Housing Tax Rise Bonanza For Md.

A hot market is putting millions of extra dollars into governments' hands

September 27, 2005|By Jamie Smith Hopkins | Jamie Smith Hopkins,Sun reporter

The hot housing market, which has made many people feel rich on paper, is sending hundreds of millions in extra cash into state and local coffers.

Maryland's property transfer tax revenue more than doubled - to $236.6 million - in the budget year that ended June 30 compared with five years earlier. State analysts say residential real estate also accounts for about a third of the state's $245 million in unanticipated individual income tax revenue, because people are reaping such windfalls from selling their homes that they're being hit with capital gains taxes.

It's the same story at the local level.

In the Baltimore area, where jurisdictions just finished tallying the final numbers for the past fiscal year, revenues directly related to real estate - property taxes, recordation taxes and transfer taxes - have soared by $654 million since 2000. Those taxes added up to $2.3 billion in the past fiscal year, and that doesn't include housing's ripple effect on income and sales taxes.

The extra money is having an impact across the state. Harford County's school system received every dollar it asked for in its operating budget this year for the first time that anyone can remember. Baltimore's finances switched from dire to comfortable. Worcester County built a long-awaited senior center. Garrett County reduced its debt and its property tax rate.

More sales and higher prices are the causes. Last month, nearly 4,650 homes sold in the Baltimore region, 44 percent more than in August 2000 - and the average price almost doubled, to about $309,188.

Sales in the past fiscal year totaled $12.2 billion regionwide, 30 percent more than in the previous 12 months.

"It has given us an unusual opportunity," said Ted Zaleski, director of the Carroll County Department of Management and Budget. "An opportunity to devote money to school projects that wouldn't normally be there. An opportunity to put more money into roads that we wouldn't normally have ... to do some catch-up on things that have been waiting to get done."

The change is especially noticeable for Baltimore. Last year, officials raised taxes to avoid layoffs; this year, they had such a surplus that they reduced the property tax rate by 2 cents. More than 60 percent of the city's $59 million in unexpected cash came from recordation and transfer taxes.

Dolly Ayd, Baltimore's property transfer supervisor, said her office has been busy since interest rates plummeted a few years ago and the housing market took off.

"It's had a tremendous impact on the city," said City Councilman Keiffer J. Mitchell Jr., chairman of the taxation and finance committee.

Good fortune

All that good fortune is making budget directors - and some politicians - a bit nervous. Real estate bubble or no, they don't think values or sales can continue rising at such a clip. The market is showing signs of a deceleration, though slight.

Average prices for existing-home sales rose slightly less than 16 percent across the Baltimore region last month, the smallest year-over-year increase in 2005, according to Metropolitan Regional Information Systems Inc.

Many jurisdictions have been tucking extra revenue from the housing market into rainy-day funds, debt payments and one-time expenses such as school construction, hoping to come out of the boom in better financial shape. Starting programs or hiring extra employees with surpluses can set a county up for budget cuts down the road.

"That revenue is suspect because, as we hear, the housing market is likely at the very least to slow," said David Bliden, executive director of the Maryland Association of Counties. "If you create an ongoing expenditure obligation with a revenue stream that's going to decrease, you're buying into future trouble."

Recalling 1990s

Zaleski said he remembers well that the residential real estate market, which soared in the 1980s, hit the brakes after the 1990-1991 recession. In the mid-1990s, Carroll's assessed home values dipped one year, he said.

"I can look back and demonstrate it doesn't last forever," he said of the boom.

Fred Homan, Baltimore County director of budget and finance, said that's why his county has put surpluses into the capital budget, a repository of one-time expenses. "We're being careful," he said.

Harford County Councilman Dion F. Guthrie is worried that Harford isn't being careful enough. The current budget uses excess real estate revenue on continuing expenses such as new teachers, he said.

"For the first time in our history, we granted the Department of Education everything they asked for, which amounts to an 11 percent increase," said Guthrie, who represents the Edgewood area. "Now we hope everything holds through, because when the [next] budget comes here, you know what we're faced with. ... It's going to be a hard-line budget if things start to calm down."

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