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December 27, 2011

Homestead credit Q&A

So many questions came in during our live-chat Q&A about the homestead credit last week that we couldn't get to them all, but I didn't want to leave people hanging. Ditto with folks who emailed questions to Midday with Dan Rodricks at WYPR that didn't get asked on air.

So here they are, with my best effort at answers.

Two people touched on a similar theme. Margaret from Baltimore asks: "What would prevent thousands of families from fleeing the city to the counties which not only have lower tax rates but also will continue to offer the homestead cap that protects homeowners?"

And Amir from Baltimore says: "These stories are great. I'm a renter and want to find the right place to maybe buy in the city. If Baltimore residents are stripped of the Homestead credit – what incentive is there to move and live for many years?"

I don't think the homestead credit would disappear in the city and remain in the rest of the state. A successful court challenge, for instance, would undo the law statewide. I doubt the General Assembly would get rid of the program on its own -- alterations are more likely -- but there too the homestead credit would probably be dealt with on a statewide basis.

Quick reminder: The homestead program caps any increases in the amount of assessed value a homeowner is actually taxed on at 10 percent statewide, allowing jurisdictions to set their own caps lower. Baltimore's is 4 percent, like Baltimore County's. Carroll, Harford and Howard counties are at 5 percent. Anne Arundel is at 2 percent.

Some counties and cities are at 10 percent -- Annapolis, Sykesville and Montgomery County, to name a few -- but most are outside the Baltimore region. So while Baltimore could raise its cap to 10 percent, it has generally been proposed as part of a plan to decrease the city's overall property-tax rate in order to increase population. Here, for instance, is a 2007 proposal from a city blue-ribbon committee that recommends such a move.

That brings us to a question asked by Dave from Baltimore: "If the cap was set at 10% in the last decade, how many thousands more homeowners would have fled the City? What with the ballooning assessments from the real estate bubble."

If the cap had been set at 10 percent in the last decade, the city could have aggressively decreased its rate during that time, a broad-based form of tax relief.

The sticking point is this: Would a substantial decrease in the rate encourage more people and businesses to move to the city, as advocates have argued? If so, and if that benefit carried over into the housing bust, then hooray -- thorny problem solved! If not, the city would have seen a substantial drop in revenue as home sales slumped, something it can ill afford.

This is not easy stuff. It's one of those "if there were a simple and guaranteed fix, we would have done it already" situations.

But as more people press the city to find a way to drop the property-tax rate, it seems logical to examine the entire system to understand how it's working, if it's reasonably fair and whether any changes could help the city lower the rate.

If everyone likes the idea of keeping a lid on taxes but dislikes the side effects that have come with the homestead program (like neighbors paying dramatically different tax bills for very similar homes), then the solution might be to look at alternatives and judge whether they've worked better.

There's Massachusetts, for instance, which since a taxpayer revolt in 1980 has limited the increase in total revenue local governments can raise from the existing property-tax base to 2.5 percent a year. (Localities that want to push past that limit must get the OK from voters.) Closer to home, Washington, D.C. doesn't tax the first $67,500 of assessed value on principal residences, a policy that doesn't cap increases but does decrease the total amount of tax paid.

On a related note, Laura from Remington asks: "What do you think of Adam Meister's argument against raising taxes on current city residents? 'A change in the homestead property tax credit rate is not going to get new people to move to Baltimore, but it will drive current residents out of Baltimore.' I would call Meister the 'homestead muckraker.' With his experience as a homestead muckraker, the Sun should hire him to write reports on the homestead credit. One, he understands basic economics and tax policy; and two, he broke the story of Conaway abusing the credit."

I don't get to hire anybody, more's the pity, so all I can do is address your question: Wouldn't changing the homestead program just make people leave?

As noted above, I think it depends entirely on what the change might be and whether you drop the property-tax rate at the same time. What economists say the city could really use is tax policy that doesn't push people out and also doesn't discourage newcomers from moving in, something that's easy to talk about but obviously less simple to put into practice.

It's long and I'm sure some readers skimmed it, so I'd better point out that the story Scott Calvert and I wrote about the homestead program does not boil down to, "Scrap the credit, raise taxes on thousands!" We pointed out that the program is leading to far bigger disparities and costs than its creators in 1977 imagined. Maybe voters think that's still better than any possible alternative. But then it's an informed choice, which is definitely better than the alternative (an uninformed choice).

Next question! Ron Levine asks: "My mother in law is 84 years old and her income from various sources is approximately $8,000 per month. She lives in a condominium in Baltimore City and her current property tax is $3,500 per year. Is she eligible for a property tax reduction or a homestead property tax credit?" 

If her income is $96,000 a year ($8,000 per month), then I don't see that she's eligible for the low- to moderate-income tax reduction program known as the homeowners' credit. That caps tax bills for households with income of no more than $60,000 a year, with a net worth of less than $200,000 (not including the home and retirement accounts). But you can always call the state Department of Assessments and Taxation to find out.

But she is eligible for the homestead credit, since she lives in her condo. "Eligible for" isn't the same as "actually getting a tax credit from" because it all depends on whether she's seen assessment increases of more than 4 percent since she moved in -- or, more precisely, since her second July 1 in the condo.

Check her address here (the Sun's searchable database) or here (the city's online look-up site) to determine whether she's receiving a break from the homestead. If not, look to see if her home is listed as a principal residence. If it's not, you'll want to contact the state Department of Assessments and Taxation to get that fixed so she will be listed as eligible for the credit going forward.

Finally, make sure your mother-in-law has applied for the homestead credit. Everyone must, and the deadline for people who owned their home before 2008 is Dec. 31, 2012. (Newer buyers have had to apply right away.) Those who don't apply lose the credit.

Susan from Baltimore asks: "If the City raised the homestead tax credit to 10%, effectively raising taxes on thousands of homeowners, exactly how much new revenue would come in? Would that revenue continue indefinitely or would it eventually phase-out, prohibiting the possibility of a sustainable overall tax cut?"

That's a great question, Susan. The total amount of additional revenue -- and how long it would come in -- depends on what happens to home values. The city would rapidly burn through the amount shielded by the homestead cap if assessed values keep falling in a big way. If values stabilize, it would take longer. If values begin rising again, even longer. 

The idea that a tax-rate cut could be sustainable -- despite what happens to the wider housing market -- is based on the argument that a sufficiently lower rate would prompt population growth, more rehabbing and an increase in property values. Steve Walters, the Loyola University Maryland professor who has suggested the city drop its rate in half, points to cities in California and Massachusetts that were worse off than Baltimore before those state's tax revolts and since then have prospered.

There's debate about whether this is possible here, and in the here and now. Fabulous for the city if it can break through the Catch-22 of, "We don't have enough taxpaying residents so we have to have a high tax rate to cover costs, but the high tax rate is keeping us from getting more taxpayers." Horrible, though, if dropping the rate does nothing but pummel revenues and make even more people decide to leave.

The next pair of questions are related:

Pat from Baltimore asks, "I appreciate that you worked hard on the numbers for the city, but I don't know what you stopped there. Specifically - why is it unfair for long-term residents of Baltimore City to get the Homestead, but not for residents of the rest of the state?"

And a questioner from Aberdeen says, "This was great journalism that we need more of. Thanks. You write, 'Critics say it discourages newcomers from moving to Baltimore.' Isn’t that the case with homebuyers in any MD county? Any new buyer will have to pay taxes based on the new assessment."

Pat, if the homestead is unfair in the city, it's unfair everywhere. The story wasn't trying to suggest that the unfairness varies depending on where you live, but rather that the homestead program has had an outsized effect in the city because of its high tax rate. Anne Arundel, with its 2 percent cap, is the only jurisdiction in Maryland with more money shielded from taxation by the homestead program than Baltimore.

That's also the answer to the Aberdeen questioner's query -- the homestead disparities matter more in Baltimore than they do in places with lower tax rates. The dollar amounts are larger on an individual basis, i.e. the homeowner paying a third more than what his next-door neighbor does. They're also larger collectively, again with the exception of Anne Arundel, which has a substantially lower tax rate but also a lower homestead cap.

Matt G. asks, "Based on my dealings with SDAT and the city's Department of Finance, it seems that Finance has to wait to receive confirmation from SDAT that a house is not owner-occupied before they can reissue a bill with the revoked homestead credits -- which often delays the process by months. Has there been any talk among either SDAT or the city's Finance Department as to ways the process can be streamlined?"

None that I'm aware of, but we also didn't specifically ask that question. I'll put that on my list. Thanks for the suggestion, Matt.

Chappy10 asks, "Is there a reason the Sun did not release its list of 'double dippers'? I note that you did talk to some people who were wrongly receiving the tax break, and you mentioned them by name, but I'm surprised you didn't make the full list public. It seems like that is public information and should be made public. I am wondering if I am missing something?" In a later comment, chappy clarified:

I think it would be good for the Sun to release the list it submitted to the city/state for a few reasons: 1) Gives notice to some of these people so they can perhaps fix the problem themselves--the best solution to such problems, 2) Transparency to your readers by letting them know "the story behind the story" or at least how you're arriving at the number of "double dippers" you report in the story, 3) It's public information and it would be generally good if it were public, 4) It would show that you stand behind your reporting and the methodology you used to arrive at that number and, lastly, 5) it would comport with the Sun's stated motto of "Light for All" by shining a light on financial matters at a time when the city needs money to do things like keep rec centers open and keep firehouses fully staffed.

Far from shaming people, I think posting your "working list" would put people on notice. If your methodology was simply to cross-reference last names, I'd be willing to bet a lot of my family is on the list because virtually all of us live in Greektown and have similar names due to the common practice of naming children after grandparents.

The big issues for the city, it seems to me, are the fact that the Homestead Credit isn't capped or means-tested, producing regressive consequences. Plus the fact you lose your HC if you move, even if to another city house.

Thanks for clarifying, chappy -- that was helpful.

We didn't publish all the names (online or in print) for the same reason we didn't publish all the names of owners with vacant properties getting the homestead credit, something we wrote about in an earlier story. We think it's important to give people a chance to comment and explain before their name is associated with even the possibility that they're getting an undeserved tax break.

I get your point about fair notice. The state's process is to send a letter to a property owner it believes is getting an unwarranted homestead credit, giving the owner 30 days to explain why he or she is actually eligible. So owners should all get notice and a chance to say, "Hey, wait, that other John Q. Public is my grandfather."

Both the city and the state, by the way, say they did similar searches for double-dippers but hadn't yet taken the next step of contacting them at the point that we inquired.

Regarding your transparency point, here's more from colleague Scott Calvert, who did the heavy lifting on the double-dipper story, about how he tried to avoid casting too wide a net:

What I did first was look for repeat names. From there I excluded common names, unless the mailing address for both properties was the same. It's a judgment call, but the more common the name, the more likely I was to skip over it. That extended to names like Joseph T. Smith Jr. -- it might well have been the same person, but odds were decent enough that they were separate people that I deemed it not worth the time.

Once I had my list, I went deeper to cull "false positives." For each pair, unless there was an address match, I actually went into Nexis to see if it connected both addresses to a person with that name, age, etc. I'd also look, in the case of male names, to make sure Junior didn't own one home and simply have a connection to the address of Senior. I'd actually look for ownership of both homes by the same person if there was any potential for junior/senior confusion.

In many cases there was dual ownership of at least one house. I excluded all such cases where the names seemed to be of the same gender. That obviously didn't mean those credits were valid, but it was the best way to exclude non-spouse co-owners (though I realize in this era of same-sex marriages that doesn't always apply).

Where one or two of the houses had co-owners whose names indicated they were indeed of opposite gender, I didn't just assume they were married and therefore ineligible for more than one credit. I checked Nexis to see if their addresses matched and also to see if their ages were close or at least in the same generation -- reasoning that that raised the likelihood they were married. But I also frequently went to and looked up deeds because deeds often identify couples as husband and wife.

Hazel Laing asks, "More a rhetorical question I guess--but why were you able to gather, analyze, and suggest applications for the data but the folks we pay to do this seem unable to do so?"

Sometimes it's simply how you're looking at the data. If you have it in a form that's fairly easy to query, you're more likely to look at it from a variety of different angles. We're using Excel and Access, which are well suited for analysis.

The city's new billing integrity program is designed to take a closer look at all sorts of tax credits, so I suspect staffers will be doing analyses that the city has never or rarely done before.

An anonymous questioner asks, "Why doesn't the City do its due diligence (you two were able to find these double dippers) and research before extending tax credits to people already getting them? It's harder to back track. Is that possible?"

The homestead program is actually run by the state, not the city. So while the city could in theory check on every recipient, it wouldn't be able to start until after they're already in the system.

One thing that should help is a 2007 law requiring that homeowners apply for the credit. The application requires Social Security numbers so the state can verify that homeowners aren't receiving the break on any other property and check that they're using the same address for their tax returns and driver's licenses.

The deadline for longer-term owners isn't until the end of next year, though, so it won't be until the following tax year -- beginning July 2013 -- that credits will disappear for those who don't apply.

Mike says, "Hi Jamie. As you know I have been complaining about this for years but do not have the money to take it to a court fight. Do you know how many people rent in the city? These people get no relief at all. Is it fair that tenant should pay more taxes than home owners?"

The Census Bureau says Baltimore's homeownership rate is about 51 percent, so there are tens of thousands of renters. 

It's not uncommon for property-tax policies to give homeowners a break not extended to other types of residential property owners, including landlords. But it's true that higher taxes affect renters. Landlords will of course try to pass their costs on to their tenants, or else there's little point in renting out their properties. (Some people are renting out their former homes in hopes of waiting out the housing market, so they might be willingly doing so at a loss. But that's not a long-term business model.)

Lili says, "My property is a double lot, but my house has a specific number. I was denied the tax credit because my official address seems to appear as a second residence, when in fact, the 'first' residence is my side yard! I tried to appeal online, and never heard back."

Frustrating! I suggest you call the state Department of Assessments and Taxation and explain the situation by phone. Hopefully if you talk to someone, it can get cleared up. Good luck.

Michael asks, "If the idea is to free the homeowner from the tax burden while they're living there, shouldn't the city get something back from the sale when the house sells one day?"

The city does get transfer taxes when a home changes hands, but that's true whether the property had a homestead credit or not. One of the reader ideas in this blog post was to change the program so the city would take a cut at sale.

Rebecca from Baltimore says, "In the early nineties, I purchased a home in the neighborhood below Federal Hill, next to a hardware parts wholesaler called Leonard Jed Industrial Supplies. I could not have anticipated that years later, a developer would persuade Leonard Jed to move, get the city to change the zoning, and then build townhouses originally priced at a million dollars apiece! (They've since been dropped to between 600 and 700,000.) Speculators all over the city have been buying low priced houses and flipping them, jacking up the cost of living for many of the longtime and moderate income residents. Where's the fairness in that?"

Gentrification has always been a strong argument in favor of a program that prevents tax bills from skyrocketing.

If the housing market is rapidly lifting all values, a cap on overall revenue collection (a la Massachusetts) would protect homeowners. But if only certain pockets are seeing big spikes, or they're seeing far bigger increases than the broader market, those homeowners would get stuck with spiraling bills unless there is a program in place to address that.

So it's really a question of what people want to accomplish. You can have rules capping total revenue collection and a separate cap at the individual homeowner level. You can design tax limits based on income, as the homeowners' credit does. You can change the system entirely, as some readers have proposed, or do nips and tucks or do nothing at all.

Here's to more discussion!

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (0)
Categories: Homestead Property Tax Credit, Property taxes, Q&A

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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.
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