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December 23, 2011

From different limits to 'land tax,' your fix for the homestead credit

Readers have been sending in ideas for how to change the Homestead Property Tax Credit, replace it or, alternatively, how to change the entire property-tax system. It's been interesting to see, and I didn't want to keep them all to myself.

Some have come in as questions.

"It looks like we have 2 tax credits for homeowners, both designed to protect them against financial shocks from tax spikes: the Homestead Tax Credit, which you've been covering so well, and the Homeowners' Property Tax Credit, which is incapable of being enjoyed by upper income homeowners because it has an income eligibility cut-off," Steve R. wrote during the homestead Q&A this week. "Couldn't we solve the inequities you found and still maintain protections for middle class homeowners (and incentives for them to stay in their city homes) by scrapping the Homestead Tax Credit and strengthening the Homeowners' Property Tax Credit?"

Del. Sandy Rosenberg's suggestion, which we covered earlier in the week, is to keep the homestead program but inject an income element into it so that the annual cap on taxes would vary based on how much a household makes. You could still end up with people in similar homes paying very different amounts of taxes under that model, but those differences would be based on income as well as when the homeowners bought rather than just the latter.

I'll circle back to that proposal -- and reaction to it -- in a bit. (Also: Allegations of class warfare!)

A quick primer on the homestead credit: It sets a limit on how fast the amount of assessed value you're actually taxed on can increase each year. The statewide maximum is 10 percent; many jurisdictions have set their caps lower. Baltimore's limit is 4 percent. Every homeowner is eligible -- it's a tax break for owner-occupiers.

While some reader proposals focus on the homestead program, by itself or as part of an effort to decrease the city's property-tax rate, others say all the attention should be focused on the rate. It's the highest by far in Maryland (though one reader says the difference isn't quite as bad as it appears -- some counties' effective rates are higher than advertised because they add on a lot of extra charges, he says). 

Reader David Meltzer writes, "The only message that an advocate of Baltimore should be sending is that Baltimore property taxes must be HALVED in order to cure its problems. Why foster infighting among us?"

Steve Walters, the Loyola University Maryland professor who wrote a paper recommending that the city cut its rate in half, has an idea for protecting certain homeowners from big increases if the homestead program disappears.

"The alternative would be a state- or city-run tax deferral program that would work like reverse mortgages do," Walters writes. "The poor or elderly could apply for a cap on their annual bill (once and for all, to address the administrative issues raised by Mr. Young), but then any unpaid balance would accrue and be collected once the home IS sold and the capital gains realized."

He adds, "This approach would eliminate an illegal and inequitable policy, could fund more broad-based city tax relief, seems administratively manageable (since the tax man already monitors closings to collect transfer and recordation taxes, etc.) and provides long-term residents needed protection against cash flow problems resulting from the city's high rate."

Rick Gilmour from Towson writes, "No longer a citizen of Baltimore City (I moved out to achieve lower county taxes), I nevertheless learned a great deal about homeowners' taxation while living in Baltimore for some 7 years." He offers four steps to get to a lower tax rate "by spreading the cost of city services to all who use them":

1) Convert basic city services, like public safety and trash collection, to fee-based services, just as water and sewer are now fee based.

2) Impose those fees on all property parcels in the city, governmental, not-for-profit, charitable, and religious property owners included. Where an entity (such as the federal government) cannot have those fees "imposed," then merely deny them the services unless they pay.

3) Do not cut any deals with any property owner as regards these fees. No reductions for anybody!

4) Vastly streamline the process by which the city can acquire title to, and then dispose of, real estate parcels that are in arrears on water & sewer charges and the basic service fees. Then use that streamlined process to get properties out of the hands of deadbeat owners.

Bill Marker, an activist from Pigtown, proposes a statewide overhaul of the property-tax system -- rather than the homestead program -- via one uniform rate. He calls it the "One State, One Rate" plan.

"Property taxes for the whole state would go into a single, state-wide fund, presumptively to be distributed to the counties (and Baltimore City) based on their percentage of Maryland’s population," he writes. "Setting the State-wide rate at .8686/$100 would raise the same total amount as currently raised, and reduce Baltimore City’s $2.268 rate by nearly 62%. Like eliminating the homestead tax credit, the city needs State action to establish the One-State, One Rate property tax; fortunately, it would benefit nearly 55% of Marylanders, including the citizens of Baltimore County."

Joshua Vincent, executive director of the Center for the Study of Economics in Philadelphia, suggests an entirely different system -- a "land value tax" rather than a property tax.

"The land tax would remove the penalty for reinvestment in construction by exempting buildings from tax,"writes Vincent, formerly of Locust Point. "It would also remove much of the need for the Homestead Tax Credit."

Tracy Gosson, the former Live Baltimore director who runs her own consulting firm, has a recommendation for how the city could solve the problem of people saying they had no idea they were getting homestead credits on homes that aren't their primary residences: "put a red insert in tax bill w rules & penalties" and "promote lawbreakers they go after 2 show there actually is accountability. lets starts w scofflaw politicians." (Suggestions via Twitter, thus the shorthand.)

Back to Rosenberg's cap-based-on-income proposal:

Reader Martin Kirchhausen thinks it's a "terrible" idea because the property tax is based on property values and "bears no relationship to income."

"I think a much better approach would be to limit any increase in the Homestead credit to a fixed amount or percentage while at the same time not allowing an increase in the credit for any homeowner whose current credit exceeds a set amount or percentage until such time as the amount reaches a predetermined acceptable level," he writes.

Shulamit Gartenhaus of Baltimore also wrote in but to cheer Rosenberg on. She fits the demographic that is generally thought of as prime homestead proponents -- nearing retirement -- but is no fan of how the credit's effects are playing out.

"I always thought I was paying much more taxes than my neighbors," she said in a letter to the editor. "I went online, and saw for myself. Some of my neighbors are getting a whopping 46 percent credit for a house assessed $20,000 more than mine, while I get a measly 24 percent credit. I can't figure it out because I bought my house long before they did. I feel even worse for those of my neighbors who are getting no credit, and I know they can't afford the high taxes. This is certainly not a fair system."

One final income-related thought: Tony Johns from Upperco wrote in to politely suggest that Scott Calvert and I are jumping onto the class-warfare bandwagon because we pointed out that the largest homestead credits are, well, very large and are going to well-do-to owners such as Constellation Energy's Mayo Shattuck.

"The current tax system has already chased the middle class away from the city," he writes. "Do we really want the rich people to leave too?"

Homestead credits for the wealthy wasn't the major thrust of the story so we didn't spend a lot of time on it, or else we might have thought to make clear that the next-door-neighbor disparities in tax bills that you find on rowhome streets are playing out among the mansion set, too.

The homeowner directly across from Shattuck's family, for instance, pays about $3,900 more than they do even though his home is assessed at $700,000 less. That's because his homestead credit shaves about $1,900 off his taxes this year while the Shattucks' credit knocks more than $22,000 off theirs.

Thanks for weighing in, folks! Apologies if you sent me an idea and I didn't include it here -- as you can see, there have been a goodly number and I might have missed one in the scrum. (That's also why there was no Thursday blog post. I've been working on this thing in what passes for my free time since Wednesday evening.)

Thoughts, arguments, other ideas?

Oh, and I will be getting to at least some of the questions that didn't get answered during the homestead Q&A and on Midday with Dan Rodricks, but it looks like that will have to be done next week. So much to do, so little time.

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (14)
Categories: Homestead Property Tax Credit, Property taxes


Change it for the worse and I'll take my tax paying butt out of this city in a second. Is that what they want to achieve? What they gain in property taxes they'll lose in income taxes, fees, etc and census. Unintended consequences will kill ya.

Yes, that is the danger. Unfortunately, that's been happening under the current property-tax system for years (people leaving, I mean), which puts the city in a tough position.

simple...allow the credit to continue when a property is sold..NO RESET. fair and balanced. Should have been set up that way to begin with except bureaucrats need their daily fix.

For the 2008 reassessment, my assessment tripled. Then for the most recent tax bill, my assessment dropped to about double what it had been for the 2007 tax bill. And according to your database, I am receiving a homestead tax credit of 46% on my house in Charles Village.

Clearly, Charles Village became trendy during the real estate bubble, and without the homestead tax credit, I would have paid a lot more, not only to the City and State but to a worthless benefits district that mainly provides us with trash cans throughout the district.

What this illustrates is that the property tax is a tax based on what others are willing to pay for a property. Assessment is an estimate of exactly that. So if your neighborhood becomes very trendy and you are a long time resident (and I have had my house since 1970), you are going to be penalized when others decide to move into your neighborhood because you and others were there to turn it into a more desirable place to live.

Yes, there is an element of unfairness in the homestead tax credit, but in my view, the alternative is worse. Do we want people to pay much more just because a neighborhood becomes trendy or because there is a real estate bubble? And do we want our less affluent neighbors forced out because their real estate taxes become unaffordable?

With the present homestead tax credit, those who pay a lot are those who paid the inflated prices during the bubble. They knew what they were getting into when they bought their houses.

So I say that we should keep the homestead tax credit as it is. And let us stop giving out multi-million dollar tax breaks to politically connected developers. That is the real unfairness in the system. We do need to lower the City's vastly excessive tax rate, but penalizing long term homeowners is not the way to do ti.

The homestead issue is not an issue at all and should be left as is. Those who received the credit moved into a developed area before it was developed and therefor did not anticipate the larger bill. Those who don't receive the credit moved into an area after it was already deemed a good place to live and probably were anticipating the bill. There are certain benefits to recognizing a trend and moving accordingly, one of them being that you will pay less on tax bills. All the whining about fairness is ridiculous, the people who lived there before the higher assessments were taking an enormous risk that the area would not improve, and with risk comes reward.

Finally, Del. Sandy Rosenberg needs to realize this is a state law and although Baltimore City is in dire need of milking our small number of lower/upper middle class residents for every penny, I don't see any of the counties getting on board. I hope he tries just so he can fail miserably and we can close this issue for good.

I like the one state, one rate. but can see how rural counties would be opposed b/c they would get less services for their taxes than more urban areas....

I applaud the land value taxation option. It gets the incentives right, shares within the community the value the community creates, and avoids discouraging those who want to improve their land with nice houses, good maintenance, energy-saving technologies. It nudges those who are mostly land speculators to find something useful to do with themselves, and makes communities better places to live and invest.

Which part of this doesn't work for you?

LVTfan, you're not addressing that question to me, are you? I'm not weighing in here -- I'm just sharing.

Jamie -- I didn't mean you individually: I was asking each of us to think about what is and isn't in our own best interests and in the best interests of our communities and society as a whole.

What works? What policies benefit a few at the expense of the rest of us? What works to create prosperity for all of us?

Aha, I see. Thanks for clarifying!

RE: the land tax,

Henry George and Thomas Paine would approve. Both held a Lockean natural rights application towards one's self, his labor, and the fruits of that labor, but essentially argued that the ground itself belonged to all, since no one could lay first claim to it. As such, all users of land should pay a ground rent into a general, public fund. Paine actually advocated those funds go to essentially create a welfare state that would have arguably been more generous than the one we have today.

George introduced an elasticity of supply component to it to argue that land was the best thing to tax, because since you couldn't alter the supply of it, there was no dead-weight-loss, or excess burden of taxation. In other words, you tax labor, you get less of it, you tax improvements on land, you get less of it, but you tax land, unless you're filling in the ocean as they have in Japan and the UAE, the supply is perfectly unchanged. The variance of land values builds in an automatic progressive nature to it as well.

I think it is a good idea to have some kind of protection in place for home owners. Prices are changing so quickly with house that home owners should be protected in some way.

I'm skeptical of the Walters paper, since it relies on two case studies that may not actually support their main argument (that you can massively cut taxes and have a thriving city). Boston had to get a massive state bailout to replace their lost revenue, and San Francisco's cut came right as Silicon Valley was taking off. Both are huge confounding factors that make their case much less convincing.

Somehow this tax reminds me of a tax we have to pay here in New York City, well, on the level of ridiculousness anyway... For any apartment sold over $1M, you have to pay an additional mansion tax. This used to apply and make more sense during a time when one million dollars was actually worth way more than what it is today. In our days, with the majority of apartments in Manhattan selling for above that amount, it's just an extra tax that is ultimately paid by upper middle-class folks, and not the super-weatlhy who the tax was originally aimed towards.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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