Property taxes are hardly the only factor people consider in deciding where to live, but there’s little question that Baltimore City’s property tax rate, which is double the rate in Baltimore County, is an incentive for people to move to the suburbs if they can. Still, it’s fair to question whether Mayor Catherine Pugh’s decision this week to continue the gradual reduction of property tax rates that began under her predecessor, Stephanie Rawlings-Blake, will really make a difference. The rate she’s proposing for owner-occupied homes may be the lowest the city has seen in a half-century, but it’s still not even close to the rate in Baltimore County. If we could somehow slash the rate in half overnight without harming the city’s ability to provide needed services, that would almost certainly move the needle. But what good does knocking a nickel off do?
More than you might think, and for an unexpected reason: the Trump tax cuts.
In general, we think property tax absolutists overstate the extent to which Baltimore’s rate drives people away. The free market has figured out that taxes make houses in the city more expensive relative to those in the county, and that’s historically been reflected in the sales prices. Simply put, people were willing to pay somewhat more for the same house in the county than the city, in part because the taxes there are cheaper. If you live in the city, you may pay more in taxes relative to the value of your property, but your mortgage is probably lower.
Another offsetting factor historically was the federal tax deduction for state and local taxes. Because that deduction was unlimited, the cost of property taxes for someone who itemized deductions was effectively discounted by whatever their federal income tax rate was. But that changed last year with the Republican tax cuts, which limited the SALT deduction to a maximum of $10,000. Although the change was mostly billed as affecting high-income taxpayers, you don’t need to be rich — or anything close to it — for it to make a difference in Baltimore.
It’s not too hard to imagine a scenario in which Ms. Pugh’s nickel cut makes a difference in the complex interaction of state and local taxes. Take an unmarried woman who is looking to buy a house — a common situation in Baltimore. She has a good job — maybe she’s a teacher, or a restaurant manager or a nurse — which pays her about $70,000 a year, roughly what the United Way says you need to cover a basic survival budget for a family in Maryland. Still, her car payments, student loans and other debts are manageable, so she can afford a house in Baltimore County, where the average sales price is about $242,000.
But for that, she could possibly get a nicer house in the city. The property taxes would be higher, but it might be worth it to live closer to her job and extended family.
Without Mayor Pugh’s proposed tax cut, though, the Trump tax bill would tilt the calculation more toward the county. This woman would pay about $5,100 in state and local income taxes. Given the amount of mortgage interest she would be paying (about $8,650 in the first year, assuming a 30-year mortgage with a 20 percent down payment at 4.5 percent interest), she would be better off itemizing her deductions. At current rates for a homeowner, Baltimore City property taxes on a $242,000 home would push her beyond the $10,000 cap on SALT deductions. After Mayor Pugh’s 5-cent cut, they wouldn’t.