The House of Delegates today voted to override Governor Larry Hogan’s veto of HB 737 – Local Governments – Income Tax Disparity Grants, a bill to extend enhanced disparity grant funding for counties with proven local income tax effort. MACo supports this bill, as disparity grant funding provides much-needed revenues to counties with limited revenue generation potential to help fund necessary services such as public safety, schools, infrastructure, and community services.
On the final day allotted for his decision regarding legislation passed by the General Assembly during last year’s abbreviated session, Governor Hogan vetoed the bill, citing budget weaknesses arising from the COVID-19 pandemic. The House voted 114-17 for the override. In order for the bill to become law, the Senate must also vote to override the veto.
The disparity grant program serves to ensure that counties, who rely on local income taxes for substantial revenue, are able to generate sufficient yield to fund education, public safety, roadway maintenance, and community services.
Recent years have seen State-imposed “caps” in this program that artificially lessen the effective revenue from such jurisdictions, including those who have exercised the maximum county income tax rate. Over the past five years, cap provisions have reduced State funding under the disparity grant program by approximately $233 million.
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.
Under current law, the amount of funding received by county governments 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 provision. The current minimum grant amount is 67.5%.
HB 737 repeals the sunset, instead of extending the funding until 2023, as was originally proposed. The bill was also amended to raise the cap from 67.5% to 75%.
However, since the Administration cannot be required to fund the mandated appropriation in the current budget bill, six counties will remain subject to the 60% minimum grant in fiscal 2022.
As such, six low-wealth jurisdictions lost $15.2 million in needed disparity grant funding for the year ahead. They are building their budgets now, and need this certainty urgently.
From the MACo testimony:
MACo supports this bill as a reasonable and appreciated effort to mitigate the impact of these caps. The extension of this relief, offered to those aforementioned counties with the maximum local income tax rate of 3.2 percent, offers approximately $8 million a year for two years to support needed public services.
Over the last three years, nine counties have raised their local income tax rates. Just this year, Dorchester and Washington raised their rates to the maximum rate of 3.2 percent. Somerset raised its rate to the maximum rate beginning in calendar year 2017. Caroline recently raised its rate to 3.2 percent in order to fund a new elementary school and sheriff’s department.
This bill will provide needed revenues to counties with limited revenue generation potential, to help fund necessary services such as public safety, schools, infrastructure, and community services. For these reasons, MACo urges a FAVORABLE report on HB 737.