DLS, Administration Agree To Replenishing Local Reserves

At today’s budget hearing on the State’s reserve fund in the Senate Budget & Taxation Committee, legislative analysts requested that David Brinkley, Secretary of the Department of Budget and Management, speak to the Administration’s plans to reimburse the Local Income Tax Reserve Account for funds raided in prior years.

The State funds the Local Income Tax Reserve Account with funds from local income tax revenues. From the Department of Legislative Service (DLS)’s analysis:

According to generally accepted accounting principles, the State is supposed to maintain a sufficient fund balance to pay future refunds realized during the fiscal year in case the income tax is no longer collected. In recent years, funds have been transferred out of the Local Income Tax Reserve Account so that the account now has a $716.8 million unfunded liability. The department should brief the committees on plans, if any, to reduce the unfunded liability in the Local Income Tax Reserve Account.

To reduce this unfunded liability, the Department of Legislative Services
recommends that the Budget Reconciliation and Financing Act of 2018 be amended to continue the annual $10 million repayment into the Local Income Tax Reserve Account indefinitely.

The Reserve Account has been raided four times since fiscal 2009 to plug in gaps in the State’s operating budget, leading to the hefty unfunded liability. DLS details the history.

Secretary Brinkley responded:

The Hogan Administration is committed to addressing the unfunded liability in the Local Income Tax Reserve Account. Our forecast of out-year spending includes funding to address the multiple repayments required under current law. The Administration is also hopeful that the repayment of funding to assist local governments with the Wynne decision will be honored at the appropriate time.

The Department of Budget and Management is supportive of the recommendation made by the Department of Legislative Services to continue the annual $10 million repayment into the Account indefinitely. In fact, the Administration would support an amendment increasing the annual repayment to $20 million a year beginning in fiscal year 2020.

Fee Waiver Helps Keep Homes From Tax Sale

MACo Associate Director Barbara Zektick testified in support of SB 466, Estates and Trusts – Administration of Estates – Waiver of Fees in the Senate Judicial Proceedings Committee. The bill is intended to help prevent from going to tax sale properties inherited by indigent heirs.

MACo representatives learned from serving on the Task Force to Study Tax Sales this year that often, homeowners inherit their residence from deceased family members – but cannot afford to probate the estate and transfer the property into their name, because of fees assessed by the Registers of Wills. Because of this, the homeowner misses out on financial assistance opportunities, and may not receive property tax and water bills from the county. The home ends up on tax sale rolls as a result – something counties would like to prevent wherever possible.

From MACo’s testimony:

Counties support this bill as a “good government,” wise approach to prevent properties from unnecessarily going to tax sale. Tax sale serves as an effective means of collection and one of last resort. However, it benefits everyone to make sure that the record owner of the property is correct, so that counties can provide notice of moneys owed and assistance to their residents effectively.

Follow MACo’s advocacy on bills coming out of the Task Force to Study Tax Sales, and other bills affecting local taxes and revenues, here.

Senate Passes Tax Exemption Clarification

The Maryland Senate took the first step towards addressing the impacts of federal tax reform on state taxpayers this week. Senate Bill 184, sponsored by Budget and Taxation Chair Edward Kasemeyer, passed the Senate unanimously and has crossed over to the House. Its cross file, House Bill 365, sponsored by Revenues Subcommittee Chair Jay Walker, had its hearing on Wednesday of this week.

The bill clarifies that taxpayers can deduct personal exemptions for themselves, their spouse, and eligible dependents under the state and local income tax, even though they cannot do so at the federal level anymore.

According to the Department of Legislative Services and Comptroller’s analyses, the bill is merely clarifying in nature and does not have a real fiscal impact. While certainly codifying current practice, the state of Maryland exemptions was unclear after the federal government passed its tax reform bill and zeroed out federal exemptions. If taxpayers could no longer take the exemptions at the state level, local governments would have gained an additional $490 million.

The Baltimore Sun reports:

Still, even if the personal exemptions are preserved, Marylanders’ tax bills stand to rise by more than $400 million if lawmakers do not step in to preserve tax deductions eliminated on the federal level. Gov. Larry Hogan and the Democrats who lead the General Assembly have pitched dueling plans to return that money to taxpayers.

This legislation is widely seen as the least controversial of many proposals to address the windfall of revenues to state and local governments as a result of tax reform. Other proposals include but are definitely not limited to:

  • decoupling the requirement to itemize at the state level with the need to itemize at the federal level,
  • raising standard deductions,
  • raising exemption amounts or indexing them to inflation, and
  • ensuring that property taxes are still deductible from state and local income taxes.

Evidence before Expansion: Tax Credits Need Time to Implement

MACo Associate Director Barbara Zektick testified before the Senate Budget and Taxation Committee on February 7, 2018 in opposition to Senate Bill 427, “Property Tax Credit – Elderly Individuals and Veterans – Eligibility”.

This would expand a recently established property tax credit to all elderly individuals in a county over the age of 65 that have also lived there for 25 years. Currently, the credit only would apply to those over the age of 65 that have lived in the same house for at least 40 years. This is potentially a large expansion of the number of people eligible for the credit.

The four counties that have implemented the current optional property tax credit have received far more people making use of the credit than they had originally anticipated.

As counties seek to work out the impact in the reduction of property tax income, the effects of an expansion of that credit at this time could have further significant effects on the ability of many counties to adapt.

From MACo Testimony:

With more residents making use of the 2016 credit than initially anticipated, the
impact of the reduction in property tax income is still being explored by county governments. Expanding the credit eligibility further widens that gap – meaning counties would have an additional deficit of property taxes to contend with when they haven’t had time to adjust to the current higher-than-projected credit usage.

Further, it is unclear whether counties have authority to limit the applicability of their individual credits under this broader enabling authority. Even if they do, however, officials will most certainly receive pressure to expand their existing credits, regardless – which they simply do not have the means to accomplish at this juncture. Counties request that they receive more time to administer this credit as-is and analyze its impacts before broadly expanding the nature and scope of this tax credit.”

Follow MACo’s advocacy efforts during the 2018 legislative session here.

The Uncertainty of Federal Reform Looms Over Tax Bills

MACo Associate Director Barbara Zektick submitted written testimony to the House Ways and Means Committee in opposition to House Bill 129 and House Bill 296, “Income Tax – Subtraction Modification – Retirement Income of Correctional Officers”, on February 7, 2018.

These two similar pieces of legislation are among a number of subtraction modification bills that would mandate reductions in local revenue by reducing an eligible individual’s taxable income. Due to the clear fiscal impact that these modifications would have on local governments and their ability to provide needed community services, counties generally oppose such changes.

Additionally, the effects from federal tax reform on local and county government revenues are still uncertain.

From MACo Testimony:

MACo suggests that consideration be given instead to providing state tax credits, which do not mandate the depletion of resources from all counties for education, public safety, and needed community services.

Counties welcome the chance to work with state policymakers to develop flexible and optional tools to create broad or targeted tax incentives, but resist state-mandated changes that preclude local input.”

Follow MACo’s advocacy efforts during the 2018 legislative session here.

Large SDAT Cost Shift Hits Counties Hard

MACo Associate Director Barbara Zektick testified in support with amendments of House Bill 305, “Homestead Property Tax Credit Program – Eligibility Awareness”, before the House Ways and Means Committee on February 6, 2018.

Notifying eligible recipients of the Homestead Property Tax Credit through individual mailings is supported without issue by local governments and counties, and the bill tasks the State Department of Assessment and Taxation with reaching out to those eligible.

However, support for HB305 from counties is contingent on the removal of a cost shift to counties of 90% of SDAT’s operations of its property assessments, information technology, and Office of the Director that was included in the Budget Reconciliation and Financing Act (BRFA) of 2018.

From MACo Testimony:

Counties have no means of control or authority over how SDAT manages its operations or spends its budget. The fiscal note for HB 305 provides a reasonable estimate of costs – about $150,000 – to implement. However, counties have no method by which to hold SDAT accountable for performing these tasks within a budget close to that amount. Nor can counties control whether SDAT or the Administration funds implementation of this bill through its Tax Credit Division, as seems most appropriate, or its Real Property Assessments Division, one of those divisions the Governor proposes counties fund almost in its entirety.

The Governor’s proposed SDAT cost shift will lead to a lack of government accountability which endangers the wise expenditure of taxpayer dollars.”

Follow MACo’s advocacy efforts during the 2018 legislative session here.

Caucus Proposes Tax Reform Mitigation Package

The Senate Republican Caucus is pushing its own package for addressing the impacts of federal tax reform on Maryland taxpayers. Their plan entails allowing people to itemize at the state level even if they do not at the federal level, and increases deductions or lowers rates to keep state tax bills constant.

There is general agreement about “decoupling” the itemization requirement from federal taxes, reports The Frederick News-Post

Other proposals include:

[Governor] Hogan, in addition to decoupling federal and state taxes, will aim to make permanent a provision in the Maryland tax code that says state taxes will not be impacted by federal changes for one year.

Senate President Thomas V. Mike Miller Jr. (D) and House Speaker Michael E. Busch (D) proposed a plan last month from Democratic legislators that would restore personal exemptions and create a state-run education fund that would allow Marylanders to claim donations as charitable expenses for tax purposes.

They would also try to negate the doubling of the federal estate tax exemption from $5 to $10 million by keeping it at $5 million in Maryland.

Quick Links

Current State Tax Legislation With Potential County Impact

Conduit Street Taxes and Revenues coverage

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

Maryland Will Join Suit Over SALT Deduction Limits

Maryland Attorney General Brian Frosh has announced his intention to join a multi-state lawsuit resisting the recently adopted limitation on federal deductibility of state and local taxes.

From the AG’s press release:

The $10,000 cap on the state and local tax deduction (SALT) disproportionately harms Maryland residents and disrupts the longstanding balance of taxing power between the states and the federal government. Maryland relies on state property and income taxes to fund a variety of critical services, including education, health care, public safety, and other priorities. Over half a million Marylanders will lose $6.5 billion in SALT deductions – an average of $11,800 per taxpayer. These changes will also have harmful collateral consequences for the State and its
residents. With the decreased value of the property tax deduction, for example, many Marylanders will see decreases in the value of their homes. Maryland residents will have an incentive to move elsewhere, and attracting young families and skilled workers to the State will become more difficult, putting Maryland at a competitive disadvantage.

Read more coverage from the Baltimore Sun.

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.