A Matter of Law: Is Rehrmann's Property-Tax Ploy Illegal?
Editorial Board
1997-08-01
It is a rare day indeed when this journal opposes a tax cut, a rarer one still when it actually suggests an increase. But Harford County Executive Eileen Rehrmann's proposal to do away with the state property tax prompts this response.
It is, of course, entirely natural for gubernatorially aspiring politicians to dream up election-year gimmicks. And this, to be sure, is one of them. It is a tax "cut" that, by definition, cannot be any such thing. The money raised by the property tax is dedicated in its entirety to paying the state's debt. The debt must be paid under the state constitution. It cannot not be paid. If the funds do not come from the property tax, they must be found some place else - period.
The state property tax is 21¢ per $100 of assessed property value. This fiscal year, it will bring in $238.1 million.1That's a handsome sum. But the state must recoup more. Before conservative readers start canceling their Calvert subscriptions, an explanation is in order. The state's debt-payment obligations for fiscal 1998 will be $423.5 million.2 While every penny of state property taxation goes toward the debt, it is nothing like enough. The state must this year come up with an additional $185.4 million to make good. This money, under the constitution, must be found. It is a matter of the "full faith and credit" of Maryland.
Where it comes from is the state general fund, where it is conveniently hidden from taxpayers' eyes. Elimination of the property tax would simply mean that all debt-service funding would have to be taken from the general fund. As such, the sum would be billed to taxpayers via their income-tax returns, where it could not be singled out as an object of reproach.
When she announced her plan in late November, Mrs. Rehrmann made much of her prop for the day - an enlargement of senior Clinton E. Marshall's $78 property tax bill.3 Yet, if Mr. Marshall does not get such a bill annually, assuming he is still working, his income-tax bill will simply be larger. In fact, Mr. Marshall's seventy-eight bucks won't even cover his share of the new Ravens' stadium, let alone all the other bond-funded handouts made by this state. Factoring in the 45 percent interest accrued over the lifetime of most revenue-raising bond issues, Mr. Marshall will pay about $125 for the stadium. As will every other taxpayer in Maryland on average.4
But here's the thing: Each time he gets a property-tax bill, Mr. Marshall knows whom to blame - profligate decision makers in Annapolis. On the other hand, if, absent the property tax, his income-tax bill is simply increased commensurately, he is unlikely to realize it. Fluctuations in income taxes are expected - so unnoticed.
Far from abolishing the property tax, Annapolis should up it to the rate necessary to cover the entire cost of annual debt service. This idea was raised by the assembly's Department of Fiscal Services (DFS) in 1996 - and utterly ignored.5
Illegal?
However, as originally conceived, the property tax more or less accomplished this. In fiscal 1966, property-tax revenues covered 89 percent of debt service6 Now, they only cover 56 percent. The state last increased the property tax in 1982 (from 20¢ to 21¢).7 Despite shameless borrowing since then, Annapolis has been too nervous to increase the tax, preferring to draw the difference between property-tax revenue and debt-service obligations from the general fund. While this has had the desired effect of obscuring large-scale borrowing from public scrutiny, it has opened the door for an endless fiscal pyramid game. As Delegate Bruce Poole (D-Washington) points out in an outstanding article on page 10, state expenditures now outpace revenues by two to three percent. As a final insult to fiscal prudence, in 1987 the Capital Debt Affordability Committee abandoned altogether the principle of attempting to ensure that old debt was paid before new debt incurred.8 From this point on, there was not even the slightest brake on taking from this year's general fund to pay for last year's borrowing. By fiscal 1997, the cumulative debt stood at $3.1 billion..9
What is required is truth in taxation. The property tax should be calculated at the start of the fiscal year and set at the rate necessary to cover anticipated debt obligations for the same fiscal year. This is how it used to be. (In 1996, DFS calculated that raising the rate to 36¢ would be sufficient.)10Don't believe us? Consider the law, which states flatly, "[T]he Board [of Public Works] shall certify...the rate of state tax on assessable property needed to meet the debt-service requirements during the next taxable year on all the state bonds that the Board anticipates will be outstanding during that year" [emphasis added].11
If this year Mr. Marshall's property tax bill is $78, but next year's is $100, he'll want to know why. Good. That's what the big spenders don't want him to know now.
End Notes
[Top] 1.State of Maryland, General Assembly, Department of Fiscal Services (DFS), Analysis of the Maryland Executive Budget for the Fiscal Year Ending June 30, 1998, Vol. IV (Annapolis, Md.: DFS, March 1997), p. 716, exhibit 1.
[Top] 2. Ibid.
[Top] 3.C. Fraser Smith, "Rehrmann Wants to End Maryland Property Tax," (Baltimore) Sun, November 20, 1997, p. 1C.
[Top] 4.This figure assumes there to be 2.55 million taxpayers in the state. Data derived from U.S. Department of Commerce, Bureau of the Census, County and City Data Book, 1994, 12th ed. (Washington, D.C.: Government Printing Office, August 1994), p. 263, table B, item 125.
[Top] 5. DFS, Maryland's Tax Structure (Annapolis, Md.: DFS, October 1996), p. 63.
[Top] 6.State of Maryland, Capital Debt Affordability Committee (CDAC), Recommended Debt Authorizations for Fiscal Year 1998 (Annapolis, Md.: CDAC, September 1996), p. 9.
[Top] 7. DFS, Maryland's Revenue Structure, Vol. III of the Legislative Handbook Series (Annapolis, Md.: November 1994), p. 88.
[Top] 8.CDAC, op. cit., p. 32.
[Top] 9. Ibid., p. 37.
[Top] 10. DFS, Maryland's Tax Structure, p. 63.
[Top] 11.Annotated Code of Maryland, State Finance and Procurement Article, § 8-134.