IRS: Special Districts Not So Special

The Internal Revenue Service (IRS) has proposed new regulations potentially restricting special taxing districts and other special districts from issuing tax-exempt municipal bonds, reports Governing

Special districts are usually created to raise revenue for and address specific functions, such as airports, libraries, wastewater, etc. Last night the Baltimore City Council approved City Council Bill 16-0671 creating the Port Covington Special Taxing District to guarantee the Port Covington tax increment financing (TIF) deal.

The IRS traditionally found that a special district can issue municipal tax-free bonds if it is authorized to exercise at least one of three sovereign powers: the power to tax, the power to exercise eminent domain, or police power. This test would still apply under the new regulations proposed by the IRS, but in addition, the special district must serve a governmental purpose and be governmentally controlled. Per Governing:

As creatures of the state, special-purpose districts have governing boards as determined by state law. But those boards may be appointed by public officials or by private entities. Or they may be elected by property owners within the special district — even though there may be only one or two residents, or in some cases, zero residents, to participate in a board election. While most special-purpose districts have employees, some don’t, distinguishing them from every other kind of government in the country.

So if these entities don’t resemble traditional state and local governments, why should they be allowed to borrow in the same tax-exempt way? That’s just what the IRS wants to know. In February, the agency proposed regulations that would more clearly define the difference between a municipality and a special district. It may seem like a fine point, but in fact there’s big money at stake. Special districts could see a nearly 30 percent increase in the costs of borrowing, which could work out to about $700 billion. It could be prohibitive enough to force many special districts out of existence.

Governing‘s article is available here. 

Pew: Maryland Leads Country In Tax Incentive Evaluation

Bipartisan, widespread support for regular, rigorous evaluation of economic development tax incentives seems to be sweeping the country, according to recent analysis by the Pew Charitable Trusts. During the 2016 legislative session, Alabama, Colorado, Hawaii, Virginia and Utah passed laws requiring regular evaluation of tax credit programs. While each state’s law addresses its own unique needs, the five new laws bear key similarities:

  • professional staff such as legislative auditors are responsible for conducting the analyses;
  • evaluations are due on a rotating, multi-year cycle; and
  • public hearings are incorporated into the evaluation processes.

About half of the states currently evaluate their tax incentive programs regularly, reports Pew. The article cites Maryland has a successful example:

Using evaluations to improve incentive policy is the ultimate objective of each of these laws. Some states with longer-standing evaluation processes are already doing just that. For example, Maryland lawmakers this year extended the state’s historic preservation tax credit for another five years, while also modifying the scoring system used to determine which projects qualify. That action directly followed the findings of an evaluation that described the credit as a model incentive program overall but also identified weaknesses in the scoring system.

As Maryland’s example shows, tax incentive evaluation can help policymakers ensure that incentives are working well for businesses, workers, and taxpayers. The states that are adopting and implementing regular evaluation processes are well on their way to achieving similar successes.

Maryland first required tax credit evaluations under the Tax Credit Evaluation Act of 2012, which established a legislative process for evaluating certain credits. The Department of Legislative Services (DLS) is required to publish a report evaluating the tax credit. The report submitted by DLS must discuss (1) the purpose for which the tax credit was established; (2) whether the original intent of the tax credit is still appropriate; (3) whether the tax credit is meeting its objectives; (4) whether the goals of the tax credit could be more effectively carried out by other means; and (5) the cost of the tax credit to the State and local governments. The evaluation committee must hold a public hearing on the evaluation report, and is required to submit a report to the General Assembly that states whether or not the tax credit should be continued, with or without changes, or terminated.

Last session, the General Assembly passed and Governor signed Senate 843, Tax Credits – Evaluations, which altered the tax credits to be evaluated and the process and timelines for the analysis. While earlier iterations of the bill would have repealed the property tax components of the Enterprise Zone and Regional Institution Strategic Enterprise tax credit programs, these programmed remained in existing law following MACo advocacy for their continuation.

MOU Promises Communities $100 Million For Port Covington

Sagamore Development and the City of Baltimore have penned a Memorandum of Understanding (MOU) providing for the developer’s $100 million investment in community benefits in exchange for its $660 million tax increment financing (TIF) proposal, reports the Baltimore Business Journal. The public is expected to have access to the MOU tomorrow, three hours before the Baltimore City Council Taxation, Finance and Economic Development Committee holds a work session on the TIF package, beginning at 5 pm at the War Memorial Building. A press conference on the MOU takes place tomorrow at 1 pm at City Garage, a facility owned by Sagamore Development in South Baltimore.

Sagamore is requesting the TIF to support its $5.5 billion project at Port Covington. Among the highlights of the MOU are:

  • a $25 million pledge to fund workforce development programs in Baltimore
  • a $10 million donation to fund creation of a small business loan program
  • reiteration of a $39 million commitment made in July to six South Baltimore communities by Sagamore Development, including a $5 million cash infusion in the neighborhoods that surround Port Covington
  • A local hiring mandate of 30 percent of all workers from Baltimore City
  • A $23 minimum wage agreement on the first $50 million of construction at Port Covington

Reports the Baltimore Business Journal:

The deal was reached over the past two weeks during closed negotiation sessions between city leaders, community advocates and the developer following four contentious public hearings and work sessions on legislation to establish the TIF.

The updated inclusionary housing agreement includes a mandate to provide 20 percent of Port Covington’s residential units for low-income residents.

Today’s MOU announcement comes on the same day that Under Armour Founder, Chairman and CEO Kevin Plank published an open letter in the Baltimore Sun (page 8) making the case for the Port Covington project. He writes,

We are at a decision point. We want to invest in Baltimore, hire in Baltimore, live in Baltimore, and give in Baltimore. I hope that you agree that we have a special opportunity here. I hope that the City Council will review and approve the TIF, to make this all possible for our city.

Maryland’s Job Growth Reflects Nationwide Trend

Last week, the Maryland Comptroller’s Office released preliminary data indicating that local income tax collections are not keeping pace with job growth, in part because most of the new jobs created pay well below average wages. Since then, economist Richard Florida reported in Route Fifty that this trend appears nationwide.

The good news for this Labor Day weekend is that America is producing jobs. The bad news is that lots of them are low-wage jobs, and most of them are concentrated in a relatively small number of metro areas.

The U.S. economy added nearly 12.2 million jobs between 2011-2016, and high-wage jobs make up the largest number of total jobs at 37 percent of the overall U.S. job market. However, low wage jobs – those that pay $13.83 an hour or less – account for the largest increase in new jobs during those four years.

Overall, the Boston-New York-Washington Corridor has fared well in comparison to the rest of the country in high wage job concentration, as tech and knowledge hubs become increasingly valuable.

Read the full article here.

“Dark-Store” – Unwelcome Dark Horse For County Coffers

A recent trend toward assessing big-box retail’s taxable value  based upon potential sales value, rather than value in use – dubbed the “dark-store” strategy – is causing substantial revenue falls in counties across the country.

Governing illustrates the problem by highlighting Michigan’s Marquette County, which has long benefited from prospering big-box retail and resulting property tax revenues. But after the Michigan Tax Tribunal ruled that local authorities must assess big-box retail based upon the sales price of comparable vacant retail buildings, Marquette County’s tax revenues plummeted. Governing reports:

Big-box retailers argue that the market value of their commercial property should be the sale price of similarly sized but vacant retail buildings. They point out that these buildings are extremely hard to sell as-is once the retailer moves out. They tend to sit empty for long periods. Thus, the assertion is, they aren’t worth nearly as much as local tax assessors have traditionally assumed in valuing the property.


Local governments, needless to say, aren’t buying this. “When you get your house appraised, they’re going to look at properties that are occupied,” says Steve Currie of the Michigan Association of Counties. “They’re not going to look at the foreclosed one because that’s not an equitable property. It’s the same case here.”

“Dark-store”assessments are not just hurting Marquette County, but also counties in Alabama, Florida, Indiana, Iowa, North Carolina, Ohio, Tennessee, Washington and Wisconsin. A few state legislatures have taken action to limit “dark-store” assessment mandates.

During a January 2016 meeting at MACo with county budget and finance professionals, leadership from the State Department of Assessments and Taxation discussed the “dark store” issue. They expressed confidence that Maryland’s laws regarding the process for property assessment were appropriately strong to ensure reasonable valuation. The state’s centralized system of assessments (as opposed to many states where the process is completely a local function) also insulates Maryland taxpayers from the potential unfairness of aggressive commercial property appeals.

Appraisals generally look to one or a combination of three factors: the sale price of comparable properties, costs to build less depreciation, and income generation potential. Assessments of big-box retail traditionally relied heavily on the construction costs method, partly because existing big-box retail real estate simply does not transfer between owners frequently enough to provide reliable sales data within most markets.

But big-box retailers say using the construction costs of a building to determine the assessment artificially inflates the value. And they insist it’s unfair to value their retail properties based on their worth to the current user (referred to as “value-in-use”) instead of the value the property would have on the open market (called “value-in-exchange”). The appropriate use of the competing valuation methods is a topic of seething debate in the appraisal world. Retail representatives fall decidedly on value-in-exchange. “It’s easy to be confused by the presence of a business,” says Florida real estate broker Sheila Anderson, whose firm Commercial Property Services has represented owners in scores of appeals. “But a business is not [what needs to be] assessed.” In her view, it’s only the resale value of the empty building that matters for taxation. And that is nearly always a much smaller amount.

A Marquette County Lowe’s,  which cost $10 million to build, succeeded in reducing its assessment from $5.2 million to less than $2 million by arguing in favor of “dark-store” assessments. This case and the resulting precedent resulted in Marquette Township’s property tax revenues falling 22 percent. Litigating the flurry of tax appeals has also caused a budgetary strain. Marquette Township Manager Randy Girard told Governing, 

The long and short of it is that we will not recover.

Read the full article here.

Sluggish Income Tax Distributions Mirror Underlying Economy

While job growth may be on the rise in Maryland, unfortunately local income tax collections are not quite keeping pace. The State’s August 2016 estimated net distribution of income tax revenues payable to counties for the second quarter of tax year 2016 totaled $56.4 million, which is about $20 million less than the same period last year. This reflects low actual collections from withholdings and estimated payments.

Withholdings in the 2016 second quarter grew extremely sluggishly at 2.5% – reflecting low overall wage growth. The Comptroller’s office interprets this to mean that, although overall employment is up, those job categories experiencing the highest growth rates are actually paying well below average wages. Once the Bureau of Labor Statistics publishes its revised employment data for the second quarter of 2016, analysts will have a better understanding for the dramatic reduction.

Estimated income tax payments for the second quarter of 2016 were also weak, which preliminary data suggests results from negative growth in capital gains. Taxpayers may well have adjusted their estimated payments in line with safe harbor provisions.

Net taxable income increased in tax year 2015 by 6.4%, and local tax liability increased by 5.8%, painting a somewhat different picture than the August 2016 second quarterly estimates. James Pasko, Manager, Revenue Accounting for the Comptroller of Maryland, opines:

It is likely that the increase in return volume is both driving the increase generally, but also related to taxpayers filing sooner to receive their refunds.  Therefore, we report more income and liability from returns, but the whole picture will not be clear until extension returns are processed and information is disseminated in November.

Read the August 2016 distribution report here. County officials with questions about the most recent distribution can contact Mr. Pasko at 410.260.7521 or at


A history of the local income tax distributions to local governments can be found on the Office of the Comptroller’s website.

State Tax Revenues 1.5% Short

Maryland’s tax revenue amounted to 1.5 percent below estimates for fiscal 2016, reflecting sustained weakness in wage growth and taxable spending and lower collections from tax returns, according to Comptroller Peter Franchot’s final closeout numbers. The State’s general fund received $16.2 billion from taxes, $250 million less than anticipated.  The unassigned general fund balance is $196.5 million. Reported the Comptroller,

These numbers reflect a continued slow and anemic economic recovery in our state with Marylanders struggling to keep pace. While a few more Marylanders have jobs, overall wages continue to fail to keep pace with the cost of living for too many families. The figures underscore a vulnerable and uncertain economy and the need to keep to a sensible fiscal course ahead. Consumers and small businesses need predictability as we move forward. I believe that any fund balance must be saved and not spent.

While employment rose 1.8 percent, many of the new jobs created pay below-average wages when compared to the statewide average, indicates the Comptroller’s office- resulting in depressed wage growth and general economic uncertainty, reducing taxable spending. Online shopping, increased casino gambling and the aging Baby Boomer population also may have contributed to reduced taxable retail expenditures.

Click here to read the press release and the Closeout Report.

Airbnb Remits $110 Million In Local Taxes Worldwide

Since it began collecting and remitting hotel, tourist and occupancy taxes two years ago in San Francisco and Portland, Airbnb has collected more than $110 million in the taxes worldwide, the online rental platform announced this month.  It most recently began collecting and remitting local government taxes in 19 cities in France, as well as Los Angeles, California. The company reports that in some local jurisdictions,

this tax revenue is a significant source of new income, and one that is likely to only grow larger as the Airbnb community continues to grow. …

We are prepared to partner with more jurisdictions to address [outdated tax] rules and collect and remit tax dollars in communities around the world.

Airbnb collects and remits taxes in jurisdictions including the District of Columbia, Montgomery County, Chicago, 27 Florida counties and 150 North Carolina local tax jurisdictions.

Post Questions Tax Exemption For Universities

The Washington Post Editorial Board published “Universities shouldn’t be exempt from D.C. property taxes” last week, questioning the long-standing given that institutions of higher education enjoy exemption from (most) state, local and federal taxes. Opines The Post: 

The rationale for this long-standing policy is a wise one: namely, that these institutions seek to serve broad public needs, not provide a return on shareholder investment.

Yet, in modern times, that argument runs into the blunt fact that some institutions of higher education have morphed into economically impactful entities employing thousands of people, occupying hundreds of acres and investing endowments that sometimes surpass $1 billion[.]

Naturally, higher education institutions in the D.C. area have long fought (successfully) against proposals to assess them a local property tax. They argue that the schools provide substantial public services, such as generating economic activity, providing security, and running shuttle buses for students.  The Post responds:

As for the stimulus universities provide for the local economy, and the services they provide students, both are fair points — but it’s equally true that the universities’ ability to attract students in the first place depends in some measure on the city’s infrastructure and amenities, paid for by local households and businesses.

Tax-exempt properties accounted for 11% of the total assessable property tax base in Maryland as of January 2014 – and as much as 31.6% in Baltimore City. For more information about property tax exemptions in Maryland, see the Department of Legislative Services’ presentation, Property Tax Exemptions and Payments in Lieu of Taxes in Maryland.

Take the Lead on Reducing Tax Fraud

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Click for a map of current fraud alerts in Maryland and learn more about scams.

A survey on taxpayer identity theft aims to track government efforts to stop fraud.

As described by the Government Business Council, recent reports show that taxpayer identity theft is on the rise, with incident reports in the millions. The Council asks,

What do these trends mean for government agencies? In the fight on fraud, is your organization taking the lead or the backseat?

The Council has released a short research survey on fraud strategy for 2016 and beyond. You may follow this link to take the 5-min survey.

At this year’s MACo Summer Conference, Attorney General Brian Frosh, Deputy Comptroller Sharonne Bonardi, and AARP Maryland Associate Director Tammy Bresnahan will be sharing strategies for reducing identity theft in Maryland, and ways county governments can help victims of identity theft and tax fraud.

Learn more about MACo’s Summer Conference: