Tax cap adds to budget problems

County executive expects a decline of $10 million or more in state funding

Anne Arundel

April 13, 2003|By Ryan Davis | Ryan Davis,SUN STAFF

By the end of this month, Anne Arundel County Executive Janet S. Owens must submit a county budget that will be constrained by both a property tax cap and a recession.

Employees are facing a year without any salary increases, open county positions may be eliminated and, as the county staff sorts through proposed levels of state funding, officials say that layoffs are possible.

Owens' proposed budget is due May 1, two months before the beginning of the next fiscal year, and she is expecting at least a $10 million cut in state funding from her nearly $900 million operating budget.

"We are now feeling the effect of the tax cap," Owens's chief administrative officer John M. Brusnighan recently told the County Council.

But budget officials differ as to how much the county's tax property cap is affecting Anne Arundel. And they agree that Anne Arundel is in far better shape than at least some of the other Maryland counties with similar restrictions.

The tax cap - which limits the amount of annual revenue the county can collect from property taxes - prevents the county from dealing with its budget woes by significantly raising the tax rate or cashing in on soaring home assessments.

"If your property values are rising, the cap is not going to allow you to tap into those," said professor Therese McGuire, who specializes in public finance and tax limitations at Northwestern University's Kellogg School of Management.

The debate in Anne Arundel illustrates the tough choices that some counties are facing this year as they try to make up for declining state revenue while facing limits on their taxing authority. Other Maryland counties with property tax caps are Wicomico, Prince George's and Talbot. Montgomery County also has a tax cap, but the County Council can override it.

McGuire said property tax caps started appearing in the late 1970s and have spread, in some form, to parts of nearly every state.

The Anne Arundel tax cap was passed by voters in 1992. It states that the amount of revenue the county collects from property taxes cannot grow from one year to the next by more than the Consumer Price Index (an inflation gauge) or 4.5 percent, whichever is lower. Revenue from new construction is excluded.

In effect, the tax rate must be adjusted each year to ensure that revenue doesn't grow faster than allowed by law.

For the fiscal year that begins July 1, the County Council will be able to enact a minor property tax rate increase of a few tenths of a cent per $100 taxable value. Owens intends to push for such an increase, budget officer John R. Hammond said. (The rate is currently 95 cents per $100 of taxable assessed property value. So a person with a house that has a $250,000 taxable assessed property value pays $2,375 a year.)

The county has not always used such opportunities. Let that be a lesson, said former County Executive Robert R. Neall.

"The county should use each year the full amount of property tax revenue allowed by the tax cap," said Neall, a cap opponent.

Neall's point is this: If the county passes on several million dollars in property tax money one year, it can't just raise the property tax rate and recoup that money the next year.

For example, two years ago the county could have raised the tax rate by about two cents per $100 of taxable property value. That would have created between $7 and $8 million more in revenue that year, this year and the next fiscal year.

With the county facing at least $10 million in state funding cuts, "I suspect this year [Owens] wishes she had that $7.7 million," Neall said.

That unwillingness to raise the property tax is what leads Howard County budget director Raymond S. Wacks to doubt the impact of the tax cap. His county doesn't have one, but he said, "The political imperative to not raise taxes is just as strong as it is with a cap."

County Councilman Ronald C. Dillon Jr., an accountant, said it's not the property tax cap that has the county facing fiscal trouble. It's the county's continual growth in spending while the financial times were good, he said.

During the recent boom, spending by the county has been growing at a rate of about 6 percent per year, county officials said.

"It's going to be hard for our revenues to grow at 6 percent regardless of the tax structures," Dillon said.

Added McGuire, the professor, "That's unsustainable."

If the county really wanted to raise taxes to collect more money, it could raise its income tax from the current level of 2.56 percent. Income tax is not as big a source of revenue as property taxes and it cannot be adjusted with as much fine tuning as the property tax rate can, but it would still produce extra money.

However, the county is not planning to raise that tax, Hammond said. Counties cannot raise their income tax rates beyond 3.2 percent, and Anne Arundel officials don't want to use up that potential source of revenue growth just yet.

"While things may be bleak now," he said, "they may get bleaker."

Montgomery and Prince George's counties, which both have tax caps, have each proposed raising their income tax rates to 3.2 percent, thus using up their last chance at raising the income tax.

In Talbot County - where a tax cap has kept the government so small that the county turned to private groups to finance public swimming pools - Finance Director Angela Lane is thinking toward a year from now.

"What we're hearing," she said, "is next year may be a worse year for the counties."

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