Disparity Grants: Disparity Between Governor & DLS Proposals

The Department of Legislative Services (DLS) is recommending that the General Assembly reduce disparity grant allocations in the Governor’s proposed budget by $2.7 million, affecting Prince George’s, Somerset and Wicomico counties.

Disparity grants are grants to low wealth jurisdictions with higher local income tax rates, intended to smooth out the effects of disparities in income tax revenue generation potential. The Governor’s proposed budget allocates $140.8 million in disparity grants, according to the formula. The Budget Analysis explains how that formula works.

For fiscal 2019, Cecil, Prince George’s, Somerset, Washington, and Wicomico counties are receiving increases from the fiscal 2018 grant, while the grant to Baltimore City declines under the formula. Unlike other counties, Cecil’s increases results from its raising its local income tax rate from 2.8 percent to 3 percent.

DLS essentially recommends flat funding grants to qualifying jurisdictions with the highest local income tax rate of 3.2 percent at fiscal 2018 levels. This would reduce the proposed grant to Prince George’s by $1.9 million, Somerset by $268,266, and Wicomico by $498,341.

At the briefing of the analysis before the House Appropriations Committee, the DLS analyst indicated that the Governor had not cut these grants this year, as he had last year- but sometimes DLS “can’t help themselves” from recommending disparity cuts, anyway.

Secretary of Budget and Management David Brinkley testified that the Administration did not concur with the recommendation and instead preferred full funding of the disparity formula according to law. Chair McIntosh said, “good.”

Chair Maggie McIntosh and Delegate Korman asked Secretary Brinkley about his department’s midyear proposal to cut disparity grants, and why they changed their mind and removed it from the agenda.

Delegate Korman sponsored a successful bill during the 2016 session that requires the Secretary of Budget and Management to post on its website notice of a proposed reduction to an appropriation at least three business days before the reduction may be approved by the Board of Public Works (BPW). Upon seeing the proposal posted in accordance with the law last September, MACo sent the BPW a letter requesting they vote against the cut. The cut was then withdrawn from consideration.

Other Quick Links

Payments to Civil Divisions of the State: Budget Analysis

State Funding for Payments to Civil Divisions, Fiscal 2019

MACo Opposition to Mid-Year Cuts for FY 2018

BPW Pares Down FY18 Cuts, Spares the Disparity Grant

The MACo Way In Ways & Means

On Thursday, MACo Legislative Committee members and staff briefed the Ways and Means Committee on priorities for the 2018 session.

Talbot County Council Member Laura Price discussed the importance of funding local infrastructure and the effects highway user revenue cuts have had on her county.

MACo Legislative Committee and Education Subcommittee Chair Craig Rice, Montgomery County Council Member, was greeted warmly as a former member of the committee. He discussed strong and smart school construction funding and his work and thoughts from representing MACo on the Kirwan Commission.

MACo Associate Director Barbara Zektick discussed the problems with the Governor’s proposals to shift costs of the State Department of Assessments and Taxation onto the counties. MACo Executive Director rounded out the presentation by discussing tax reform effects.

At the end of the hearing, Vice Chair Frank Turner indicated sympathy for counties for enduring highway user revenue cuts for as long as they have. He indicated that something should be done to restore the revenues to local governments.

Taxes: Counties Have Skin In The Game

The Maryland General Assembly and Governor Hogan are clearly hard at work investigating ways to alleviate some of the adverse impacts of federal tax reform on state taxpayers. Will those potential actions affecting state income tax collections impact counties, too?

Yes, they no doubt will.

Personal Income Tax 

The state personal income tax is the State’s top source of general revenue. It is also, frequently, the biggest overall target for policy changes. A quick glance of all of the “subtraction modification” bills – bills that offer itemized deductions from state income taxes – proves that rule.

County income taxes, sometimes called the “piggyback tax,” are counties’ second top source of general revenues, after property taxes.  County tax rates are independent of the state rates – counties are affected by some state changes, but not all of them. In essence:

  • changes to state tax rates do not affect counties, since they don’t affect a taxpayer’s taxable income.
  • State income tax credits do not affect counties, since they are funded only with state income tax dollars.
  • Changes to exemptions, deductions and subtraction modifications at the federal and state levels affect the taxable income base. These do flow through to county revenues.

Property Tax

The adverse is true for property tax in Maryland. While property tax is the largest revenue source for counties, the State’s “piggyback” or “piggyback-like” property tax is only 0.112 (or 11.2 cents per $100 of assessed value). The revenue from the state’s property tax is dedicated to the State’s annuity bond fund to pay debt service. This revenue is dependent upon the value of the assessable base of real and personal property – assessed by the State Department of Assessments and Taxation (SDAT).

Maryland’s taxation of business personal property (equipment and some inventory) is completely local, with most counties levying a tax but granting several major exemptions authorized (but not mandated) by the state. The state receives no direct revenue from personal property taxation, but does assess filing fees to corporate entities.

Quick Links

When Do State Tax Changes Spill Over Into County Budgets?

Current State Tax Legislation With Potential County Impact

Conduit Street Taxes and Revenues coverage

Comptroller Releases Final Local Income Taxes Reconciling Distribution

The Comptroller’s Office has released its data on the January distribution of local income tax to counties.

From the Revenue Administration Division’s email:

The January distribution of local income tax revenues includes the final reconciling distribution for tax year 2016 and the interest/penalty distribution for the first half of fiscal year 2018.  The January distribution to the counties totals $57.8 million, a 12.1% decrease from last year.  This distribution will be made on January 31, 2018.

Reconciling distributions can be volatile, in part because they typically involve higher income households.  Additionally, while the number of tax returns processed through the first half of the fiscal year was essentially equal to the number of returns processed by this point last year, 2.9 million (Table 3), more of the returns were processed earlier in the year compared to the same time period in 2016.

This distribution is the last tax year 2016 distribution; any remaining revenue from tax year 2016 activity will be distributed through the delinquent distributions and, ultimately, the unallocated distribution for tax year 2016. Year to date, cumulative local income tax distributions total $4.6 billion (Table 2), a 0.6% increase over the same time period last year.

Maglev Zooming Forward

Today at the briefing in front of the House Environment and Transportation Committee, Maryland Transportation Secretary Pete Rahn announced that The Northeast Maglev has whittled down its list of eligible, potential alignments to two: one alignment just west of the Baltimore-Washington Parkway, and one just east. The Secretary indicated that the preferred alignment at this point was the one to the east, which minimized impacts on residential property.

From the project website:

The Preliminary Alternatives Screening Analysis evaluated and eliminated certain alternatives based on Engineering Constraints (fatal flaws) and Environmental and Constructability Constraints. Based on this analysis and as presented at the October 2017 Open Houses, four alternative alignments are being recommended for detailed study (Three Build & No-Build), including:

•  No-Build Alternative

•  Alternative E1 (Amtrak Modified)

•  Alternative J (BWP Modified-East)

•  Alternative J1 (BWP Modified-West)

•  Alternative E1 has most recently been eliminated

Leadership for the project answered an arsenal of questions from committee members about project costs, impacts on neighborhoods, estimated costs to passengers, and plans for future community outreach. Delegate Anne Healey asked why the project planners had not engaged more with local government transportation departments. Project representatives indicated that they had invited all relevant county transportation departments to engage, and received responses from some but not all of them.

Trump’s Infrastructure Plan: Direct Line To Locals?

The folks in this room turn dirt faster than anybody in America.

New Orleans Mayor Mitch Landreiu said this of local governments, when pushing the Federal government to directly fund locals through a federal infrastructure package.  Local governments will have the opportunity to apply directly for funds under the Administration’s yet-to-be-released plan, stated D.J. Gribbin, a special assistant to President Trump on infrastructure.

Governing reports:

Gribbin said the White House would release a detailed set of principles a week or two after the State of the Union speech on Tuesday, although the administration has missed several self-imposed deadlines so far.

The administration’s two main goals are to increase spending on government-owned infrastructure by $1 billion and to reduce the time it takes to get federal approval for major projects to two years. The plan won’t include any new revenue, but Gribbin said Trump would not stand in the way of a gas tax hike.

Gribbin said that the plan includes redirecting money supporting Amtrak.

Significant match requirements will be included in the plan. Governing reports that the Administration’s plan requires local governments to fund 80 percent of projects, in order to receive a 20 percent match in federal funds. In contrast, current projects receiving Federal Highway funds require a 20 percent match of state or local funds.

Budgeting Workgroup: Counties Want In

On Wednesday, January 24, MACo Associate Director Barbara Zektick testified before the Senate Budget and Taxation Committee in support with amendments on Senate Bill 192, Workgroup on Categories for Funding Priorities in the Annual State Budget.

This bill would create a workgroup to:

study, evaluate, and make recommendations concerning budgeting models used by state or local governments in the United States that utilize well–defined service categories to set budget funding priorities and then allocate budget resources based on the categories of funding priorities established.

Representatives from the State Department of Budget and Management, the Office of the Comptroller, and the Department of Legislative Services comprise the workgroup.

MACo testified that it would like a “seat at the table,” with one administrative representative for county governments joining the three state representatives. Counties are not only significant beneficiaries of programs in the state budget, but many also incorporate service-based or outcome-based budgeting systems into their own annual budgeting processes. County budgeting experts have meaningful value to add to the conversation, and would welcome the opportunity to participate.

Presidential Advisor: No New Infrastructure Revenues

On Thursday, DJ Gribbin, a special advisor to President Donald Trump on infrastructure, told a group of mayors that the President’s infrastructure plan would not identify new revenues to pay for infrastructure costs or cut any mainstay programs, reports Route Fifty.  Details on the plan are expected a couple of weeks after the President delivers his State of the Union address next week. From that coverage:

“Our infrastructure proposal, when we introduce it, will not include new revenue,” Gribbin said during a panel at the U.S. Conference of Mayors winter meeting.

He noted that the administration does not support, or oppose, an increase to the federal gas tax, and that the White House  believes decisions about direct federal funding for the plan need to be made collectively with the House and the Senate.

The plan is anticipated to center around shortening federal permitting processes and incentivizing greater private sector investment.

Tax Reform In MD: DLS & Comptroller Weigh In

How will the federal Tax Cuts and Jobs Act affect the Maryland budget and county coffers? The Department of Legislative Services (DLS) opened the week with a prologue to the Comptroller’s analysis, planned for release on Thursday.

The Comptroller’s Office is hosting a briefing on its analysis of the impact of the federal legislation on Maryland revenues on Thursday, January 25, at 10:30 am in the Assembly Room of the Louis Goldstein Treasury Building, located at 80 Calvert Street in Annapolis.  It will be streamed live on the Comptroller’s Facebook page

At its Fiscal Briefing on Monday, DLS outlined four of the “dozens and dozens” of aspects which could potentially, significantly affect Maryland revenues:

Increased Federal Standard Deduction

Under State law, a taxpayer who claims the federal standard deduction is required to claim the standard deduction on their Maryland income tax return. With more taxpayers claiming the standard deduction at the federal level given its near doubling, less taxpayers will itemize in Maryland. This will lead to more taxpayers taking the state standard deduction of no more than $4,000. This leads to higher state and local income tax revenues, if nothing else changes.

State and Local Tax Deduction Limitation

Under the new federal tax law, a taxpayer’s federal itemized deduction for
State and local taxes may not exceed $10,000. Therefore, any additional property tax payments over that cap will be subject to state and local income taxes.

Personal Exemptions

The State personal exemption amount that may be claimed ranges from $0 to $3,200, depending on the taxpayer’s federal adjusted gross income. Elimination of the federal exemptions could be interpreted by some to eliminate the state exemptions – which would result in hundreds of millions of additional state and local tax revenues. It is anticipated that legislation to address this will be considered this session as part of the leadership’s tax package.

Estate Tax

A doubling of the federal estate tax exemption amount will lead to a reduction in State revenues from new estates – costing the state $40-65 million in tax revenues. Legislative leadership is also anticipated to address this issue through legislation.

 

Fiscal Briefing: Budget Outlook & Local Aid Loss

On Monday, the Department of Legislative Services (DLS) delivered its annual fiscal briefing to the General Assembly budget committees. Occurring right off the heels of the federal government shutdown, the tone was markedly different from the Governor’s budget proposal announcement.

Local Aid 

clipart-thumbs-down-25The Governor is proposing to balance his budget in part by shifting costs for the State Department of Assessments and Taxation (SDAT) to the counties, costing them a total of $19.7 million, and cutting county aid by an additional $23.5 million. While his proposal adds $15 million in county transportation grants over last year’s approved budget, and $15.2 in Hold Harmless Education Grants to specific counties, net local aid impact is a loss of $9.2 million.

DLS provides a county-by-county breakdown of effects of the SDAT cost shift here.

Following a line of questioning by Speaker Busch, DLS analysts reported that the Governor is seeking to defer repayments for Program Open Space, funding only $6 million for the program. The Governor has previously championed his support for repaying funds shifted away from the program.

No bond capacity is reserved in the capital budget for local initiatives.

The local aid section is available here. Transportation aid increases by $18 million, or 8.2 percent; public safety increases by $700,000, or 0.5 percent; disparity grant aid increases by $2 million, or 1.4 percent; and local health grants are decreased by $600,000, or by 1.2 percent.

Structural Deficit

The Spending Affordability Committee (SAC) set a goal of eliminating the structural deficit forecast for fiscal 2019. The Governor’s proposed budget, according to DLS, leaves a structural deficit of $75.0 million in the upcoming fiscal year, which grows to over $1 billion in fiscal 2022.

The Administration, when claiming that it had alleviated the structural deficit, had excluded from its analysis ongoing facilities renewal funding for the University System of Maryland ($44 million) and statutorily required spending for declining enrollment grants and prekindergarten grants ($34 million).

DLS provided a strong visual of the severity of the structural deficit issue with a bar chart showing how education aid, debt service and entitlements essentially cost enough to spend nearly all general fund revenues.

The Sunny Day Fund includes $10 million for Amazon – the first piece of the Governor’s incentive package to woo the monolith to Montgomery County.

While the Governor has offered state employees a COLA in the upcoming fiscal year, he has frozen salary increments – saving the State $63 million. The Governor also proposes avoiding a mandated supplemental pension contribution of $50 million, and reducing support for K-12 grants by $19 million.

The legislative “to do” list is available here.

The briefing can be viewed here.