by Bob McWilliams
This time of year, state, county and city governments are currently working on their budgets, looking to determine if taxes will go up, go down or stay the same. Real estate taxes are a major source of government revenues, and given what’s being proposed at the state and local levels, homeowners could be in store for some significant increases.
For example, Annapolis Mayor Joshua Cohen is recommending an increase in the tax rate from 56 cents per hundred of assessed value to 65.83 cents, a jump of 17.6% in one year, and 24.2% over the last two years. On top of that, Governor Martin O’Malley is calling for a reduction in the amount of mortgage interest and real estate taxes that can be deducted on state income tax returns. In a weak economy and fragile real estate recovery, it could be an untimely blow to struggling homeowners.
When evaluating the direction and degree of changes in real estate taxes, it’s important to note that the “tax rate” is only part of the equation. The “tax rate” and “assessed values” work in combination to determine how much you owe. During the housing boom, politicians seeking more in tax revenues didn’t talk too much about assessments, because they could hold the tax rate steady, or even promise a cut, all the while knowing rapidly rising assessments would automatically push taxes higher. Now, that assessments are falling, this aspect of the real estate tax equation is suddenly front and center as a primary excuse for raising rates.
In an effort to bolster support for his proposed 17.6% tax rate increase, Annapolis Mayor Cohen has pointed out that, among what he calls the 20 largest Maryland municipalities, the tax rate for Annapolis (currently at 56 cents) ranks number 13, far lower than most other cities and much lower than Cumberland, which holds the number one spot at 96.54 cents. However, such a comparison is really terribly misleading. As we mentioned, tax rates are only half the story. To make a fair comparison, one must also add in the element of property values. According to City-Data.com, the median value of a home in Cumberland is $107,586; whereas, in Annapolis, it’s $414,292.
So if you run the math, Annapolis isn’t near the bottom at #13 in Mayor Cohen’s list of 20 municipalities; it ranks right up there at the top, second only to Takoma Park. Using this method, the average Annapolis household pays $2,320 in city real estate taxes. That’s 124% higher than Cumberland, and over 50% higher than the combined average of the 20 cities on Mayor Cohen’s list.
Mayor Cohen also added in the County real estate tax rate, and was quick to point out that Annapolis, when looking at “only” the tax rate, was second lowest in this group of 20 cities. But once again, when you complete the equation by including home values, Annapolis is somewhere in the middle of the pack. This is due primarily to low taxes for Anne Arundel County. Takoma Park still leads the list, with average City/County real estate taxes coming in at a whopping $7,157. But if Mayor Cohen gets his proposed 18% increase in rates, Annapolis might give Takoma Park a run for its money as the highest taxed city in the state.
Granted, the median income for a place like Annapolis is higher than what you find in Cumberland, but there are some important things to remember when it comes to evaluating the cost of city services and taxes needed to support them. First, there really isn’t any relationship between rising or falling home values, and what it should cost to provide police/fire protection and fix the potholes. Pretty much the same amount of potholes materialize every spring, regardless of whether or not the assessed value of someone’s house has gone up or down. Second, a ton of asphalt probably doesn’t cost much more in Annapolis than it does in Cumberland. And third, when assessments were rising, people were told that supposedly wealthier households could afford to pay higher taxes. Nevertheless, taxpayers are still being asked to pay more now that assessments are declining. In reality, changes in the value of your house don’t necessarily make you richer or poorer, since you live in your house, and won’t realize any profit or loss until it’s sold. Therein lies an obvious disconnect between what your home is worth and what should be paid to fund many of our city services.
In the end, a comparison of real estate tax rates among various municipalities and movement in assessed values has really little or nothing to do with determining an appropriate amount to spend on state and local government. So, be wary of politicians who use these measures. Rather, examine how efficient government is in providing necessary public services and their ability to properly rationalize the need for more spending.