House votes to close tax loophole

But measure not likely to pass in the Senate

General Assembly

March 23, 2007|By Laura Smitherman | Laura Smitherman,sun reporter

House acts, Senate apt to balk at closing tax loophole The Maryland House of Delegates passed legislation yesterday aimed at ending what Majority Leader Kumar P. Barve called the "most gigantic tax loophole on the books," referring to a strategy mostly used by big-ticket real estate developers that critics say costs the state tens of millions of dollars.

But Senate President Thomas Mike V. Miller said the measure is not likely to win passage in his chamber this year, and more likely would be considered for a broader plan to close a projected $1.5 billion shortfall next year. Miller has opposed other revenue-raising measures, such as a tobacco tax to fund health care, because he says they should be part of a budget-balancing initiative that also includes legalized slot machines.

The House legislation, which passed 101 to 35, would impose a tax on certain transfers of property. The revenue would be directed to school construction and land preservation, and be used to help defray state park admission costs. The House has approved similar measures in past years.

"This is about basic fairness in our tax code," said House Speaker Michael E. Busch, an Anne Arundel County Democrat. "Developers and out-of-state business interests should not be able to avoid the closing costs that working families have to pay."

The bill targets developers who, instead of buying property, acquire ownership of a limited-liability company in which the only major asset is property. Because a deed never changes hands, the exchange of property is not taxable. By comparison, when most residents sell real estate, that's a taxable transaction.

"It ain't a tax increase if you should have been paying it all along," said Barve, a Democrat from Montgomery County.

According to the Maryland Department of Assessments and Taxation, more than 200 transactions worth at least $1 million would have netted $150 million in tax revenue over the last five years but didn't because of the way the deals were structured.

Among the recent transactions that avoided taxation was Philadelphia-based Resources America Inc.'s sale of the 30-story Alex. Brown Building in downtown Baltimore to a Miami firm last year. The deal could have generated an estimated $2.4 million in city and state transfer and recordation taxes.

And in 2002, the Rouse Co. used the same legal method to sell 11 shopping centers in Columbia to a New York company, which could have netted Howard County and Maryland an estimated $2 million in tax revenue.

Some Republicans said the bill would raise costs for affordable housing and other projects. Those costs would be passed on to consumers at a time when housing prices have been on the rise for several years, said Del. Christopher B. Shank, the House minority whip from Western Maryland.

Del. Gail H. Bates, a Howard County Republican, also said the bill doesn't fully close the loophole because deals could still be structured so as not to trigger a tax bill.

"We're trying to close a loophole, and all I think we're doing is creating a bigger loophole," she said.

Barve conceded that "skillful lawyers and accountants" might still try to avoid taxes in real estate transactions but that this would only be in limited cases. And, he said, that shouldn't deter the legislature from trying to stop them.

laura.smitherman@baltsun.com

Sun reporter Melissa Harris contributed to this article.

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