Take a “Deep Dive” Into Local Government Financial Info

The Department of Legislative Services has released several reports that detail information on local governments, and local effects of the state budget. As always, these reports represent an extraordinarily valuable resource for county officials and financial managers.

Local Government Finances and Demographics

From the introduction:

The Department of Legislative Services has prepared this overview document to provide legislators and the public with a better understanding of the fiscal and social issues confronting local governments in Maryland. Topics discussed in this report include the following:

• Structure of Local Governments
• Demographic Indicators
• Local Government Finances
• Tax Rates for Local Governments
• Local Revenue Growth
• County Salary Actions
• Public School Funding and Student Enrollment
• Local General Fund Balances
• Local Debt Measures
• Balance of State Payments

Overview of State Aid

This report includes detail on virtually every component of state aid to local governments in the proposed FY 19 budget. Most areas are shown county-by-county, with comparisons to the prior year, and with additional analysis reflecting trends or changes important to the programs.

County Revenue Outlook

This report looks at local revenue sources and tax bases, with a variety of comparisons across jurisdictions and over time. Once again, the detail in these analyses makes the report deeply valuable for local professionals and policy makers.

Governor’s FY 2019 Budget Includes $8 Million for Garrett County Parks Projects

A Garrett County Republican article (2018-02-01) reported that Maryland Governor Larry Hogan has included more than $8 million in his FY 2019 budget for state and local park projects in Garrett County. This included $33,000 funding for upgrades to the Friendsville Community Park and $20,000 in funding for Town Park West in Accident. The funding would be provided through the Community Parks and Playgrounds Program.  From the article:

“We are very grateful and appreciative to Gov. Hogan for proposing to fully fund our request, which includes these very worthwhile projects in our community park,” [Friendsville Mayor Spencer Schlosnagle] said. “We take great pride in our park, as it is very beneficial to the many people and groups around the town and the tri-state area who visit and enjoy its many outdoor activities.”

The article also listed the funding proposed for various State parks located in Garrett County that totals $8.03 million.

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.

Income Tax Spillover Effect: Nearly $400 Million

The Comptroller’s Office released its estimate of the Maryland effects of recent federal tax changes — and their nearly $400 million estimate figures to shake fiscal decision-making during the legislative session.

From the Comptroller’s media release:

The impact on individual taxpayers’ state and local tax bills depends on whether they aim to minimize their combined federal-state-local tax burden or focus on their federal tax. Assuming most taxpayers prioritize greater overall savings, 68 percent of Marylanders would see no change in the amount of state and local tax owed, 28 percent would pay more and 4 percent would pay less.

As for the impact on the state’s coffers, the report estimates Maryland’s general fund would increase by $28.7 million and $392.5 million in fiscal years 2018 and 2019, respectively. The Education Trust Fund would realize an additional $867,000 and $5.1 million, respectively.

The driving factors behind the changes to state and local income tax bills are the taxpayer shift to the State standard deduction – a consequence of taxpayers’ choices to no longer itemize at the federal level – and related changes to itemized deductions for such things as real estate taxes and home equity indebtedness. In addition, taxable income changes for moving expenses, alimony and 529 College Savings Accounts.

Governor Hogan quickly responded by pledging to shield these Maryland effects. From coverage in the Washington Post (limited free views available):

Hogan on Thursday announced legislation that would allow taxpayers to continue claiming deductions on their state returns, even if they no longer itemize deductions on their federal returns.
Under state law, only residents who itemize deductions on their federal returns can itemize deductions on their state returns. Congress doubled the standard federal deduction in an effort to make taxes simpler, so that fewer people would seek to itemize deductions.

“Marylanders will not pay one cent more in state taxes as a result of the actions on the federal level,” Hogan said at a news conference. “Our legislation makes sure this money will remain in the pockets of hard-working Maryland families and small-business owners.”

The Governor’s press release details his intent to negotiate with legislative leaders on a reaction:

Secondly, acknowledging that multiple legislators have put forward proposals to address this issue, the governor called on the Maryland General Assembly to work with his administration to devise a collaborative solution. The governor named Budget Secretary David Brinkley, Labor Secretary Kelly Schulz, Health Secretary Bobby Neall, Chief Legislative Officer Chris Shank, and Senior Advisor Keiffer Mitchell – all of whom joined him for the announcement – to work directly with legislative leaders to negotiate an agreement that both the administration and the legislature can support before the Fiscal Year 2019 budget is passed.

Because the state-level effects after mainly a function of the definition of “taxable income,” these carryover effects alter Maryland county income tax liabilities as well.

income tax chart
From The Bureau of Revenue Estimates’ Powerpoint, 1/25/18

Read the Comptroller’s full report online.

See the quick summary of state and county effects.

Listen to more analysis of tax effects on this week’s MACo’s Conduit Street Podcast.

 

Conduit Street Podcast: New Tax Analysis, Paid Leave Dilemma, Fiscal Outlook, and More!

The Comptroller’s Office on Thursday held a briefing on its analysis of the impact of federal legislation on Maryland revenues. Meanwhile, Governor Larry Hogan unveiled his plans to protect Marylanders from state and local tax increases resulting from the recent federal tax overhaul.

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

Also this week, Senate Finance Chairman and chief sponsor of a new law requiring most employers to provide workers with sick leave, Senator Thomas “Mac” Middleton introduced a bill to delay enforcement of the new law. While most state legislators would seemingly support the legislation, its passage is far from certain.

On the latest episode of the Conduit Street Podcast, Kevin Kinnally and Michael Sanderson break down the Comptroller’s report, analyze the latest news on paid leave, examine the fiscal plan for the year ahead, highlight hot-button budget issues, and more!

MACo has made the podcast available through both iTunes and Google Play Music by searching Conduit Street Podcast. You can also listen on our Conduit Street blog with a recap and link to the podcast.

Listen Here:

If you are having trouble using this media player, listen on our website.

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.

 

Gubernatorial Candidates Address Community College Leadership

Several Maryland gubernatorial candidates were on hand Monday evening for the Maryland Association of Community Colleges’ (MACC)Gubernatorial Forum. Candidates were asked about the ways community colleges benefit Maryland and whether they would support and fund a Maryland Promise program, if elected.

From left to right: Jim Shea, Prince George’s County Executive Rushern Baker, Ben Jealous, Alec Ross, Baltimore County Executive Kevin Kamenetz, Maryland State Senator Richard Madaleno, Krishanti Vignarajah (photo courtesy MACC)

Promise Programs are designed to address financial barriers for students who have the academic readiness and commitment to succeed in college, but lack all the necessary financial resources to do so, even if they qualify for federal financial aid.

According to a press release:

Candidates were unanimous in their support of community colleges and several shared stories of their own experiences as community college students or professors. There was less agreement among the candidates about how to make community college more affordable for students, but several did express support for a Maryland Promise program that would provide free tuition for eligible students.

Candidates in attendance were: Prince George’s County Executive, Rushern Baker; Ben Jealous, former president and chief executive officer of the NAACP; Baltimore County Executive, Kevin Kamenetz; Richard Madaleno, Maryland state senator from the 18th district; Alec Ross, former senior advisor in the Obama administration; Jim Shea, former chair of the Board of Regents at the University System of Maryland; and Krishanti Vignarajah, former senior adviser and policy director in the Obama administration.

“Rapid advancements in technology mean equally rapid changes in necessary workforce skills,” said Dr. Bernie Sadusky, MACC’s executive director. “Maryland needs more workers with today’s skills, otherwise we limit our businesses and economy. A Maryland Promise program would expand Maryland’s skilled workforce by making training at community colleges accessible to more students.”

Read the full press release for more information.

Final Knott Commission on School Construction Report Released

The final report is released for the Commission Chair’s briefings for the House Appropriations Committee and Senate Budget and Taxation Committee.

IMG_3441
Many recommendations in the Knott Commission Report aim to streamline processes and reduce school construction costs.

The 21st Century School Facilities Commission (Knott Commission) final report has been released and the recommendations, at first glance, seem to be largely in line with the Commission’s prior discussions.

In the briefing for the House Appropriations Committee, Delegate Maggie McIntosh, Chair of the Committee, made opening remarks and stated that the Report would be put into bill form and could be a major piece of legislation to come out this year.

Martin Knott, Chair of the Commission, spoke of 4 needs in school construction:

  1. Flexibility for locals and streamlining processes;
  2. Incentives for positive construction practices;
  3. A focus for the role of the State on providing technical assistance to small school systems with fewer resources; and
  4. Transparency in existing facility conditions.

Knott also spoke about the need to prioritize school facilities that support educational goals, and emphasized the importance of the State remaining a strong partner in funding school construction.

The four areas described by Knott are generally aligned with MACo’s school construction advocacy. County governments share responsibility for financing K-12 school construction with the State, whose funding depends on statutory formulas and regulations. MACo advocates efforts to promote the smartest and most effective funding for modern schools, and urges State policymakers to retain the State’s strong commitment to this top funding priority.

During the briefing, Knott noted the Commission’s consensus on the recommendations. Delegate Ghrist also noted during the hearing that the Governor’s Office was fine with the final report’s recommendations.

Alternative Financing

One subject of the Commission’s discussions was alternative financing. As Knott said, the Commission took a long and hard look at this area.

MACo has advocated for alternative financing law reform to expand the tools available for counties and school boards as they seek the most effective options for school construction and renovation.

Included in the recommendations are several items for alternative financing. For example, the report recommends that the State:

  • Explore the possibility of creating a school construction authority that includes members with expertise in school construction to accelerate State school construction funding and provide more flexibility for financing school construction projects;
  • Provide technical assistance to help facilitate P3s, such as developing template lease agreements between developers and school systems;
  • Encourage innovation through alternative financing by providing a financial incentive to assist one or more LEA(s) interested in pursuing alternative financing to cover the associated risks;
  • Consider allowing school systems to enter into long-term lease agreements for school buildings;
  • Explore the feasibility of regional (multi-district) school construction projects including regional P3 zones.

MACo will post the full report here when it is available online.

Supreme Court Ruling on Internet Sales Tax Expected By June

The United States Supreme Court has agreed to take up the case of South Dakota v. Wayfair and revisit its previous holding that a state can only require retailers to collect sales tax if the retailer has an in-state physical presence. While Maryland counties do not directly benefit from the State’s sales tax, a favorable outcome would have significant positive economic benefits for the State. The Court’s decision is expected by June of 2018.

The following analysis of the issue was prepared by State & Local Legal Center Executive Director Lisa Sorenson and is reprinted with permission:

In November 2017 a Government Accountability Office report estimated that states and local governments could “gain from about $8 billion to about $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers.”

In January 2018 the Supreme Court agreed to decide South Dakota v. Wayfair. In this case South Dakota is asking the Supreme Court to rule that states and local governments may require retailers with no in-state physical presence to collect sales tax.

This case is huge news for states and local governments. This article describes how we got here and why it is likely South Dakota will win.

In 1967 in National Bellas Hess  v. Department of Revenue of Illinois, the Supreme Court held that per its Commerce Clause jurisprudence, states and local governments cannot require businesses to collect sales tax unless the business has a physical presence in the state.

Twenty-five years later in Quill v. North Dakota (1992), the Supreme Court reaffirmed the physical presence requirement but admitted that “contemporary Commerce Clause jurisprudence might not dictate the same result” as the Court had reached in Bellas Hess.

Customers buying from remote sellers still owe sale tax but they rarely pay it when the remote seller does not collect it. Congress has the authority to overrule Bellas Hess and Quill but has thus far not done so.

To improve sales tax collection, in 2010 Colorado began requiring remote sellers to inform Colorado purchasers annually of their purchases and send the same information to the Colorado Department of Revenue. The Direct Marketing Association sued Colorado in federal court claiming that the notice and reporting requirements were unconstitutional under Quill. The issue the Supreme Court decided in Direct Marketing Association v. Brohl (2014), was whether the Tax Injunction Act barred a federal court from deciding this case. The Supreme Court held it did not.

The State and Local Legal Center (SLLC) filed an amicus brief in Direct Marketing Association v. Brohl describing the devastating economic impact of Quill on states and local governments. Justice Kennedy wrote a concurring opinion stating that the “legal system should find an appropriate case for this Court to reexamine Quill.” Justice Kennedy criticized Quill for many of the same reasons the SLLC stated in its amicus brief. Specifically, internet sales have risen astronomically since 1992 and states and local governments have been unable to collect most taxes due on sales from out-of-state vendors.

Following the Kennedy opinion a number of state legislatures passed laws requiring remote vendors to collect sales tax in clear violation of Quill. South Dakota’s law was the first ready for Supreme Court review.

In September 2017 South Dakota’s highest state court ruled that the South Dakota law is unconstitutional because it clearly violates Quill and it is up to the U.S. Supreme Court to overrule Quill. In October 2017 South Dakota filed a certiorari petition asking the Supreme Court to hear its case and overrule Quill. The SLLC filed an amicus brief supporting South Dakota’s petition. The Supreme Court ultimately agreed to decide the case.

It seems likely the Supreme Court will rule in favor of South Dakota and overturn Quill for a number of reasons. It is unlikely the Supreme Court accepted this case to congratulate the South Dakota Supreme Court on correctly ruling that South Dakota’s law is unconstitutional. Said another way, if the Supreme Court wanted to leave the Quill rule in place it probably would have simply refused to hear South Dakota v. Wayfair.

It is easy to count at least three votes in favor of South Dakota in this case. First, Justice Kennedy of course. Second, Justice Thomas. While he voted against North Dakota in Quill he has since entirely rejected the concept of the dormant Commerce Clause, on which the Quill decisions rests. Third, Justice Gorsuch. The Tenth Circuit ultimately decided Direct Marketing Association v. Brohl ruling that Colorado’s notice and reporting law didn’t violate Quill. Then-judge Gorsuch wrote a concurring opinion strongly implying that given the opportunity the Supreme Court should overrule Quill.

That said, the Supreme Court, and the Roberts Court in particular, is generally reticent about overturning precedent. The Quill decision illustrates as much. The Supreme Court looks at five factors in determining whether to overrule a case. One factors is whether a rule has proven “unworkable” and/or “outdated . . . after being ‘tested by experience.’” This factor weighs strongly in favor of overturning Quill. As Justice Kennedy pointed out in Direct Marketing Association v. Brohl: “When the Court decided Quill, mail order sales in the United States totaled $180 billion. But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.”

The Court will hear this case this term meaning it will issue an opinion by the end of June 2018.

Useful Links

State & Local Legal Center Website