While the local fiscal outlook remains relatively stable regarding property tax collections, other primary revenue sources are either experiencing minimal growth or falling short of the prior year’s budgeted amounts.
As previously reported on Conduit Street, state lawmakers face considerable budget challenges that could drive spending cuts, tax increases, or other remedies to resolve significant structural deficits projected through fiscal 2029.
For counties, rising costs, sluggish growth, unfunded mandates, and greater demand for services all signal turbulent times ahead for local budgets. Economic instability, shifting demographics, and funding the ambitious, multi-billion-dollar overhaul of Maryland’s education system exacerbate the ballooning pressure.
Local governments are projecting minimal revenue growth in the current fiscal year. According to the Fiscal 2024 County Revenue Outlook report from the Department of Legislative Services, over the past two years (fiscal 2022 through 2024), total local tax revenue is projected to increase at an average annual rate of 0.9 percent, while county general fund revenue is projected to increase by 1.3 percent.
This revenue scenario results primarily from ongoing inflation and higher interest rates, severely affecting most jurisdictions’ local housing market. In addition, recent decreases in capital gains and investment earnings have dampened projected revenue increases from the local income tax.
According to the report, compiled from each county government’s adopted budget, local property tax revenues are expected to experience modest growth in the current fiscal year, with revenues increasing at an average annual rate of 3.9 percent between fiscal 2022 and 2024. However, local income tax collections are projected to increase 1.3 percent over the same timeframe.
Recordation and transfer taxes continue to be negatively affected by the current economic climate. In contrast, hotel rental taxes and admissions and amusement taxes are trending up after being decimated by the COVID-19 pandemic.
Local Tax Revenues
The projected growth in local tax revenues is minimal, with an average annual increase of 0.9 percent since fiscal 2022.
Statewide, local tax revenues average $3,133 per capita. The highest per capita amounts are in Howard and Montgomery counties, where local tax revenues exceed $4,000 per capita. The lowest per capita amounts are in Allegany, Somerset, and Wicomico counties, where local tax revenues are below $1,500 per capita.
Seven counties are realizing average annual increases in local tax revenues of between 1 and 3 percent. Only St. Mary’s and Frederick counties anticipate an excess of 4 percent, while seven counties anticipate increases below 1 percent. Eight counties anticipate a decrease or no growth in local tax revenues over the two years.
Local Income Taxes
Approximately two-thirds of Maryland’s population resides in a jurisdiction with a 3.2 percent local income tax rate.
Local governments are authorized to set a local income tax rate of at least 2.25 percent but not more than 3.2 percent. Currently, 11 jurisdictions impose the maximum local income tax rate, with five jurisdictions located in the Washington-Baltimore corridor and six on the Eastern Shore.
Three counties changed their local income tax rates for tax year 2024. Anne Arundel and Frederick counties modified the income tax brackets by incorporating a 3.2 percent rate for high-income earners, and Cecil County reduced its tax rate from 2.8 percent to 2.75 percent.
Anne Arundel and Frederick counties are the only jurisdictions that have adopted graduated income tax rates under the authority granted by the General Assembly in 2021. While some counties have successfully enacted local brackets, others cannot achieve a more equitable system without jeopardizing significant resources for schools, housing, health, public safety, roadway maintenance, and other essential public services.
While the enabling legislation envisioned allowing counties to enact revenue-neutral rate structures, approximately two-thirds of Maryland residents live in a county levying the maximum income tax of 3.2 percent. Absent the flexibility to exceed the cap under limited circumstances, these counties cannot reduce the tax burden on low-to-moderate income earners while remaining revenue-neutral.
Local income tax revenues are projected to total $7.4 billion in fiscal 2024, representing a 0.1 percent increase over fiscal 2023. Statewide, local income tax revenues average $1,194 per capita.
The highest per capita amounts are in Montgomery, Howard, and Queen Anne’s counties, where local tax revenues exceed $1,500 per capita. The lowest per capita amounts are in Somerset and Allegany counties, where local income tax revenues are below $500.
The average annual increase in local income tax revenues over the prior two-year period ranges from 0.1 percent in Dorchester County to 6.4 percent in Queen Anne’s County. However, nine counties expect a decrease in local income tax revenues over the two years, and four counties report annual growth rates below one percent.
Property Taxes
Due to the triennial assessment process and the homestead assessment caps, the property tax remains a relatively stable and predictable revenue source for county governments. Property tax collections depend on each county’s tax rate and assessable base. Revenue collections are projected to total $10.2 billion in fiscal 2024.
For fiscal 2024, four counties (Anne Arundel, Kent, Montgomery, and Talbot) increased their real property tax rates, with the increase in Anne Arundel, Montgomery, and Talbot counties exceeding the tax limit within the county charter (in these counties, the revenue increase over the charter limit must be dedicated to the local school system). Cecil and Wicomico counties decreased their real property tax rates.
Real property tax rates range from $0.7434 per $100 of assessed value in Talbot County to $2.248 in Baltimore City.
The larger the assessable property tax base in a county, the more revenue can be derived with increased property tax rates. For example, a 1 cent increase in the real property tax rate in Talbot County for fiscal 2024 generates approximately $820,100. In contrast, it generates only $152,200 in Somerset County, even though the jurisdictions have a comparable number of residents.
The county assessable base in fiscal 2024 totals $910.7 billion, or $147,724 per state resident. Per capita assessable base ranges from $64,754 in Allegany County to $341,764 in Worcester County.
For the most part, the increase in county property tax revenue is driven by the growth in the jurisdiction’s property tax base. Based on projections by the State Department of Assessments and Taxation, the county assessable base will increase by 4.4 percent in fiscal 2024.
The average annual increase in local property tax revenues over the prior two-year period ranges from 0.5 percent in Harford County to 8.9 percent in Talbot County. Cecil County is the only jurisdiction anticipating decreased property tax revenues over the two years. However, two counties expect annual increases of less than 2 percent annually, while six counties are experiencing growth rates of 5 percent or higher.
Recordation Taxes
Recordation taxes remain an important revenue source for local governments, with anticipated revenues totaling $565.3 million in fiscal 2024. Although recordation taxes increase statewide by 2.1 percent in fiscal 2024, recordation tax revenue is projected to decrease by $290.4 million between fiscal 2022 and 2024, representing an 18.7 percent average annual decrease over the two years.
This decrease is due to a projected downturn in the national and State real estate markets resulting from low inventory and higher mortgage interest rates.
Transfer Taxes
Local transfer tax revenues are projected to total $515.6 million in fiscal 2024. The current revenue projection is significantly below the amount collected by local governments in fiscal 2022 and reflects a slight decrease from fiscal 2023.
Between fiscal 2022 and 2024, transfer tax revenue is projected to decrease by $320.3 million. This represents a 21.5 percent average annual decrease over the two years.
The same economic factors as the recordation tax affect local transfer tax revenues. They are primarily influenced by the overall conditions in the real estate market and mortgage interest rates.
MACo Legislative Initiative: Modernize Local Revenue Structures
Maryland’s local governments, including the charter counties with the broadest authority, are hamstrung by outdated state-defined tax systems that fail to reflect the modern economy. By expanding revenue authority, this initiative aims to provide counties with the necessary tools to meet the evolving needs of their communities, stimulate economic growth, and enhance the quality of life for residents.
By modernizing local revenue structures, this initiative promotes local decision-making and empowers counties to be more self-sufficient in addressing unique challenges and opportunities.
Stay tuned to Conduit Street for more information.
Useful Links
Department of Legislative Services: Fiscal 2024 County Revenue Outlook
Previous Conduit Street Coverage: 2024 Issue Preview: Budget and Fiscal Outlook
