Property tax rates in Montgomery County will be roughly the same for next year — down a hundredth of a penny in the rate.
The current weighted average property tax rate is 97.86 cents per $100 of assessed value. The new rate will be 97.85 cents.
The County Council unanimously supported the decision through a straw vote on Monday afternoon.
It also discussed a proposal from County Executive Marc Elrich to interpret the county charter differently to increase tax revenues — a method that would have slightly increased taxes by 0.24 cents, or close to a quarter of a cent.
On Thursday, the council unanimously supported keeping its property tax revenues at the county’s charter limit. The charter limit is the maximum levies on real property tax revenue.
It restricts the growth of real property taxes on existing property owners. The tax revenue only increases by the rate of growth in the Consumer Price Index (CPI), based on Dec. 1, 2018, through Nov. 30, 2019.
The council has calculated the charter limit the same way for the last 30 years.
Elrich proposed a new interpretation of the charter limit that would change how the tax rate is calculated and increase FY21 tax revenues by $5.17 million.
With the proposed change, a property tax bill at the median sales price of $450,000 would have increased by $11.25.
The council turned down Elrich’s initial proposed tax increase from March of roughly 5 cents for fiscal year 2021— most of which would go to the public school system through a special 3.18-cent supplemental property tax. The increase would have exceeded the charter limit.
“Under a good economy in the county, tax revenues will always increase each year because we can increase revenues. … Taxes technically go up every year based on that CPI growth,” Gene Smith, a legislative analyst for the county, told Bethesda Beat. “Generally in Montgomery County, our assessments go up unless there’s a sharp downturn in the economy.”
The charter states that the limit “does not apply to revenue from” certain properties, including newly constructed property.
According to the county’s staff, newly constructed properties are the only taxes added to the county’s tax revenues most years. Those properties pay quarterly bills issued by the state, and do not pay a full year of taxes if they’re not productive for part of the year since it would be “unequitable,” according to the county staff.
As a result of quarterly bills, most newly constructed properties add a portion of the total taxes that the property would generate in a full year.
The current calculation of the charter limit only includes actual tax revenues generated by newly constructed properties.
Elrich proposed estimating the entire value of the tax revenue amounts that would have been collected by the county if the newly constructed properties paid taxes for the entire year.
“This proposed change adds value to the estimated real property taxes paid in FY20 before applying the growth in the CPI,” county staff members wrote in a report.
Smith said the phrase “revenue from” referenced in the charter section is what Elrich interpreted differently.
“The question is whether we should interpret that ‘revenue from’ as the full amount of revenue or the revenue received,” Smith said, adding that he considers it as the revenue collected since that’s the way it’s been interpreted.
During the council’s meeting on Monday, Council Member Nancy Navarro said Elrich’s proposal would be a change that would possibly require an amendment to the charter.
“Alterations of the charter methodology require detailed review and thorough public discourse, possibly even a charter amendment,” she said. “Before the council adopts a change like this, I think that we should take our time to deliberate.”
In the staff report, county officials wrote that there is “some ambiguity” for how newly constructed property tax revenues should be calculated.
“County residents clearly intended to exclude newly constructed property taxes from the Charter Limit. This reasoning suggests that it would be acceptable for the County to capture 100% of potential tax revenues generated from these properties,” county staff members wrote in a report.
“However, it is also reasonable to conclude that this exemption from the Charter Limit includes only those property taxes collected by the County during the year, which is inevitably determined by the time of year the property comes online.”
Council Member Hans Riemer said at the meeting that Elrich’s budget proposal included no mention of his interpretation to the charter limit to collect more tax revenues, which meant the public was not informed of it. The council was only recently made aware of it.
The $5.17 million increase in tax revenue was built into the budget, but had no explanation for how the figure was produced, he said.
“It is unthinkable to me that we would have a tax increase that has not actually been transparently presented to the community, and what more, is actually illegal,” Riemer said. “It is a violation of the charter.”
He said the proposal carried a “tremendous amount of risk.” The charter is clear in its meaning — only the revenues actually collected should be used in the calculation for property tax rates, he said.
“By substituting a hypothetical amount for the actual amount, that no longer provides a sound basis for the calculation of our property tax base,” he said, adding that the change would open the possibility of a legal challenge.
When asked about the legal risk with the proposal, Bob Drummer, a senior legislative attorney for the county, said a court would consider that the county has interpreted it the same way for 30 years and that the intention of the charter amendment made then was to limit the growth of the property tax rates.
“My opinion is that the Court of Appeals, if asked, would ultimately rule … that this provision means actual revenue received during the relevant year for newly constructed property and not the potential revenue it would have received if everything had been online for a full year,” he said.
Council Member Andrew Friedson said he was also troubled that the recalculation of the charter limit was proposed without a public debate. Public policy means public input, he said.
“To recalculate 30 years of precedent without a significant public debate and a transparent and thoughtful conversation with public input is deeply disturbing and very troubling to me as a lifelong Montgomery County resident,” he said. “It is simply not the way that we do business here.”
About 60% of newly constructed properties is calculated as part of the tax revenues each year.
Friedson said that because the county would account for a full year of new construction the remaining 40% that Elrich wants to account for would have to be paid by all taxpayers in the county, not by the individual owners of the newly constructed properties.
Elrich’s proposal would not have an impact on newly constructed properties, which would continue to pay quarterly bills.
Council Member Evan Glass asked Smith how Elrich’s calculation was discovered in the budget.
Smith said tax rates typically don’t increase when tax revenues are set at the charter limit with an income tax offset credit (ITOC) of $692, and assessments increase. That raised questions from the council staff, he said.
The income tax offset credit program grants a credit against the county’s real property tax rate to offset increases of more than 2.6% in the county’s income tax revenues. The current income tax rate is 3.2%.
The credit is only provided to owners of an owner-occupied residential property. As the value of a property goes up, the value of the credit decreases.
Rich Madaleno, the county’s budget director, said the piece that explained the new interpretation was taken out of the proposed budget for revisions. It did not make it back in before it went to the printer, he said.
Madaleno said Elrich believes that by not counting the roughly 40% of uncollected tax revenue from newly constructed properties, the county is inadvertently setting the property tax rate too low the following year because of the relationship between last year’s revenues and the next year’s estimated tax base.
Elrich has mentioned multiple times in the last year that the charter limit needed to be changed, Madaleno said.
Glass said it’s “unfortunate the deep conversation is being had the week the budget is to be approved.”
He said the council needed to be directly informed of the proposed change.
Council disagrees on income tax offset credit
By a straw vote of 6-3 on Thursday, the majority of the council supported keeping the income tax offset credit at $692.
Council Vice President Tom Hucker and Council Members Will Jawando and Riemer voted against setting the ITOC at $692
Elrich had proposed an ITOC of $800, which would have generated an additional $1.8 million with a higher property tax rate.
Hucker, Jawando and Riemer supported setting the credit at $800.
Jawando said at the meeting that the credit is fixed and would help lower-income homeowners who are financially struggling.
“When you don’t raise it, it shifts the burden to lower-income folks,” he said. “It’s not as useful.”
Riemer said he has wanted to change the credit for a long time.
“I think that this adjustment provides property tax relief to most homeowners,” he said, adding that there would be a “very marginal change” for some property owners.
Navarro and Friedson said setting the credit at $692 would follow the council’s goal of forming a “continuity of services” budget, meaning funding would remain at levels that allowed current programs to continue. It would be unlikely to include new programs or initiatives.
“This would provide some modest level of certainty and consistency for residents,” Friedson said at the meeting.
The credit would generate more revenue from the property tax, which would have the effect of being a tax increase even though the council was not raising the tax rate, he said.
Briana Adhikusuma can be reached at email@example.com.