'Piggyback Tax' Could Be Fairer for the City and Boost Regional Planning

LESTER M.SALAMON

March 27, 1992|By LESTER M.SALAMON

The Maryland General Assembly appears poised to balance its cuts in state aid to local government with permission for local governments to increase the so-called ''piggyback tax,'' the add-on to state income tax bills that local governments levy to help finance their activities.

But there is a far fairer and more effective way for the state to help local governments:

Require local jurisdictions wanting to increase their piggyback tax to allocate half the proceeds of any increase to a Special Regional Projects Fund that would finance projects of regional significance decided on by local elected officials. To sweeten the pot, the state could agree to match contributions to such a fund out of state resources.

The ''piggyback tax'' as currently structured is widely acknowledged to be unfair. This is so because, though a tax on income, it delivers its proceeds to the jurisdiction where a taxpayer lives rather than to the one where he or she works and earns. Wealthy bedroom suburbs consequently get the benefits of income earned in central cities, even though the central cities must provide fire and police protection and other infrastructure required by the work site.

Baltimore City in particular loses heavily from this system. More than $4 billion in income earned in Baltimore City travels home to surrounding counties, where it pulls down an estimated $112.5 million in piggyback tax revenue for other local jurisdictions. Baltimore City thus functions as an engine not only for the region's economy, but also for its local governments.

More than half of the employed residents of Baltimore County, for example, are employed in the city -- usually in higher paying jobs -- producing $59 million in piggyback tax revenue for the county. If the piggy-back tax delivered its benefits to the jurisdiction where income is earned rather than to the one where the taxpayer lives, Baltimore City would receive enough new revenue each year to lower its property tax rate from $5.90 to $4.15, or 30 percent.

Because of this, city leaders have urged that any increase in the piggyback tax be earmarked for the jurisdiction of work rather than the jurisdiction or residence. Comptroller Louis Goldstein and others have taken exception to this, however, on the not-unreasonable grounds that such an arrangement would be extremely difficult to administer and might induce Washington's city administration to pass its own ''commuter tax'' on the numerous Maryland residents working in the District.

The approach I am proposing would deliver real benefits to jurisdictions like Baltimore City while avoiding these problems. Under this approach, the administration of the piggyback tax would remain as it is at present. The only difference is that half of the funds produced by the increased rates the legislature seems prepared to authorize would go to a Special Regional Project Fund (SRPF) to underwrite the costs of services of regional importance, decided upon by local elected officials in a region. These could include the upkeep of regionally important cultural facilities, promotion of regional environmental quality, solid waste management, alleviation of poverty and even educational improvement.

Not only would this system make it easier to tap the resources of regional taxpayers to help support regionally important activities that now fall more heavily on the shoulders of central city residents, but also it could end up saving money overall. This is so because regional approaches can often reduce overlap and duplication in services, making it unnecessary to have two libraries within blocks of each other or competing recreational facilities.

In the past, our tax structure has been a barrier to such sensible regional approaches. With a simple change in the structure of the piggyback tax, the Maryland legislature could create a powerful new incentive for regional cooperation and begin eliminating some of the gross inequities of the existing system.

Lester M. Salamon is director of the Johns Hopkins Institute for Policy Studies and author of a recent report on the Maryland economy.

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