September 22, 2010

County revenues hit hard by housing collapse

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By Barbara Pash
For MarylandReporter.com

Maryland counties are feeling the pain of the collapse of the housing market. From fiscal 2006, the height of the housing boom, to fiscal 2010, they have lost $345 million in revenue from transfer taxes that are charged every time a property is bought or sold.

Revenues to counties from property taxes will be declining soon too, officials said, as the decline in housing prices starts reducing the assessable base for this key source of local funds.

Losses from residential and commercial properties vary by county. Leslie Knapp, associate director of the Maryland Association of Counties, said there is not much the counties can do to compensate. “They could raise property taxes, but that is politically difficult to do,” he said. “They could charge other fees and taxes – hotels, impact fees – but much of that is tied to economic growth.”

Knapp pointed out that there was a slight rebound of less than half a percent in overall transfer tax revenue from fiscal 2009 to 2010. Still, many counties experienced significant losses. Caroline County dropped 82%, Talbot decreased 32%, and Dorchester went down by a quarter.

Moreover, said Knapp, the figures are misleading in the few counties that saw an increase in transfer tax revenues.

Montgomery County increased 1%, but still posted less than half of its transfer tax revenue in 2006. Queen Anne’s County rose a dramatic 212% because a few developments opened.

“But it’s still significantly down from the high of the housing market,” Knapp said.

Of Maryland’s 24 counties and Baltimore City, 18 (including Baltimore City) charge a transfer tax. Most rates are between 1 to 1.5 percent, although Montgomery County has a sliding scale that tops out at 6 percent.

In addition, the state of Maryland charges its own .5 percent transfer tax. These funds go to preserve open space and farmland.

Property taxes are a larger source of income for counties. From fiscal 2006 to 2010, property tax revenue rose almost $2 billion, from $4.3 billion to $6.2 billion.

The state is taking the decline in housing prices into account, said Assessments and Taxation Director C. John Sullivan Jr. Last year, taxes were reduced on 600,000 properties, he said.

The department is likely to reduce assessments on another 600,000 properties during the next general assessment for the three-year cycle that begins in July 2011.

In 2010, the number of petitions for review from property owners was 70% higher than in 2009. But, Sullivan said, the Homestead Tax Credit — a state cap of 10% on taxable assessment increases per year on a primary residence — softens drastic changes in property values.

All counties except Calvert, Montgomery, Somerset and Wicomico have caps below 10 percent. Many have not increased property tax rates. Said Sullivan, “When someone appeals the assessment and gets a reduction in those areas [with caps], it makes no sense dollar-wise. They don’t get a benefit at all.”

Joseph Wagner, special assistant to the department director, said, “When property values increased statewide, homeowners were protected by the Homestead Credit and they did not pay on those high values.

“The flip side is, when property values then declined, they didn’t get the benefit of the reduction because they never paid on the increase,” said Wagner.

Neil Bergsman, director of the Maryland Budget and Tax Policy Institute, said property tax is critically important revenue for counties and Baltimore City. It is a minor revenue source for the state, and is dedicated to debt service on state bonds.

The housing boom enabled the counties to build up a revenue cushion. As the housing downturn continues, that reserve will be depleted.

“So far, the big problem for the counties has been the transfer tax, which has collapsed,” said Bergsman. “They’ve been knocked down by the [personal] income tax shortfall, and just when they’re ready to get back up, the decline in property tax will hit them in a couple of years.”

Counties are already beginning to see a decline in property tax revenue. The first county to do so is Worchester, whose property tax revenue declined $3.9 million from FY 2009 to FY 2010, said Knapp of MACo.

“For the counties, the end of the bubble is in sight,” said Knapp.