Tax reform at what cost?

January 07, 2008

Baltimore suffers from a difficult conjunction of financial maladies: the highest property tax rate in Maryland, the greatest concentration of poverty in the region and a big swath of tax-exempt property (fully one-third of its taxable base). The best way to lower the tax rate would be to enlarge the tax base, but unfortunately, the best way to enlarge the base is to lower the rate. It's not a vicious circle, exactly, but it's one that's very difficult to break into.

What's the city to do?

After months of study, a mayoral task force of business, city and civic leaders has proposed what looks like a Chinese menu of tax-reform options that could be read as: Choose one from Column A, one from Column B. But that would be the wrong approach; a piecemeal program would produce less savings than the task force intended - an 11 percent cut in the tax rate - and do it, inevitably, on the backs of homeowners.

The panel's challenge, then, is to convince the public that a unified package of measures should be adopted, and that together they will help increase the city's tax base and cut residents' taxes over time. It's a big sell, when you consider that the chief item is a proposal to raise the 4 percent cap on assessments to the state limit of 10 percent. That would generate enough revenue to start winnowing the city rate of $2.268 per $100 of assessed value, though at the expense of an undeniable benefit.

It's an even bigger sell when you consider that true savings to an individual homeowner would depend on several variables - such as the annual growth in assessed value - and passage of a majority of the items in the package, which include raising the city income tax rate to 3.2 percent, increasing the hotel tax from 7 percent to 10 percent and bumping up the paltry $30 registration fee for vacant properties to $500.

If approved as a package, proponents say, the city could lower its tax rate by nearly 25 cents in two years. New homeowners and commercial property owners, whose assessments aren't capped, would first feel the gains. This strategy would reduce the discrepancy in taxes paid by long-term homeowners and new homeowners, whose tax bill is based on the full assessed value of a home after it is sold.

The panel's 104-page report, released last week, includes more-ambitious proposals as well, such as a regional sales tax or a commuter tax, unlikely remedies because they require approval by the state legislature.

The report does cite some examples of potential savings for individual homeowners under the package of proposals. But tax reform proponents will have to muster lots more information and data to convince city residents that they aren't pocketing savings one way and paying out another.

To its credit, the tax reform panel showed that cutting the tax rate in a significant way could be done. Now it's up to Mayor Sheila Dixon, the City Council and the public to weigh the costs and benefits, and to decide how serious they are about reducing Baltimore's reliance on its stifling property tax rate.

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