Tax credit for homeowners means big break for some, nothing for thousands

Homestead credit, created with tax relief in mind, has had unintended effects in Baltimore for years

December 17, 2011|By Jamie Smith Hopkins and Scott Calvert, The Baltimore Sun

Jeff Burdick and his next-door neighbors have nearly identical two-story rowhouses, on the same block of East Clement Street with the same public schools and the same city trash pickup. But one striking difference is the $5,300 he pays in yearly property taxes — more than both his neighbors combined.

The reason behind Burdick's disproportionate tax bill is Maryland's Homestead Property Tax Credit, which caps his neighbors' taxes but not his, because he moved to Riverside many years after they did.

"I don't think it's fair," said Burdick, 37, who works in accounting. "Regardless of whether someone's been there 30 years or two years, I'm paying for the same services they are — but I'm basically paying more."

The huge tax disparity is not just a result of how the homestead credit works, however. It's also an example of how it doesn't work. One of the houses next to Burdick's is getting a two-thirds discount, even though it doesn't qualify for the program because the owners are renting it to someone else.

The situation on Clement Street is playing out on block after block across Baltimore, an investigation by The Baltimore Sun has found. Since the late 1970s, when it was devised as a low-cost way to keep a lid on tax increases, the homestead credit has morphed into a massive subsidy fueling widespread inequality — a problem made worse by errors in billing and inadequate oversight.

Today the program lops off at least 50 percent of the annual tax bills for more than 13,000 city homes. Some of those large breaks are a consequence of the wild real estate market of recent years, which let homeowners lock-in low tax levels even as the value of their homes soared. Many are still paying well below full freight several years after the housing boom turned to bust.

But the city's property tax rolls also contain discounts so high that statisticians call them obvious mistakes. Thirty homes even have had their taxes reduced to nothing — mathematically impossible for a program designed only to limit increases.

The Sun's investigation found that hundreds of outsized tax breaks were caused by typographical errors, unnoticed property improvements and people receiving credits they aren't eligible for under the tax law. In many cases, state or city officials could have uncovered the errors simply by looking at their own records. In other cases they uncovered problems but didn't correct them until The Sun inquired.

The homestead credit's cost has ballooned to a degree never imagined by the state lawmakers who passed it in 1977, as a two-year measure to insulate homeowners from spiking home values. It was projected to cost less than $7 million statewide for both years combined, which comes to about $25 million in today's dollars. Now it's keeping $120 million out of the budget-strapped city's coffers just this year alone, according to The Sun's analysis and budget documents.

Although these problems don't end at Baltimore's borders, the investigation focused on the city because its tax rate is far and away the highest in Maryland. That gap is frequently cited as a significant drag on the city's efforts to lure businesses and stem population loss. Mayoral challengers campaigned this year on promises to cut the rate by as much as half.

And the credit is one reason Baltimore's tax rate remains stubbornly high — at least double that of any other jurisdiction in Maryland. Without the cap, or with a higher one, the city could take in millions of additional tax dollars each year, giving it the fiscal means to reduce the rate citywide.

How substantial is the credit's cost? If it vanished overnight, the city could slash its tax rate 13 percent and pull in the same amount of money this year.

The Sun's findings reinforce the argument made repeatedly by Maryland attorneys general since the law passed 34 years ago that the homestead credit is likely at odds with the state constitution, which guarantees "uniform" taxation of property.

The owners of 98,000 homes in Baltimore receive at least some benefit from the homestead credit this year. The remaining 25,000 get nothing, either because their home values have plummeted or, like Burdick, they bought within the past few years and have had no increases to cap. Renters are also on the losing end of the homestead equation — landlords aren't eligible for the break and pass the cost of their higher tax bills on to their tenants.

U.S. Sen. Benjamin L. Cardin said The Sun's analysis shows that the tax cap has warped the property-tax system to an extent he didn't envision when he helped design the limit as a high-ranking state delegate in 1977.

"It does distort the fairness of the tax code when you have two people living side by side with the exact same homes, one paying higher property tax than the other," he said.

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