DLS: Fully Fund Disparity Grant Formula

The Department of Legislative Services, in its budget analysis of Payments to Civil Divisions of the State, is recommending that the General Assembly concur with the Governor’s formula-driven fiscal 2021 allocation for the Disparity Grant Program.

The Governor’s allowance for the Disparity Grant Program totals $158.3 million, an increase of $12.2 million over fiscal 2020, which is due primarily to increases in disparity grant payments to Dorchester, Washington, and Wicomico counties generated by increases in those counties’ income tax rate to 3.2%. Year-over-year funding for Prince George’s County decreases by $255,000, which is a result of an increase in the County’s per capita income tax revenues.

The Disparity Grant Program provides noncategorical State aid to low-wealth jurisdictions for county government purposes. Disparity grants address the difference in the abilities of counties to raise revenues from the local income tax, which for most counties is one of their larger revenue sources.

Counties with per capita income tax revenues less than 75% of the statewide average receive grants unless a county has an income tax rate below 2.6%. Under current law, aid received by counties equals the lesser of the dollar amount necessary to raise the county’s per capita income tax revenues to 75% of the statewide average or the amount received under the cap provisions.

The original cap provision did not allow counties to receive an amount higher than what that county received from the State in fiscal 2010. However, Chapter 425 of 2013 changed the disparity grant formula cap provisions in order to take into account a local jurisdiction’s income tax effort.

The proportional amount is based on that particular county’s income tax rate, as follows:

from a tax rate of 2.8% to 2.99%, 20% of the uncapped grant amount;
from a tax rate of 3% to 3.19%, 40% of the uncapped grant amount; and
at a tax rate of 3.2% (the maximum), 67.5% of the uncapped grant amount.

Chapter 738 of 2016 increased the proportion that a county with a 3.2% tax rate receives from 60% to 67.5% for fiscal 2018 and 2019. Chapter 472 of 2018 extended the sunset for the 67.5% rate through fiscal 2021.

Caroline, Dorchester, Prince George’s, Somerset, Washington, and Wicomico counties are all subject to the 67.5% cap and could see lower disparity grants in fiscal 2022.

At the same time the provisions to encourage higher county income tax rates are increasing disparity grant funding, the cap provisions continue to limit disparity grant funding. Exhibit 5 shows that, without the cap provisions, the fiscal 2021 disparity grant would have totaled $205 million, or $46.7 million higher than the actual amount.