Problems with current charter amendment and proposed changes

Current charter amendment

Does not capture growth in the tax base except for new construction (not even full value there).
Disconnect between economic growth and tax revenue growth

Hypothetical example of overall: Assume no new construction in this example

Year 1 With charter cap Without
Assessable base $100 billion $100 billion
Tax rate 1.00% 1.00%
Revenue $1 billion $1 billion

Assume 2% inflation and 10% growth in property values

Charter limits overall revenue to $1.02 billion (previous year’s revenue plus 2% inflation)
Year 2 With charter cap Without
Assessable base $110 billion $110 billion
Tax rate .93% 1.00%
Revenue $1.02 billion* $1.1 billion
* Assume no new construction in this year.

Increased occupancy in commercial building does not add to the taxable base.
Commercial assessments have the same rate as for residential but commercial assessments are based on vacancies
and the income that the commercial property generates. Even when commercial buildings fill up and no longer have
vacancies and reassessment increases their taxes, the county does not realize new revenue because the property tax
revenue is still subject to the cap based on inflation. It is all relative.
Example –
A building has a 20% vacancy rate and pays property taxes relative to the building’s income. A new business
comes to the county rents out the vacant space, and the building is now fully occupied. At the time of the
new assessment, the property owner’s taxes go up, but the additional new taxes from the new business
occupying the building cannot exceed the revenue cap – someone else’s taxes will go down as a result.

Underestimates affect the base forever.

Because forecasts are (understandably) cautious, the forecast of revenues (which is needed to set the tax rate each
year) may underestimate actual revenues available from the assessable base, which results in setting the revenue
base lower than the limit. That lower limit cannot be adjusted in future years. In FY19, a cautious estimate resulted in
$40 million less than actual revenues available.

Charter limit does not cap individual taxes at rate of inflation.

Taxes for individual properties taxes may go up or down, and by different amounts (even if the tax rate stays the same
or goes down slightly. Some property owners see tax increases; others see tax decreases. A homeowner with a
modestly priced house ($400,000) may see their assessment increase by up to 10% and their taxes will go up; another
homeowner with a $2 million home may see a decrease. Below are actual property tax changes for different sample
properties (changes from 2018 to 2019).
 Property type Location Assessed value increase/decrease
Residential Silver Spring $640,000 11%
Residential Potomac $2,147,800 (.21%)
Residential Silver Spring $540,000 2.49%
Commercial Rockville $371,183,600 (.2%)
Commercial Friendship $91,000,000 2.28%
Heights

Revenue cap keeps the tax rate artificially low

- Charter amendment forces County to raise tax rate simply to spend at same rate; it gives Montgomery County
the reputation of tax and spend without actually getting the revenue
-
Expected 0% inflation means no additional revenues regardless of economic growth.
- The charter amendment added by Council in 1990 occurred during a period of relatively high inflation and
large increases in property values.
- It is possible that inflation will be close to 0% next year; if so, property tax revenues will be the same as this
year; in additionincome taxes are likely to be flat or go down. Council may have to vote to lower the tax rate
to stay under the revenue cap – cutting taxes during a pandemic and time of great demand. Additionally re-
assessments may go down from COVID – when they do, the decreases are immediate and don’t change for 3
years and when the assessments increase again – phased in, the total taxes collected do not go above the
previous year’s revenue cap + inflation.

We’re in a fiscal death spiral - simply defeating the proposed charter amendment leaves us in the ICU ward.

Who gets high increases during under charter cap?

- Residential property owners in houses that are increasing in value – biggest demand is moderately priced
houses – those are going up in value NEED EXAMPLES – Aspen Hill, Forest Glen…..
Montgomery County does not have high rates compared to neighboring jurisdictions

Commercial Tax rates NEED A YEAR

Proposed change:
Keep existing language (red):
By June 30 each year, the Council shall make tax levies deemed necessary to finance the
budgets. 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.
Proposal would replace the deleted language above with language below (blue):
UNLESS APPROVED BY AN AFFIRMATIVE VOTE OF SIX COUNCILMEMBERS, THE COUNCIL MAY NOT LEVY
AN AD VALOREM TAX RATE ON REAL PROPERTY GREATER THAN THE AD VALOREM TAX RATE ON REAL
PROPERTY IN THE PRIOR FISCAL YEAR.
FOR EACH TAXABLE YEAR, THE TAXABLE VALUE OF AN OWNER-OCCUPIED RESIDENTIAL PROPERTY
SUBJECT TO AN AD VALOREM REAL PROPERTY TAX MAY NOT INCREASE BY MORE THAN THREE PERCENT.