The Department of Legislative Services (DLS), in its analysis of the disparity grant program, has singled out the effects of program caps as a source of increasing inequity in the system. The disparity grant was created by the state to ensure that counties, who rely on local income taxes for substantial revenue, are able to generate sufficient yield to accommodate costly required spending on education, public safety, and other essential or mandated services.

The DLS issues arise in their analysis of the “Payments to Civil Divisions of the State” section of the FY14 proposed budget, which will be presented to the House Appropriations Committee Friday. From that analysis:

Disparity Grant Formula Should Be Modified to Address Cap Inequity and Tax Effort

Disparity grants have been provided to lower wealth local jurisdictions since fiscal 1992, in recognition of constrained tax capacity. Grants are calculated according to a statutory formula, which supplements per capita income tax receipts to 75.0% of the statewide average. To be eligible to receive a grant, a jurisdiction must have a local income tax rate of at least 2.4%. The maximum local income tax rate that jurisdictions can assess stands at 3.2%. Due to cost containment following the 2008 recession, grants were capped at the fiscal 2010 level. One consequence is that jurisdictions that are otherwise eligible for grant funding are excluded.

The DLS analysis covers several policy options for altering the disparity grant, including a modification for jurisdictions that are not approaching the maximum allowable income tax rate of 3.2%. That discussion is centered on page 9 of the analysis.

DLS offers three policy options for legislative consideration, each of which would require a statutory change either in stand-alone legislation, or as a part of a broader bill such as the Budget Reconciliation and Financing Act. DLS’s options are summarized in this recommendation:

Legislation is recommended to modify the Disparity Grant program to either (1) permit jurisdictions that are eligible for disparity grants to receive a minimum of 40% of the formula; (2) to phase out the cap over five years but limit grants to the ratio of each eligible jurisdiction’s local income tax rate to the statewide 3.2% maximum; or (3) to provide a flat grant that could be increased periodically based on the health of the State’s general fund. Under any scenario, it is recommended that the minimum local income tax rate required to receive disparity grants be increased from 2.4 to 2.6%.

The details of these, and the county-by-county effects are laid out in the budget analysis.

MACo has supported HB 914, one bill designed to remedy the concerns with the current formula. That bill is slated to be heard on Tuesday, February 26 in the Appropriations Committee.