By Adam Pagnucco.
Buried in the fine print of County Executive Marc Elrich’s recommended FY21 operating budget is a shocking revelation: the executive claims that a mistake made by county revenue estimators two years ago has caused tens of millions of dollars in losses for the county. One reason why the Elrich administration is proposing a tax hike now is to recover that money.
To understand what happened, we have to understand how the county’s charter limit on property taxes functions. Here is the exact text of the charter limit.
Unless approved by an affirmative vote of all current Councilmembers, the Council shall not levy an ad valorem tax on real property to finance the budgets that will produce total revenue that exceeds the total revenue produced by the tax on real property in the preceding fiscal year plus a percentage of the previous year’s real property tax revenues that equals any increase in the Consumer Price Index as computed under this section. This limit does not apply to revenue from: (1) newly constructed property, (2) newly rezoned property, (3) property that, because of a change in state law, is assessed differently than it was assessed in the previous tax year, (4) property that has undergone a change in use, and (5) any development district tax used to fund capital improvement projects.
In plain English, what this means is that the county’s real property tax receipts (with a few exceptions) may not rise at an annual rate exceeding inflation unless the entire council votes to exceed it.
Calculating the charter limit involves three basic steps. First, one must estimate the value of the assessable base subject to the charter limit. Second, one must calculate the value of the many property tax credits offered by the county. Third, one must calculate the levels of real property tax rates that, when applied to the assessable base and taking account of the credits, produce an increase in receipts equal to the rate of inflation.
Hence, estimating the size of the assessable base is critical. If it is underestimated, property tax rates will be set too high and the charter limit will be violated. If it is overestimated, property tax rates will be set too low and the county will not collect as much revenue as it could at the charter limit. These are extremely technical considerations but this affects tens of millions of dollars (at least) for the county budget.
In his recommended budget, the county executive makes this statement:
I am proposing this supplemental tax rate this year to partially offset an unexpected underperformance of the property tax for the last two years. In preparing the FY19 County budget, the taxable property base of the County was overvalued. As a result, the property tax rate needed to generate revenues at the Charter limit for the past two years was set too low. This resulted in lost revenues of $80 million, now permanently embedded in our revenue projections.
The amount of revenue lost by this mistake was $35 million in FY19 and $45 million in FY20. Because of compounding, the lost revenue will rise each year unless it is recovered.
It’s important to note that Elrich was not yet the county executive when the FY19 charter limit was estimated. That was done by the finance department in former County Executive Ike Leggett’s last year.
Must the losses be stanched? The county usually allows property tax receipts to rise up to the charter limit each year, but there is nothing in county law requiring that. For example, in FY13, Leggett recommended level-funding of property tax receipts, which actually kept them below the charter limit. The amount of forgone revenue was estimated at $26 million that year, which would have risen in subsequent years. However, this was not the result of an estimation mistake. The county had doubled the energy tax two years before and had not sunset it as was promised. Forgoing a bit of property taxes was something of a consolation.
This issue must be frustrating for all concerned. County leaders have a choice. They can live with the mistake and move on. Or they can tell voters, “We screwed up and now we need to raise your taxes.”
If option number two is selected, how do you think folks will respond to that?
Dear reader, if you are someone who is considering running for office someday, remember this story. Something terrible could happen to you when you run.
You could win!