Big rise in Md. tax revenue is partly credited to home sales

July 31, 2005|By Jay Hancock

WHAT'S BEHIND the surprising spurt in Maryland tax collections and what Gov. Robert L. Ehrlich Jr. calculates is a billion-dollar budget surplus?

It's not something just for the politicians to brag about and the revenue nerds to dissect. Tax tills provide one of the most vivid, nearly real-time views available of the economy - where it's strong, where it's weak and where it's headed.

Analysis of the fiscal intake valves by Bureau of Revenue Estimates director David F. Roose shows a Maryland economy that's being supercharged by the housing boom but is also supported by a strong, broad base of business activity that shows few signs of fading.

"You have to look long and hard right now to see any negative signs for Maryland's economy," says Roose, although he warns that some of the accompanying tax gravy is temporary.

In May, Comptroller William Donald Schaefer, Roose's boss, announced state revenue would be $250 million higher than previously estimated for the fiscal year ending June 30.

Strike that, he said two weeks ago, it'll be nearly $400 million more than estimated, and it might come in higher still when the accounts are closed.

It's the kind of jolt Maryland's general fund got in the late 1990s and 2000, when big stock-market profits prompted equally big capital-gains taxes and propelled personal-income tax payments into space.

Personal-income tax revenue is again popping, and the stock market again gets some of the credit.

But Roose's first suspect this time was residential real estate, and research supports his hunch. He figures as much as a third of the unsuspected extra revenue from personal-income taxes is housing-generated.

Years ago the federal government exempted from capital-gains taxes up to $500,000 in profits from the sale of a primary home by a married couple and up to $250,000 for a single person.

Most people probably figured that was the same as abolishing the tax. But the great 21st-century housing bubble has apparently inflated up to and way past the $250,000/$500,000 ceiling for many home sellers.

It's too early to analyze tax returns one by one, but figures Roose collected from property assessors make a compelling case for a bull market in taxable home sales.

Annual Maryland sales of existing owner-occupied homes worth at least $250,000 more than tripled from fewer than 9,000 in 2001 to more than 30,000 in 2004. Marylanders selling these houses collectively reaped $6.1 billion in profits last year, not counting money they might have spent on additions and improvements.

Average profit on each home went from $137,000 in 2001 to $202,000 last year, presumably meaning capital gains on many passed the taxable thresholds. And the number of million-dollar Maryland homes changing hands also more than tripled, rising from 178 in 2001 to 635 last year, Roose said.

The housing bonanza contributed other taxes, too. Construction sales-tax collection was up 16 percent for the fiscal year through February. Furniture sales taxes rose 9 percent for the same period, Roose said, although since March gains for both haven't been as impressive.

The addition of 5,000 construction jobs since 2001 has contributed new payroll taxes, although that growth, too, has been slowing.

Many economists question how far the housing boom can go and worry about what happens if it falters. But Maryland has other things going for it.

Nearly 60,000 new state-based jobs in the last year have fueled broad payroll-tax increases.

Corporate income-tax collections have soared, too. Collections rose by half to $665 million for the fiscal year, not counting a one-time settlement, which results not only from closing a loophole involving Delaware holding companies but also from healthier corporate profits, Roose said.

Better corporate profits also drove the recovering stock market, which has helped financial service companies such as T. Rowe Price and Legg Mason and prompted what Roose suspects is a resurgence in stock-related capital gains taxes and employee bonuses.

Is it sustainable? "That's the big question," he said.

The overall employment-tax gains are sustainable, he believes, and he doesn't expect a housing crash. But some of the stock-related taxes, pay bonuses and other factors driving the May and July revenue surprises, he said, may not be.

But in the big picture those are relatively minor.

"I think the outlook for the Maryland economy over the next 18 months or so is still very good," Roose said, "and therefore, for revenues."

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