill on a $250,000 house. The same house would accrue $2,750 in taxes in Baltimore County.

In addition to the high rate - which is a function of government spending - property assessments have leaped ahead in past years with the booming real-estate market. In the most recent one-year assessment period, the average value of city homes increased by 25 percent for taxing purposes.

Though property taxes may be efficient, they can slam people on fixed incomes if home values suddenly spike. Then there are homeowners like Waldmann, who wonder whether to stay in Baltimore if they can cross the county line and pay less in property taxes.

"We want Baltimore to really start thinking about retention as much as it does recruitment. It seems like the city does everything it can to make you want to come here, but not too much to make you want to stay," said Keith Losoya, a community liaison for the Baltimore TEA Party, a nonprofit whose acronym stands for Tax Education and Action.

"You run into so many great people, families that have really made the investment here. It'd be a shame that you'd do anything to disincentivize them to stay."

Baltimore has wrestled with the puzzle for years. In 2004, as then-Mayor Martin O'Malley faced a projected $45 million deficit, he proposed a series of tax increases - from a rise in the recordation fee to a new cell phone tax - which were later justified, in part, as a way to reduce the city's reliance on property taxes.

Meanwhile, the city began an annual 2-cent reduction in the property tax rate, though many residents wound up with higher tax bills because their assessments kept rising.

And then last year, months before property taxes became an issue in the mayoral election, Dixon announced the creation of a task force to explore a larger rate cut. The group's report, released in January, suggested nine short-term solutions and two long-term options to bring the rate down by as much as 65 cents, or 29 percent.

Among the most controversial is a proposal to reduce the benefit of the Homestead Tax Credit, which works like a circuit breaker. For example, if a home's assessed value doubles in a given year, the owner is taxed on a value that is no more than 4 percent higher. The proposal to lift the cap to 10 percent - and reduce the tax rate - would give some homeowners a short-term break, but could raise their tax burden in the long run.

Other recommendations in the report include creating a local sales tax, which many believe would be politically difficult, and using $46 million in gambling revenue to reduce property taxes. The report was the subject of a public hearing and the Dixon administration is reviewing the plan.

The committee did not consider ways to reduce government spending. Baltimore's coffers have benefited significantly because the city has lowered its tax rate only slightly while assessments have increased sharply. That money has been used for school construction, police overtime and programs for children.

Other cities are struggling with the issue, too. While the nation focused on Florida's presidential primaries last month, state officials and residents were also wrapped up in a statewide referendum - ultimately approved - that will increase state property tax credits and allow homeowners to use those credits even when they move to another home.

But Florida officials have not yet identified new sources of revenue to replace what will be lost. Opponents of the measure have predicted large cuts to education and other services that traditionally rely on property tax revenue.

In New York, Gov. Eliot Spitzer has created a commission to study caps on the property tax. In Indiana, Gov. Mitch Daniels has proposed raising the state sales tax to allow low caps on annual property tax increases.

Joseph T. Landers III, a former Baltimore city councilman who chaired the mayor's task force on property taxes, suspects that the recent nationwide focus on the issue is directly related to the housing boom, which raised home values in the market and for tax purposes.

Whatever Baltimore does, Landers said, it has to strike the difficult balance: offering a stable source of revenue for services while keeping residents from being priced out of the city. It may require short-term tax increases for long-term payoff, he said, acknowledging that may be a difficult sell.

"We're just locked into this cycle," he said. "As bad as things may be, people have sort of adjusted to them. It's easier to just sort of maintain the status quo than it is to really sort of change our direction. Right now we're relying on a property tax that's exceedingly high."

john.fritze@baltsun.com

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