By Adam Pagnucco.
The income tax restructuring now before the council threatens to disproportionately hit low income homeowners. But that’s not all. It will also inflate property tax bills and eventually add to the county’s structural deficit. Will the council avoid blowing itself up?
First, let’s summarize the issue. The county currently has a flat 3.2% tax on individual adjusted gross income (AGI). The county executive would like to raise it to 3.3%, an option that most on the council oppose. Instead, the Government Operations and Fiscal Policy (GO) Committee has recommended adopting progressive income tax brackets and abolishing a $692 tax credit received by homeowners to pay for it. As I have previously laid out, the combined impact of the GO Committee’s recommendation is a net tax increase for low income and high income owners and a small tax cut for folks in the middle (roughly $150,000 in taxable income). Renters would benefit. Rather than being progressive, the truth is more complicated but there is no question that low income homeowners would lose.
If the council adopts the GO Committee’s recommendation, here is what will happen next.
Property tax bills will explode.
Repeal of the $692 homeowner credit will show up on this summer’s property tax bills. Consider the impact on the average residential property tax bill, which is close to $5,000. Loss of the credit would amount to a 14% increase in the bill (and a larger percentage increase for lower value properties). Additionally, assessments are increasing. If a homeowner’s property assessment increases by 6%, their tax bill will immediately rise by 20%. That’s a sticker shock for sure, but happily for council incumbents, it won’t show up in mailboxes until after the primary.
Income tax withholding changes will start in January.
The income tax changes, which will reduce income taxes for most taxpayers, will begin showing up in withholding tables in January. But since county income taxes represent lower amounts than federal and state income taxes, the withholding change will range from slight to modest. It certainly won’t match the sticker shock of the property tax bills.
Structural deficits will get worse.
This is the worst part. According to council staff, the income tax changes will lose $65 million in FY27 while repeal of the $692 homeowner credit will gain $140 million. That’s a net tax increase of $75 million in FY27 and it will help this year’s budget.
However, after FY27, the math starts to change. That’s because of the difference between the county’s fiscal year, which starts on July 1 and ends on June 30, and the calendar year to which income taxes apply. The $65 million loss in income taxes applies only to January through June in 2027, which is half of Fiscal Year 2027. Once this loss gets annualized and fully kicks in, it will mushroom.
The table below from a council staff memo shows how this will happen. Multiple proposals are tested over a six-year period, but pay attention to the “Alternative (Progressive Rates)” line, which I have marked with a purple arrow. That’s the proposal approved by the GO Committee.
In year one, which represents a half year of activity, the tax rate changes lose $65 million. But since repealing the homeowner credit raises $140 million, that’s a net plus. (This is a major explainer of why many on the council would like to implement this change.) However, in future years, it starts growing and by FY32, it will hit $210 million. Subtract out the $140 million from repealing the homeowner credit and this reaches a net $70 million loss for the county by FY32.
This tax proposal will add to the county’s long-term structural deficit, a deficit on which the council’s staff has already issued a dire warning. On April 7, council staff estimated that the executive’s recommended budget would lead to a $257 million structural deficit in FY28. Council members rightly criticize the executive for creating structural deficits that they need to fix, but now they are proposing to make them worse.
Add all of this up – a net tax increase on low income homeowners, ballooning property tax bills and expanding structural deficits – and it’s hard to divine any wisdom in this course of action, either budgetary or political.
The good news is that this is completely avoidable. The council does not need to restructure income taxes to rewrite Elrich’s budget. It’s a distraction and the product of rushed and sloppy policymaking that never gave taxpayers a chance to provide input through a hearing.
The wise course is to concentrate on slowing the growth of county spending, as Council President Natali Fani-González and Council Member Will Jawando have proposed to do, and then return to the issue of progressive income taxation later. Progressive taxation is a worthy goal but given the limited tools at the county’s disposal, it’s hard and complicated to do. The council needs time to do it right, and with good staff work, robust discussion and public input, they can get it right.
But passing the GO Committee’s proposal in its current form would create more unintended consequences than the council – or the taxpayers – would like to experience. Let’s avoid this disaster in the making.