It's usually hard to pick much of a fight in Annapolis over homeownership. They're for it. But battle lines are being drawn over a proposal to change Maryland's system of property-tax collection in an effort to lower the cost of settling a home purchase and make it easier for first-time buyers to afford a home.
The bill, sponsored in the Senate by Sen. Nancy L. Murphy, D-Baltimore County, would have the counties and Baltimore City collect annual property taxes in two chunks, one every six months. The subdivisions now collect a full year's taxes in advance.
For homebuyers, the change would end a system under which they have to pay up to 14 months' property tax in advance at closing. Instead, they would have the option to pay only six months' tax at closing, slashing settlement costs by about $750 for a buyer of a $100,000 house in Baltimore County.
Settlement costs include state and local transfer taxes, recordation taxes and the advance payment of property taxes. They also include such private-sector charges as loan origination fees, or points, paid to the mortgage lender; advance payment of homeowners insurance premiums; and the cost of a home inspection, among other charges.
Proponents say the proposal would also benefit senior citizens who have paid off their mortgages, by allowing them to pay their taxes in two payments six months apart rather than all at once. The bill is scheduled for an initial hearing in the Senate Budget and Taxation Committee Friday.
But lobbyists for counties, which like collecting their property taxes a year in advance and investing the money until it's needed, and for the mortgage banking industry say the bill is all blue smoke and mirrors. The tax liability for that $750 doesn't go away -- it just gets put off. And they say the long-term cost of the tax break for consumers outweighs what homebuyers will gain.
The ultimate question: Will it save consumers money or won't it?
"We are a country that believes in homeownership and [the current system] makes it more difficult," Senator Murphy said. "I just feel it's part of the American dream."
Senator Murphy said Maryland's closing costs are among the highest in the nation, and the state and local tax systems are largely to blame. The cost of closing on a $100,000 home in Baltimore County approaches $7,000 -- not including the down payment, she said.
"When you consider that you have to have a sizable down payment, this is really a substantial hit," she said. She said settlement costs in Maryland are more than double the cost of closing on the same house in Washington or Virginia.
But Maryland Association of Counties lobbyist Charles "Chip" MacLeod say it's not quite that simple.
"There are other ways to do what the Realtors are saying without turning the tax system upside down," he said. "I say this is smoke and mirrors because it's really a deferment, and tax deferments always ultimately cost people more."
Mr. MacLeod said that the counties' lost interest and administrative costs will add up to millions of dollars, money that will have to be made up somewhere. Also, the fact that Maryland subdivisions collect their property taxes in advance helps bolster their bond ratings and cut their cost of borrowing, he said.
The bill calls for homebuyers to pay the counties the interest lost by slower payment of taxes, as well as administrative costs, Mr. MacLeod said, adding that consumers will pay those fees and still have to pay the taxes eventually, thus coming out poorer in the end.
"It's lovely in concept," said George F. Cormeny, a senior vice president of First National Bank of Maryland. But he said the relief would come dearly: "You would pay $200 for the privilege of deferring $500. It's kind of usurious."
Mr. Cormeny said that Maryland mortgage lenders have benefited from the current tax system because it makes Maryland mortgages more attractive to buyers in the mortgage bond market. If the tax law changes, that could make a $100,000 loan worth about $250 less, forcing the banks to make up the difference in the loan origination fee.
But Senator Murphy argues that other states manage to get by without collecting taxes in advance, and that Maryland counties can simply learn to do the same. And she derides the idea that consumers can't decide whether taking advantage of the tax deferment is in their own best interest.
"I think we have to make it optional, and let people decide whether it benefits them," she said.
"This helps the little consumer leverage himself a little better to get into a house," said Delegate Henry R. Hergenroeder, D-Baltimore, who plans to introduce a similar bill in the House of Delegates. "This is a people bill. All the money goes into people's pockets."