July 21, 2010

Higher flush tax, state property taxes are seen as options


By Len Lazarick


Raising the annual $30 per household “flush tax” by 80% to $54 is one of the options being considered to make up for a $660 million shortfall in the Chesapeake Bay Restoration Fund to clean up Maryland’s wastewater treatment plants, the Capital Debt Affordability Committee was told Monday.

Comptroller Peter Franchot also said state property taxes might have to be raised because of increasing state debt, despite recent federal subsidies on interest rates.

“I’m pretty amazed at how much borrowing we’re doing,” Franchot told the debt committee. “This means a very significant tax increase or a shift of money from the general fund,” as has been done in previous years. The state property tax of 11.2 cents per $100 of assessed valuation is used exclusively to pay off bond issues. The owner of a $200,000 house pays about $224 in state property taxes.

Total state general obligation bond debt is now at a record $6.5 billion, but recent bond issues, such as one scheduled next Wednesday, have been sold at very low interest rates. That total does not include borrowing for transportation, the university system and bay restoration.

The clean-up of nitrogen and other chemicals flowing into the Bay that create “dead zones” on the bottom is estimated to cost $1.5 billion. That’s $660 million more than is generated by the annual “Bay Restoration fee” on every household and septic system – commonly dubbed the “flush tax.” 

House Appropriations Committee Chairman Norman Conway asked Jag Khuman, director of the Maryland Water Quality Financing Administration, how much it would take to make up the difference, and fund all the projects. “It would have to go up about 80%,” Khuman said, but there is a serious question about “whether there is the political appetite for that.”

Sensitive issue

Conway agreed. “It’s a very, very sensitive issue,” he said in an interview. Residents of rural areas with septic systems that make up much of his district were particularly upset by the fee passed in 2004 with the support of then-Gov. Khuman said raising the flush fee is one of five options being considered by the Bay Restoration Fund Advisory Committee. The other options include: reducing the funding of the upgrade of local systems; increasing the term on the Bay fund bonds from 15 to 30 years; discontinuing operating grants to local sewer systems; and delaying or eliminating some projects, though that option “would not be a good thing for the environment.”

Jay Apperson, a spokesman for the Maryland Department of the Environment, said the advisory committee would be making recommendations in its year-end report.

The legislature would have to act to change the flush tax and the grants.

The principal cause of the shortfall in funds to upgrade sewage treatment plants is the cost of the two largest projects and the two largest sources of nutrients to the Bay – the Back River plant in Baltimore County and the Blue Plains plant in D.C. that services suburban Washington.

Conway said because the major cause of the shortfall is wastewater from urban areas, the state ought to consider regional rates for the flush tax, with urban customers paying more.

State debt is growing partly because cash that would have been used to pay for capital projects like the treatment plants has been transferred into the general fund to balance the budget, with the money being replaced by bond debt over the next three years. For fiscal 2011, which just began, the governor and legislature took $205 million out of open space and farmland preservation funds and $200 million from the Bay Restoration Fund. 

Ehrlich and the Board of Public Works raised the state property tax by 5 cents in 2003 to help balance the general fund budget, and reduced the rate by 2 cents in 2006 to 11.2 cents, where it has remained.

Neil Bergsman, director of the Maryland Budget and Tax Policy Institute, said that in the past, raising the property tax is often brought up as a possibility, but “so far, more often than not, something comes to the rescue,” making a tax hike unnecessary.

But he agreed with Franchot that in a year or two, “at some point it will be necessary” to pay rising debt service by raising the property tax or dipping into the general fund.