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Maryland prepares to use federal financing tool before GOP tax plan can end it

Maryland prepares to use federal financing tool before GOP tax plan can end it
A planned renovation for Rosemont Tower, 740 Poplar Grove Street, could be affected by a proposal moving through Congress to limit a type of tax exempt bonds used by state and local governments for affordable housing and other projects. (Karl Merton Ferron / Baltimore Sun)

When Maryland officials announced last year they had secured funding for a $5.6 billion light rail project in the Washington suburbs, they touted the millions of dollars in private money that had been put up to offset the cost to taxpayers.

Now, as construction on the Purple Line gets underway, some of those same officials — Republicans and Democrats — are warning that a provision of the tax overhaul moving through Congress would threaten similar projects by making it more difficult to lure that private investment.

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As a result, Gov. Larry Hogan’s administration is planning to sell hundreds of millions of dollars in bonds by the end of December to secure a year’s worth of funding before President Donald Trump has a chance to sign a tax bill into law.

The sweeping tax legislation approved by the House this month would end the so-called private activity bonds, a tool local governments have used for transportation projects, affordable housing and student loans. Supporters say the financing mechanism reduces costs, but critics view it as a subsidy to private businesses.

City and state officials said ending the program could jeopardize Baltimore projects such as renovation of the J. Van Story Branch Apartments in Charles North and Rosemont Towers in the Franklintown Road neighborhood.

Hogan, a Republican, has joined a bipartisan chorus pushing back on the proposal.

“The governor supports lower taxes for working families and a more internationally competitive tax system, but is concerned about the potential removal of financial incentives for affordable housing and long-standing tax exemptions for ordinary citizens,” Hogan spokesman Doug Mayer said in a statement.

Mayer described the possible bond sale as a “contingency plan.” The final version of the federal legislation may restore the financing tool and eliminate the need to sell bonds quickly, state officials said.

The change is included in the House version of the massive tax legislation that Republicans are scrambling to finish before the end of the year. GOP leaders are eager for a legislative victory during Trump's first year.

But eliminating the tool would contradict another central tenet of Trump's administration: an emphasis on public-private partnerships to rebuild the nation's infrastructure. The bonds are one of the key incentives local governments have used to bring private money into projects.

The bonds allow private entities to borrow money tax-free in the same way that governments do. The bonds are paid back by the private entity, not taxpayers.

For the Purple Line project, the state issued $313 million in private activity bonds for the 16-mile light rail line that will connect Bethesda to New Carrollton.

Eliminating the bonds “would have a significant impact,” said Sen. Ben Cardin, a Maryland Democrat and member of the Senate Finance Committee. “It would affect particularly vulnerable communities and it would affect economic growth in the Baltimore area.”

The Senate version of the bill does not call for dismantling the program. Ending it would require the approval of both chambers.

The state has also used private activity bonds to finance $650 million of affordable single family homes in 2013 and 2014, state analysts say. Local officials point to several more projects in the pipeline, including a 60-unit apartment building in Baltimore's Johnston Square neighborhood.

Yet the bonds have drawn criticism in part because they have been used to finance sports stadiums in some cities. The Brookings Institution found last year that the federal government had lost as much as $3.7 billion since 2000 on stadium financing.

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A spokeswoman for the House Ways and Means Committee said the House legislation would “deliver greater accountability to taxpayers by removing this special status for private activity bonds, which directly benefit private individuals and entities.”

Rep. Andy Harris, a Baltimore County Republican, agreed. He voted for the House version of the tax legislation.

“There is no reason to give tax breaks to multi-billion-dollar professional sports teams building new stadiums, especially at the expense of the middle class,” Harris said.

Even “well-intended projects like the Purple Line,” Harris said, are a “waste of taxpayer dollars” when financed through the private activity bonds.

Ending the initiative would save $39 billion over a decade, according to the Joint Committee on Taxation.

But that would come at a cost. The bonds cover about half of the state's affordable rental housing production annually, according to the state.

"A loss of these resources would be detrimental," said Miranda Darden-Willems, executive director of the Maryland Affordable Housing Coalition.

The program is used in tandem with a federal tax credit for low income housing that requires the use of tax exempt bonds. Tania Baker, a spokeswoman for the Housing Authority of Baltimore City, described the credit as "the most significant tool used to preserve the existing stock of privately owned affordable housing.”

Hogan’s administration has taken notice. The Maryland Department of Housing and Community Development sent a two-page memo to developers and local housing officials this month noting that Congress is contemplating the changes. In response, the state officials said, they are exploring borrowing a “significant amount” by year’s end in case Washington eliminates the bonds.

That would allow the state to continue to provide funding for projects through 2018 and “possibly beyond."

The Maryland Democratic Party has criticized Hogan, who is up for reelection next year, for not speaking out against the GOP tax plans on Capitol Hill. The Republican governor has balked at some policies from Washington, but has also sought to project an image of staying above the fray of national politics.

The state’s Democratic Party chairwoman, Kathleen Matthews, said doing away with the bonds would be a particularly bad deal for Maryland, given how another provision of the proposal could fall on its taxpayers. The House version of the bill would limit how much filers could claim in the federal deduction for state and local taxes.

A higher share of filers in Maryland claim that deduction than any other state in the nation. Three Democratic members of the state’s congressional delegation held a town hall meeting in Baltimore on the tax plan Monday evening.

“Republicans in Congress are using Maryland families as their piggy bank to give tax breaks to the wealthy, and Governor Hogan has not lifted a finger to fight for us,” Matthews said in a statement.

Mayer disputed that characterization. He pointed to the steps the administration is taking to issue the bonds.

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“Partisan political organizations should check the facts before hitting 'send,'” Mayer said.

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