{"id":9090,"date":"2017-12-11T07:00:14","date_gmt":"2017-12-11T12:00:14","guid":{"rendered":"https:\/\/www.theseventhstate.com\/?p=9090"},"modified":"2017-12-11T10:24:08","modified_gmt":"2017-12-11T15:24:08","slug":"is-mocos-budget-in-trouble","status":"publish","type":"post","link":"https:\/\/www.theseventhstate.com\/?p=9090","title":{"rendered":"Is MoCo\u2019s Budget in Trouble?"},"content":{"rendered":"

By Adam Pagnucco.<\/em><\/p>\n

Montgomery County\u2019s $120 million budget shortfall has set off political fireworks this election season, including attacks from Delegate Bill Frick<\/a> (D-16), who is running for Executive, and Republicans<\/a> who question how taxes could be going up while revenues are going down.\u00a0 County Council incumbents pooh-pooh it<\/a>, insisting that the budget decline is unremarkable and the economy is strong.\u00a0 County Executive spokesman Patrick Lacefield, who once predicted that any loss of the county\u2019s $30 million in liquor profits would cause a big property tax hike<\/a>, now says that the $120 million shortfall is \u201cpretty small\u201d<\/a> at just 2.2 percent of the county\u2019s budget.<\/p>\n

What is going on here?\u00a0 Is MoCo\u2019s budget in trouble?<\/p>\n

First, the incumbents are right to point out that mid-year corrections, including budget savings plans, are not uncommon.\u00a0 Between FY08 and FY11, the County Council approved five mid-year cut packages<\/a> ranging from $30 million to $70 million each due to the Great Recession.\u00a0 In FY16, the council approved a $54 million savings plan<\/a> associated with the U.S. Supreme Court\u2019s Wynne decision<\/a> and disappointing income tax receipts in the prior year.\u00a0 While mid-year cuts happen occasionally, it\u2019s important to note that their history indicates that they are often \u2013 but not always \u2013 produced by looming economic problems.<\/p>\n

So what\u2019s causing this one?\u00a0 No one is totally sure yet, but there seems to be two phenomena at work.<\/p>\n

Declining Income Tax Payments from the Wealthy<\/strong><\/p>\n

In Maryland, the state collects income taxes on behalf of local governments and remits them in periodic distributions.\u00a0 Part of MoCo\u2019s problem originated in its November income tax distribution from the state, which includes extension filers who tend to be disproportionately very wealthy.\u00a0 It\u2019s difficult to forecast income tax payments from wealthy people because their dependence on capital gains and business income can be volatile.\u00a0 The chart below from the state\u2019s Bureau of Revenue Estimates contrasts the annual change in average federal adjusted gross income between all MoCo taxpayers (pink bars) and the top 100 MoCo taxpayers (blue line).\u00a0 Income change for all taxpayers usually varies by single digits each year while income for the super-wealthy almost always varies by double digits.\u00a0 This creates serious forecasting challenges for the county government since the super-wealthy have a material impact on its budget.<\/p>\n

\"\"<\/a><\/p>\n

One relevant fact is that the November distribution may be down by 29% in MoCo but, according to the state, it is also down by 30% in Howard County and 26% in Baltimore County.\u00a0 One thing these three jurisdictions have in common is that they all have substantial concentrations of very wealthy people.\u00a0 That suggests that some of MoCo\u2019s problem is not specific to the county but rather to variations in the incomes of the super rich.<\/p>\n

Why is this happening?\u00a0 One explanation lies in capital gains income.\u00a0 Council analyst Jacob Sesker writes<\/a>:<\/p>\n

To a large degree, that volatility is the result of the year-to-year variations in the capital gains income of a small number of County residents. Illustrating this point, part of the projected FY18 decline in income tax revenue can be traced to a sharp drop in the capital gains of the County’s top 50 taxpayers, who realized gains in tax year 2016 that were 50% of the gains realized in tax year 2015, resulting in $21 million less in County income tax revenue (Revenue Administration Division of the Maryland Comptroller). Staff\u2019s review of tax return data published by the Comptroller indicates that roughly 1.8% of Montgomery County returns report income of $500,000 or greater. On average, these returns explain more than half of any year-to-year increases in income tax revenue, and explain more than 100% of any year-to-year declines in income tax revenue.<\/p><\/blockquote>\n

Another factor could be the tax bills being considered by Congress, which contain numerous large cuts for wealthy individuals and corporations.\u00a0 The super wealthy could be deferring capital gains and business pass-through income to next year when they would be subject to significantly lower rates.\u00a0 If true, that would mean less income tax revenue this year but perhaps more next year when the deferred income is reported.\u00a0 That\u2019s just a theory but it can\u2019t be ruled out.<\/p>\n

Broader Economic Weakness<\/strong><\/p>\n

There are other facts that can\u2019t be explained by the tax planning of the super wealthy.\u00a0 First, FY17 (the year of the 9% property tax hike) closed out with $25 million less than expected<\/a>.\u00a0 Second, the county is writing down<\/a> $206 million over the next six years in property taxes, energy taxes, transfer taxes, recordation taxes, telephone taxes and hotel taxes in addition<\/em> to a $212 million income tax writedown.\u00a0 The energy tax revision alone is $100 million over six years.\u00a0 The reason for that is unclear, but it\u2019s worth remembering that since commercial energy users pay roughly double the tax rates of residential users<\/a>, some assumptions regarding employer energy use may be operative here.\u00a0 It seems unlikely that a \u201cstrong economy\u201d<\/a> would produce such broad, multi-tax writedowns of the kind just put forth by the county.<\/p>\n

What\u2019s the bottom line?\u00a0 Over the years, we have learned that under most circumstances, economic trends usually matter more than singular events.\u00a0 One good year should not cause irrational exuberance and one bad tax distribution should not cause panic.\u00a0 Whether the recent shortfall turns out to be meaningful or not, MoCo\u2019s serious budgetary challenges are long term in nature.\u00a0 They relate to decade-plus trends of lagging growth in employment and income<\/a>, repeated funding of ongoing spending with one-time revenue sources<\/a> and the county\u2019s recent passage of large tax hikes and expensive employment laws at the same time, a unique combination among Washington-area jurisdictions.\u00a0 That is on top of any targeting of Maryland<\/a> and general economic insanity<\/a> by Congress.\u00a0 The big question is not about one tax distribution from the state but whether a combination of all these long-term factors will catch up with MoCo in a really bad way in the next couple years.<\/p>\n

That\u2019s a question for the next Executive and County Council.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Adam Pagnucco. Montgomery County\u2019s $120 million budget shortfall has set off political fireworks this election season, including attacks from Delegate Bill Frick (D-16), who is running for Executive, and Republicans who question how taxes could be going up while revenues are going down.\u00a0 County Council incumbents pooh-pooh it, insisting that the budget decline is … Continue reading Is MoCo\u2019s Budget in Trouble?<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[151,33,338,152,134],"tags":[1545,1368,1993,2050,1539],"class_list":["post-9090","post","type-post","status-publish","format-standard","hentry","category-adam-pagnucco","category-budget","category-economy","category-income","category-taxes","tag-adam-pagnucco","tag-budget","tag-economy","tag-income","tag-taxes"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p4mKJE-2mC","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/9090","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9090"}],"version-history":[{"count":4,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/9090\/revisions"}],"predecessor-version":[{"id":9095,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/9090\/revisions\/9095"}],"wp:attachment":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9090"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9090"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9090"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}