Predicted tax cap ruin unrealized

March 14, 1994|By John Rivera | John Rivera,Sun Staff Writer

The day after Anne Arundel County voters overwhelmingly approved a property tax cap in November 1992, government officials predicted financial ruin. Employees would be laid off, services cut, libraries closed, recreation programs scaled back.

But as they prepare a budget for the second fiscal year since then, county officials concede the cap -- which limits the growth in total property tax revenue to 4.5 percent or the regional rate of inflation in January of each year, whichever is lower -- hasn't had the devastating effect they predicted.

But they also point out that the January 1993 rate of inflation for the Baltimore metropolitan area, the rate used in the current budget, was only 2.9 percent. The rate for January 1994, which will be used in the next budget, was 1.3 percent.

"If we were in a period of higher inflation, you would see some effects of this pretty quickly," said County Executive Robert R. Neall. "When you really run into trouble is when your income is capped, but your expenses aren't capped."

Mr. Neall also takes credit for dampening the tax cap's effect by cutting expenses through reorganizing and consolidating county government and reducing the work force by 10 percent.

"In dealing with the effects of tax cap, we're somewhat victims of our own success, because we did take some quick, effective action," Mr. Neall said. "Some of the dramatic impact of it was lost because we were on a track to reduce the government by 10 percent anyway. The only thing the tax cap did was accelerate it."

Robert C. Schaeffer, author of the tax cap, scoffs at the fears of officials and predicts that the best is yet to come for county homeowners.

"The cap has worked fine, and it's going to benefit people even more as the cumulative effect takes place," he said. "I notice in the newspaper weekly some official uses the tax cap as an excuse for something. If you include all the things they say they can't do because of the tax cap, it would add up to hundreds of millions of dollars. I find this quite humorous."

County budget analysts saw the tax cap as cause for concern because it threatened the county's most important, and most flexible, source of revenue. Property taxes accounted for 40 percent of Anne Arundel's $663 million budget this year. Before the tax cap, they could easily be raised or lowered, depending on the government's financial needs in a particular year, said county Finance Officer John Hammond.

For a flexible revenue source in the future, the county will have to turn to the income tax, which is currently set at 50 percent of the state tax but can be raised to 60 percent.

For the 1995 fiscal year, which begins in July, the county's revenues from property taxes can rise about $3.5 million to match the 1.3 percent inflation rate. Taxes for new construction, which is not included under the cap, will add an additional estimated $3.5 million.

Because property assessments have increased more quickly than the rate of inflation, the tax rate of $2.38 per $100 of assessed value, which was lowered by 8 cents in May by the County Council, will have to be lowered again this year, Mr. Hammond said.

But because of lower inflation, the sting of the tax cap will be less next year than this. In the current fiscal year, county officials estimate they lost $9 million in revenue because of the tax cap. In the next fiscal year, the county will be unable to collect $2.5 million to $3 million in property taxes because of the cap.

Mr. Hammond also is lamenting the loss of $5.5 million in annual revenue because the County Council reduced the tax by 8 cents in May instead of the 4 cents Mr. Neall wanted .

That cut in the tax rate reduced the revenue base, the starting point for future revenue calculations, Mr. Hammond explained. Because of the tax cap, that figure can never grow by more than 4.5 percent.

For now, Mr. Neall says he can live with the tax cap, but he would like to see its authors make a correction: Exempt commercial and industrial property. Shortly after the cap was passed, the county's law office issued an opinion that it applied to commercial property because the language in the charter amendment did not specify residential property.

That means that some of the biggest beneficiaries of the tax cap are not homeowners, but large commercial property owners, such as Baltimore Gas and Electric Co., which owns the Brandon Shores power plant, and potentially Redskins owner Jack Kent Cooke if he builds his stadium in Laurel.

"It'll be interesting to see what kind of position they take on this," Mr. Neall said of the Anne Arundel Taxpayers Association, which spearheaded the drive to approve the tax cap. "If they're really interested in protecting the residential property owner, there should be no problem with it."

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