Every year’s winter conference lands at just the right time to hear of plans ahead for the legislative session. As usual, a large crowd gathered to hear four prolific leaders offer their views for the 2017 session. Here are a few key items that were raised that seem to set the tone for counties and other Conduit Street readers.
#1 – Budget Uncertainty: Well, That Escalated Quickly
Both Senate President Miller and House Speaker Busch dwelt on economic issues, noting the recent write-down in state revenues and speculating on the effects for the coming year’s budget. President Miller spoke of making “real cuts to programs,” but ruled out tax increases as a component of the solution for the year ahead. Without much specificity, it seems clear that the last two years’ relative fiscal comfort (and even a year without the need for a reconciliation bill!) have given way to a tougher task for FY 2018. The on-the-margin budget decisions are going to gather more attention in the 2017 session than the first two years of this Administration’s tenure.
Expect attention on the state’s revenue forecasting methods, a potentially tougher road for tax reduction proposals, and more general engagement from service recipients.
#2 – Eyes On Washington
Maryland has multiple reasons to be focused on Washington DC for policy reasons. That strong connection – and currently its own uncertainty – was evident during the panel discussions as well.
Maryland has a heavy reliance on the federal workforce, as the state houses multiple major federal agencies, and hosts thousands of other federal employees as state residents. So, any changes in federal employment policies or overall workforce will have an outsized effect on the local economy. As America awaits clarity on the incoming federal Administration’s priorities – if “drain the swamp” translates to a meaningful reduction in federal workforce – expect the Maryland economy to be among the first ripple effects.
The Chesapeake Bay is also under multiple federal mandates for cleanup, as a declared “impaired waterway.” The future federal role in enforcement and oversight of Watershed Implementation Plans is another unknown. An earlier roundtable discussion at the conference focused on this in detail — but the fiscal and policy effects on state and county governments are substantial. Counties are already underway with a variety of cleanup efforts, and what trajectory makes sense for the years ahead is not yet clear.
#3 – Pieces of the Governor’s Agenda Are Coming Into View, And It May Indeed Be “Robust”
Governor Hogan’s Special Adviser Keiffer Mitchell commented on the Governor’s pending package of legislative proposals, and even the broad outlines suggest this will be the Administration’s most aggressive year before the legislature. The Governor has announced plans to introduce “family leave” legislation for private employers, which will likely help shape a high-profile debate in the year ahead. Mr. Mitchell also spoke of the transportation “scorecard” legislation from 2016, and reiterated the Governor’s intent to pursue its repeal (as the Governor himself had indicated at the MACo Summer Conference).
The Governor also plans to pursue incentives for manufacturing employers in the state, with “a focus on areas that have not been able to grow their jobs as much,” according to Mr. Mitchell. This proposal is likely to include multi-year tax incentives in economically distressed areas. Coupled with the Governor’s very visible outreach to the incoming leadership in the City of Baltimore, a focus on redevelopment and longtime “One Maryland” may be its own 2017 motif.
#4 – Nothing About Medical Marijuana Is Going To Be Mellow
While the state licensing process is not a central issue for county government, the panelists at the forecast session all recognized its gravity and spoke to it. Couple that with a standing-room-only audience at a workshop on medical cannabis earlier during the three-day conference — it’s clear that the topic remains very lively.
The takeaway? This is far from over. The licensee system, and resulting controversy, will surely trigger legislative action. And the eventual implementation of the full spectrum of growers, manufacturers, retailers and the associated questions of zoning, public safety, and security will keep this topic bubbling for the foreseeable future.
The Comptroller’s Office has released its report on the November distribution of the local income tax. The November distribution of county income tax revenues – which includes a substantial year-end “reconciliation” amount and are therefore very volatile – are 8.9 percent higher than last year, totaling $1.394 billion.
The November distribution reflects tax year 2016 third quarter withholding and estimated payments (and late second quarter withholding) ($1.022 billion), and the fourth reconciling distribution for tax year 2015 ($371.4 million).
James Pasko, CPA, Manager of Revenue Accounting for the Comptroller of Maryland, details the report:
Table 1 shows the forth reconciling distribution, which totals $371.4 million. This distribution accounts for the returns filed through the October filing extension; these returns typically show disproportionately high levels of income. As is typical with reconciling distributions, growth varies widely across the counties.
Table 2 shows the new Local Tax Percentage. The percentage for the counties, and cities and towns was recalculated in November as tax year 2015 is now complete. The Local Tax Percentage has been reduced in part by the ruling in the Wynne case, which is why the amount of tax going to localities increased by less than total receipts. The third quarterly distribution grew 4.6% to $1.0 billion. Withholding growth of 7.3% is welcome but due in part to calendar issues rather than fully attributable to increasing wage earnings.
Table 4 shows cumulative Local Income Tax distributions through November. Cumulatively, distributions increased 5.7% to 4.5 billion compared to this point last year.
Table 5 shows that the cumulative amount of tax returns processed through November 1st of this year have increased 1.8%, to 2.8 billion, compared to this point last year. This fact helps explain why third quarter receipts are up this year. The increase in tax returns processed, and other timing issues, have essentially pulled the collection of money forward in this year.
Lawmakers in the state of Missouri may consider turning over responsibility for maintaining and funding state roads and bridges to counties in an effort to address state transportation funding shortfalls, reports The Kansas City Star – though it is unclear how such a move would reduce overall infrastructure investment needs or align revenues with obligations more strategically.
Missouri state funds for road and bridge repair fell from $1.3 billion in 2009 to $800 million in 2017 – and the political will does not appear to exist to raise the gas tax. The Kansas City Star quotes incoming House Speaker Pro Tem Elijah Haahr:
Haahr suggested turning some local roads and bridges back over to county governments and providing block grants to help fund their upkeep.
“The state would maintain primary transportation arteries,” he said, “but local roads and bridges, we’d give them back to the counties so they could prioritize what projects are most important to their communities.”
To the extent that this approach would alleviate burden on the state budget by passing the costs over and above the block grants to counties, it is unclear how counties would foot the bills. For one thing, counties would not benefit from the economies of scale inherent from purchasing supplies and equipment in larger quantities, indicates Patrick McKenna, Director of the Missouri Department of Transportation. Read more here.
While Missouri counties have the option to create special taxing districts called Transportation Development Districts to fund transportation improvements, it is unclear whether any more political will exists for those tax increases than for those at the state level.
State Governments are Limiting Counties’ Revenue Authority to Fund Essential Services
Counties are Coping with More State and Federal Mandates, Not Fully Covered by State and Federal Aid
Counties are Adjusting to New Fiscal Challenges on the Horizon
Counties are Pursuing Various Solutions to Ensure Quality Service Delivery Despite Fiscal Constraints
Keeping Counties’ Taxing Authority
Property taxes, in additional to sales taxes, serve as the main revenue source for most counties. However, the state places restrictions on property taxing authority in 42 of the 45 states where counties collect property taxes – and 45 percent of these caps have been enacted or modified since 1990.
STATE PROPERTY TAX LIMITATIONS FOR COUNTIES, TIMELINE
AS OF NOVEMBER 2016
“Dark Stores” Threaten County Coffers
Further compromising the collections of property taxes, NACo’s report highlights the “dark store” phenomenon:
Counties in at least 12 states are confronting valuation and assessment issues, including valuation appeals, due to the “dark store” method of assessing big-box stores. This method values currently operating retail store locations for tax purposes as if they were vacant and closed; proponents argue that this real estate could not be sold near the cost of construction, since these stores were built out for particular purposes. Since the assessment of a closed location is far lower than that of an operational facility, property tax revenue generated from operating big box store is significantly diminished with this valuation method.
Commercial real estate owners have achieved successes getting their assessments lowered by litigating that traditional methods for valuating commercial property – by their value-in-use – conflict with statutory law. Since 2013, Michigan counties have refunded approximately $78 million in property taxes related to dark store valuations.
Unfunded Mandates, Oh My… And Steps Forward
While NACo reports that the above-mentioned factors are limiting counties’ taxing abilities, 73 percent of states have required counties to do more with what they have, decreased state funding to counties, or some combination of both over the last decade.
The report recommends that state and federal governments provide full funding for compliance costs associated with new mandates passed to local governments, and that counties be granted the autonomy to generate revenue to pay for the services they provide.
The Department of Legislative Services (DLS), Department of Budget and Management (DBM), and Comptroller’s Office testified before the Spending Affordability Committee today in agreement on one point: that the State should start limiting the amount of capital gains tax revenues it includes in its revenue estimates.
Warren Deschenaux, executive director of DLS and the legislature’s senior budget analyst; David Brinkley, secretary of DBM; and Andrew Schaufele, director of the Bureau of Revenue Estimates within the Office of the Comptroller authored a report recommending that the State apply a cap to the estimate of nonwithholding revenues assumed in the budget process. The recommendation comes after the Bureau of Revenue Estimates significantly reduced its revenue estimates in September, and at the last Spending Affordability Committee briefing, Deschenaux emphasized that income tax revenues – the General Fund’s largest revenue source – are generated more and more from unearned income such as capital gains, making revenues harder to estimate and generally more volatile.
The cap should reflect the average share of nonwithholding revenues to total general fund revenues over the most recent 10-year period (i.e., if nonwithholding revenues represent 15% of total general fund revenues over the last decade, then the revenue estimate for next year for nonwithholding is capped at 15% of general fund revenues)
Estimated nonwithholding amounts in excess of cap should not be appropriated
Revenues captured by the cap at closeout should be utilized to increase Rainy Day Fund balance to 10% of general fund revenues (currently at about 6%), avoid debt by supporting pay-as-you-go projects, and address unfunded retiree health and workers’ compensation liabilities
Capital gains makes up about 20 percent of the state’s net taxes but the vast majority of that comes from just 5 percent of the more than 2.6 million taxpayers, reports The Daily Record.
At the last Spending Affordability Committee briefing, when asked whether the General Assembly had a “spending problem,” Deschenaux responded, “this is an economy problem.” This time, he referenced that previous question again and clarified that this was not a “spending problem,” but a “revenue problem.”
At today’s meeting of the Maryland General Assembly’s Joint Committee on the Management of Public Funds, Comptroller Peter Franchot shared the results of a comprehensive independent audit of income tax distributions made by the Comptroller’s Office to counties and municipalities for tax years 2010-2014.
We are currently contacting the affected jurisdictions directly, and those jurisdictions that are owed money will receive payment within days. For those jurisdictions that owe money as a result of this reconciliation process, we are mitigating the financial impacts by providing ample time for long-term budget planning. Those jurisdictions will not have to begin repaying what is owed until 2024, and they will have the flexibility to repay the funds over the course of ten years from that point forward.
The erroneous distributions resulted from failures to ensure that every single tax return went through a geocoding process with the appropriate software to ensure that it was assigned to the correct jurisdiction. The Comptroller’s Office is making necessary technological and procedural upgrades to ensure that all tax returns will be adequately geocoded moving forward. In addition, the Office will ensure that all of its geocoding and distribution processes are audited once every two years.
The Comptroller stressed that the audit indicated that 99.9 percent of local income taxes were distributed correctly. However, to get to 100 percent perfect, the Comptroller’s Office is making the above-mentioned improvements through its “Project Perfect” initiative.
The Comptroller’s staff has been in direct contact to coordinate with MACo, and has nearly completed their process of reaching out to the fiscal authority in each jurisdiction to detail their exact fiscal effects.
Questions about the distributions may be directed to Andrew Schaufele, Director of the Bureau of Revenue Estimates within the Comptroller’s Office, at ASchaufele@comp.state.md.us or 410-260-7450.
A Governing magazine column discusses the major party presidential candidates’ proposed changes to tax systems, and what they might mean to state and local governments:
So when a new president comes into office in January, how might campaign tax reform promises affect the ability of states and local governments to make critical investments?
Apart from the muni tax exemption — which helps states and localities to borrow money for infrastructure — eliminating the deduction for state and local taxes is one campaign promise that could most directly impact those governments. It would mean that Americans pay federal taxes on their state and local taxes. So it is that presidential candidate Hillary Clinton proposed limits on high earners’ deductions, and candidate Donald Trump said he would cap the value of individual deductions. He also promised to “reduce or eliminate some corporate loopholes” and cap the deductibility of business interest expense.
The target of their proposed changes involve deductions that currently serve to ensure the federal government does not, in effect, impose federal taxes on state property and sales and use taxes. If implemented, they would undo and reverse important provisions in our federal tax code.
The Comptroller’s Office has released details on the October distribution of the local income tax to counties, with this year’s distributions 25 percent higher than they were last year at this time. The October distribution is composed of two parts related to revenues received in the second half of fiscal year 2016: the local share of delinquent tax receipts from tax year 2014 and before, and the local share of fiduciary payments.
Delinquent tax distributions increased by 25.4 percent over last year’s October distribution, to a total of $154.6 million. According to the Comptroller’s Office, delinquent receipts have increased due to tax amnesty and a program by the Motor Vehicle Administration (MVA). Tax amnesty included some payment plans that extend through December 2016, resulting in some payments attributable to the October distribution. An MVA program established in fiscal 2012 prevents the renewal of driver’s licenses and motor vehicle registrations if the driver has an outstanding tax liability – which has also increased delinquent payments.
Fiduciary income tax distributions to local governments for the second half of the fiscal year increased by 22.1 percent, or $17.9 million. Since the local income tax of fiduciaries is distributed to the jurisdictions where the tax is administered, only a few counties receive the lion’s share of this revenue: namely, Baltimore County, Baltimore City, and Montgomery County, which all saw this revenue increase by at least 22.3 percent over last year.
Local infrastructure requires reliable investment to keep Maryland moving. Recession-driven cost shifts have left local roadways lacking proper maintenance, bridges in dire need, and other public infrastructure neglected. Re-investing in infrastructure – a call being heard at every level of government – is good for Maryland jobs, business attractiveness, and quality of life across the state. Meanwhile, funding for school maintenance, water delivery systems, and public safety centers all lack predictable centralized funding commitments.
MACo has adopted four initiatives for the 2017 General Assembly Session. This post outlines MACo’s initiative to advocate for a Local Infrastructure Fast Track for Maryland (#LIFT4MD). For additional information about MACo’s priorities, read all of MACo’s top initiatives.
MACo calls on state leaders to provide a #LIFT4MD in 2017:
Approve meaningful new FY 2018 funding for restoring highway user revenues – using the fair, statewide formula used for decades
Enact a phased-in restoration of the historic 30 percent local share of state transportation revenues – enhancing safety and road quality for motorists everywhere
Document and assess the state of public infrastructure across Maryland – assessing the needs and reliable revenue sources targeted for each area of service
Road Funding and Why We Need It
One thing is certain: local roads and bridges are starved for highway user revenues.
Q: What are highway user revenues, anyway?
A: Highway user revenues are toll, gas tax, and other dollars. For several decades, 30% of these revenues were used to fund locally-owned roads and bridges.
The State and local governments have shared responsibilities for roads and bridges and the revenues generated from them since at least 1904. The State created the highway user revenue formula in 1968, placing motorist revenues – some motor vehicle fuel and vehicle titling taxes, registration fees and some others – into the Gasoline and Motor Vehicle Revenue Account (GMVRA). For more than forty years afterwards, local governments have received at least 30 percent of these revenues to fund their roads and bridges – 83 percent of the public road mileage in Maryland.
No local governments collect their own revenues from motorists – they have counted on their share of highway user revenues as their engine to maintain local roads and bridges.
Q: Why do local governments get this share?
A:Because local governments own and maintain 83 percent of the public roads located in Maryland.
Unlike most states and any other state in the northeast or mid-Atlantic United States, Maryland local governments maintain the vast majority of roads in Maryland.
In fact, with Maryland’s counties (including Baltimore City) owning and maintaining 74 percent of the public roads, only two states in the entire country depend on counties for a larger percentage of their roads: Kansas (81 percent) and Iowa (79 percent). Hawaii ties with Maryland at 74 percent.
Q: OK, so what’s the issue?
A: Since fiscal 2010, the State has reduced highway user revenues by 90 percent for most counties – but local governments still own and maintain 83 percent of the roads.
The longstanding policy of sharing transportation revenues with local governments took a drastic turn in fiscal 2010 when the Board of Public Works reduced highway user revenues by 90 percent for most jurisdictions. These reductions were made permanent during the 2010 session. More or less from that point on, 23 of 24 counties have received 1.4 percent of all highway user revenues, Baltimore City has received 7.5 percent, and municipalities, .3 percent.
Q: Enough percentages. What does this all mean in dollars?
A: Counties have missed out on more than $3 billion since fiscal 2010. That’s a whole Red Line! The local share that used to amount to $535 million has been drastically cut back to $177 million – with a mere $35 million to be shared among 23 county governments (that figure used to be $296 million).
Q: But when we increased the gas tax in 2013, that made the pot bigger for everyone, right?
A: No. All of that money goes straight to MDOT.
Even though the Maryland General Assembly passed the Transportation Infrastructure Investment Act of 2013 which increased taxes on motor fuel, all of those new revenues bypass the GMVRA and go directly to MDOT, with no new revenues funding local roads and bridges.
Q: What’s the deal with Baltimore City?
A: Baltimore City gets a larger share because it maintains almost every public road mile in its boundaries.
Baltimore City has traditionally received a larger share of highway user revenues because it owns and maintains all roads within its boundaries, except for those portions of I-895 and I-95 maintained through toll revenues by the Maryland Transportation Authority. While state roads – i.e., Maryland’s numbered roads – are maintained by SHA throughout Maryland’s other 23 counties, Baltimore maintains those roads within its borders, as well as interstates including I-83 and I-295. Although Baltimore City’s percentage reduction has not traditionally been as large as it has been for all other counties, the reduction per capita was greater in fiscal 2010 than the average per capita reduction for the remaining counties.
Q: How do they handle this in other states?
A: In no other state do local governments own and maintain so many public roads, yet receive so small a percentage of road-related revenues.
As previously mentioned, only two states in the entire country depend on counties for a larger percentage of their roads: Kansas and Iowa. In Kansas, counties and cities receive approximately one third of all motor fuel revenues collected in the state. In Iowa, counties receive 43 percent of their state’s equivalent of the GMVRA. In Hawaii, where counties also maintain 74 percent of the roads, counties impose and collect all of their motor fuel taxes themselves. In Michigan, where counties maintain 73 percent of the roads, counties receive 35 percent of their equivalent to the GMVRA. In no state, however, do counties maintain nearly as much mileage as Maryland counties do, yet receive anywhere near 9.2 percent of the associated revenues.
Q: It does not seem like local roads and bridges are falling apart. Why is that?
A: Because local governments, in fulfilling their responsibilities to maintain this infrastructure for Maryland drivers, have backfilled transportation needs from their general funds.
Counties budgeted 38 percent of their capital funds on public works projects in fiscal 2016 – more than any other category. Counties across the state have had to increase taxes, institute layoffs and furloughs, eliminate employee adjustments and increments, enact across-the-board cuts, and dip into rainy day and reserve funds — all required to offset the State funding reductions, and in addition to their own revenue declines related to the economy.
But local roads have suffered. Counties have had to do the following to withstand the loss:
Delay or eliminate construction projects completely;
Significantly reduce street tree maintenance and street light repairs;
Reduce stormwater and waterway maintenance;
Reduce preventative maintenance and surface treatment of roadways such as asphalt overlays and slurry seal – smaller jurisdictions are experiencing major reductions or have eliminated repairs and maintenance altogether;
Eliminate or significantly reduce mowing, tree trimming, street sweeping, and leaf collection;
Reduce guardrail replacements to the point where no new guardrails are being installed, and existing guardrails are only being repaired or replaced in the most damaged areas; and,
If you’re a legislator, we need your support for legislation to get highway user revenues back on track. Get off the starvation diet for local roads, and get back to fair funding. Support MACo’s highway user revenue restoration legislation. Start talking now with your colleagues on the House Environment and Transportation Committee, the House Appropriations Committee, and the Senate Budget and Taxation Committee, and let them know this is a priority. And keep talking about this issue, and what it means to the citizens and communities back in your district.
If you’re a county leader, Maryland driver or other stakeholder and want to help – keep delivering the message. Tweet or otherwise use social media to share your needs and stories, using the hashtag #LIFT4MD. Talk to your senators and delegates, write to your local paper, and raise the issue. We can’t let these deep budget cuts just continue because too many people forgot, or don’t understand, what has happened.
Assess Maryland’s Infrastructure Needs
Addressing infrastructure needs in Maryland requires more than just restoring the fair share of funds originally provided to local governments. At least a decade has passed since Maryland has undertaken a comprehensive analysis of state and local infrastructure needs. It is time to take a fresh look at our variety of needs, so we can comprehensively and strategically stretch our limited resources wisely – and begin working towards a Local Infrastructure Fast Track For Maryland (#LIFT4MD) now.
Governor Larry Hogan has indicated that he is willing to “keep an open mind” regarding whether to take a stand on the establishment of a regional sales tax for Metro, reports The Washington Post. He indicated that such a tax would have to be regional in nature. As he told the Greater Bethesda Chamber of Commerce, “We’re not going to tax the people of Maryland all across the state to pay for Metro, I can tell you that.”
Hogan met privately with D. C. Mayor Muriel Bowser and Virginia Governor Terry McAuliffe to discuss long-term funding needs for WMATA. Reports The Post:
Bowser favors a 1 cent sales tax or other dedicated revenue source. Hogan was cool to the idea and said he would discourage any such local effort in Montgomery or Prince George’s counties. A Hogan spokesman reinforced the point a few hours after the meeting, saying that the governor “has no plans to support a tax increase, regional or otherwise.”
Local officials were encouraged to hear that Hogan was willing to keep the door open.
“That’s a 180-degree difference in tone,” said council member Roger Berliner (D-Potomac-Bethesda), chairman of the Metropolitan Washington Council of Governments and the council’s transportation committee. “That’s a big deal.”
Funding for local and regional infrastructure continues to draw concern from both sides of the aisle, from both public and private sectors, and from all levels of government. The questions remain on how to fund this investment, how to stretch our limited resources wisely, how to leverage this opportunity to best stimulate our economy, and how to target the greatest of our many needs.
At this year’s MACo Winter Conference, “An Ounce of Prevention,” join MACo in advocating to strengthen our roads, bridges, water mains, wastewater systems, and public structures with a #LIFT4MD: Local Infrastructure Fast Track for Maryland. In this session, experts will discuss how we might begin to answer the many questions about funding our local infrastructure.
Date/Time: Thursday, December 8, 2016; 10:30 am – 11:45 am
Joel Griffith, Esq., Deputy Research Director, National Association of Counties
Rudy Chow, P.E., Director, Baltimore City Department of Public Works
Theresa McClure, ENVSP, Regional Strategic Communications Lead, HDR, Inc.
The MACo Winter Conference will be held December 7-9, 2016 at the Hyatt Regency Chesapeake Bay Hotel in Cambridge, Maryland.