Agenda Item 7 A
February 7, 2017
Action
MEMORANDUM
February 3, 2017
TO:
FROM:
County Council
Robert
H.
Drummer, Senior Legislative Attorney
Ivtv
r\
Action:
Bill 48-16, Taxation - Credit to Offset Certain Income Tax Revenues ­
SUBJECT:
Amendments
Government Operations and Fiscal Policy Committee recommendation (3-0):
approve the Bill
as introduced.
Bill 48-16, Taxation - Credit to Offset Certain Income Tax Revenues - Amendments, sponsored
by Lead Sponsor Government Operations and Fiscal Policy Committee and Co-Sponsor Councilmember
Rice, was introduced on December 6,2016. A public hearing was held on January 17 and a Government
Operations and Fiscal Policy Committee worksession was held on January 30.
Bill 48-16 would clarify the eligibility for the property tax credit to offset certain income tax
revenues.
Background
Maryland law pennits counties to provide a property tax credit to offset a portion of the income
tax levied. Under Md. Code, Tax-Property §9-221 (Property Tax Credit for Income Tax Offset or ITOC),
the credit is only available to the owner-occupied property of a homeowner, as described in Md. Code,
Tax-Property §9-1 05 (Homestead Tax Credit),
l
which in
turn
defines a homeowner as an individual having
a legal interest in a dwelling. A dwelling is then defined as a house or unit that is used as a principal
residence and is actually occupied as such (or expected to be occupied as such) for at least 6 months out
of the relevant 12-month period.
Montgomery County implemented the property tax credit for income tax offset
2
law in County
Code §52-86, which states that an "eligible taxpayer is any homeowner who
qualifies
for a homestead
property tax credit under Maryland Code, Tax-Property Article, Section 9-105, or any successor
The State Homestead Tax Credit is a "circuit-breaker" that limits the amount of any annual property tax increase for
homeowners who use the home as a principal residence and occupy it as such for at least 6 months out of the relevant 12 month
period. The impact of this "circuit-breaker" protection is felt during periods of rapidly rising assessments. The effect of the
credit is to spread the increase out over multiple years.
2
The amount of the County's property
tax
credit for income tax offset is set annually by resolution. For FYI?, the credit is
$692 per eligible homeowner. Approximately 244,000 taxpayers will receive the credit in FYI?
I
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provision. " The Montgomery County law further states that a taxpayer need not file an application to
receive the income tax offset credit.
Several years later, the State of Maryland amended Tax-Property §9-105 (Homestead Tax Credit).
The amendment added a new requirement to the Homestead Tax Credit law: to qualify for the credit under
this section, a homeowner must submit an application for the credit to the State.
This change to the Homestead Tax Credit law has resulted in some confusion about the County's
property tax credit for income tax offset.
Discussion
1.
Is there a link under Maryland law between the State Homestead Tax Credit and the State law
enabling counties to implement a property tax creditfor income tax offset?
No.
As noted above, Tax-Property §9-221 (Property Tax Credit for Income Tax Offset)
does
incorporate by reference the definition of "homeowner" in Tax-Property §9-105 (Homestead Tax Credit).
There is no other link under State law between these two sections of the Tax-Property Article.
There is
no indication that the State Legislature intended, by adding the Homestead Tax Credit application
requirement, to affect eligibility for any local income tax offset credits.
At the time the Homestead
application requirement was enacted, SDAT advised the County Department of Finance that the
Homestead application requirement was not intended to affect anything other than the Homestead Tax
Credit, and SDAT implemented the application requirement in a way that ensured that it did not affect
other credits.
2. Is there a link under Montgomery County law between the County's property tax credit for
income tax offset and the State's Homestead Tax Credit law?
Yes.
Montgomery County Code §52-86 entitles eligible taxpayers to receive a property
tax
credit
to offset certain income tax revenues. An eligible taxpayer is any homeowner who
qualifies
for a
homestead property tax credit under Maryland Code, Tax-Property Article, Section §9-105, or any
successor provision. This reference allows Montgomery County to refer to an existing definition
in
the
State code, thereby limiting the number of statutory definitions. Unfortunately, it also adds ambiguity to
the County law by appearing to allow Montgomery County to piggyback on the State's determination of
eligibility for the Homestead Tax Credit.
The County Attorney and the Department of Finance have consistently interpreted the County
income tax offset credit law to not require a taxpayer to file the State application for the Homestead Credit.
3. Has the Council ever decided as a matter ofpolicy that Montgomery County taxpayers must
satisfy the application requirement of the State's Homestead Tax Credit law in order to
receive the County's property tax credit for income tax offset?
No.
There is no evidence to suggest that the County Council ever made a policy decision that
Montgomery County taxpayers, in order to be eligible to receive the property tax credit for income tax
offset, must satisfy the application requirement of the State's Homestead Tax Credit. The County's
property tax credit for income tax offset was created in 1998, and the changes to the State Homestead Tax
Credit law occurred in 2005. Furthermore,
the County's law expressly states that a taxpayer need not
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file an application to receive the County's credit.
Therefore, the County law states a policy that
eligibility would not depend on whether or not a taxpayer had completed an application or certification
form.
4. Has Montgomery County ever informed taxpayers that they would lose their property tax
credit for income tax offset if they do not submit an application to the State for the
Homestead Tax Credit?
No. Consistent with Montgomery County's interpretation that there is no connection between the
property tax credit for income tax offset and the State application for the Homestead Tax Credit, and the
unambiguous position from SDAT at the time they initiated the homestead credit application process, the
Department of Finance has indicated that there has never been any public information campaign to warn
County taxpayers that they would lose their property tax credit for income
tax
offset if they do not apply
for the State's Homestead Tax Credit.
June 30, 2016 Government Operations and Fiscal Policy (GO) Committee Worksession.
On June 30, 2016, the GO Committee discussed these issues in a worksession on the income tax
offset credit law. The Committee requested staff to work with Finance to draft legislation that would
clarify that a property owner did not need to qualify for the State Homestead Tax Credit in order to be
eligible for the County ITOC. Bill 48-16 would clarify the County's interpretation of the current law and
remove any ambiguity that has arisen since the State began requiring a property owner to apply for the
State Homestead Tax Credit.
Public Hearing
The lone speaker, Finance Director Alex Espinosa, representing the Executive, supported the Bill.
See ©1O.
January 30, 2017 GO Worksession
Finance Director Alex Espinosa represented the Executive Branch. Robert Drummer, Senior
Legislative Attorney, represented the Council staff. Mr. Espinosa explained how Finance was working to
implement a system to remove ineligible properties from the credit without relying on the State. The
Committee discussed the Bill and recommended (3-0) approval as introduced.
Committee recommendation:
approve the Bill as introduced.
This packet contains:
Bill 48-16
Legislative Request Report
Fiscal and Economic Impact statement
Testimony of Alex Espinosa
Circle
#
1
3
4
10
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Bill No.
48-16
Concerning: Taxation - Credit to Offset
Certain Income Tax Revenues ­
Amendments
Revised: October 24, 2016 Draft No.
L
Introduced:
December 6, 2016
Expires:
June 6, 2018
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ _ __
Effective: _ _,.--_ _ _ _ _ __
Sunset Date: --=-.:.No::::.:n..:.::e'---_:--_ _ __
Ch, _ _, Laws of Mont. Co. _ _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
Lead Sponsor: Government Operations and Fiscal Policy Committee
Co-Sponsor: COWlcilmember Rice
AN
ACT to:
(1)
(2)
clarify the eligibility for the credit to offset income tax revenues; and
generally amend the law governing the credit to offset income tax revenues.
By amending
Montgomery County Code
Chapter 52, Taxation
Section 52-86
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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BILL
No.
48-16
1
Sec.
1.
Section 52-86 is amended as follows:
52-86. Credit to offset certain income tax revenues.
(ill
The Director of Finance must allow [each eligible taxpayer] a credit
against County real property taxes due in each tax year [in which the
taxpayer is eligible for the credit] for each property that is an owner­
occupied dwelling of a homeowner as defined in Md. Tax-Property Code
§9-105(a), as amended.
(b)
The Director must not grant the credit if the Director fmds that the
property is not an owner-occupied property ofa homeowner.
[An
eligible
taxpayer is any homeowner who qualifies for a homestead property tax
credit under Maryland Code, Tax-Property Article, Section 9-105, or any
successor provision.]
2
3
4
5
6
7
8
9
10
11
12
13
*
Approved:
*
*
14
15
Roger Berliner, President, County Council
Date
16
17
Approved:
Isiah Leggett, County Executive
Date
18
19
This is a correct copy ofCouncil action.
Linda M. Lauer, Clerk of the Council
Date
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LEGISLATIVE REQUEST REPORT
Bill 48-16
Taxation
-
Credit to Offset Certain Income Tax Revenues
-
Amendments
DESCRIPTION:
Bill 48-16 would clarify that a property owner did not need to qualify
for the State Homestead Tax Credit in order to be eligible for the
County property tax credit to offset income tax.
Legislative changes to the State Homestead Tax Credit law requiring a
homeowner to apply for the State credit has resulted in some confusion
about the County's property tax credit to offset income tax.
Clarify the eligibility for the County property tax credit to offset
income tax.
Department of Finance, County Attorney
To be requested.
To be requested.
To be requested.
Not applicable.
Robert H. Drummer, Senior Legislative Attorney
Yes.
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
None
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ROCKVILLE, MARYLAND
MEMORANDUM
January
9, 2017
TO:
FROM:
Roger Berliner, President, County Council
Jennifer A. Hughes, Dill, ffice of Management andfJi.Jet
AlcxandreA. Espinosa irector, Department of
Financ~
FEIS for B
ill
48-16,
Taxation - Credit to Offset Certain Income Tax Revenues ­
Amendments
SUBJECT:
Please find attached the fiscal and economic impact statements for the above­
referenced legislations.
JAH:fz
cc: Bonnie Kirkland, Assistant Chief Administrative Officer
Lisa Austin, Offices of the County Executive
Joy Nurmi, Special Assistant to the County Executive
Patrick Lacefield, Director, Public Information Office
David Platt, Depat1ment of Finance
Dennis Hetman, Department of Finance
Jane Mukira, Office of Management atld Budget
Naeem Mia, Office of Management and Budget
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Fiscal Impact Statement
Bill 48-16,
Taxation - Credit to Offset Certain Income Tax Revenues - Amendments
1. Legislative Summary
Bill 48-16 would clarify the eligibility for the property tax credit to offset certain income
tax revenues.
It
would clarify that the Director of Finance has the authority to remove a
credit when the Director fmds that the property is not owner-occupied. Currently the
Department of Finance reviews and identifies properties that are not owner-occupied
(they are normally rental properties, and have rental licenses issued by the Department of
Housing and Community Affairs) and provides that list of non-owner-occupied properties
to the State Department of Assessments and Taxation (SDAT). SDAT can use
this
information to update the occupancy status of the subject properties to "not owner­
occupied." However, SDAT is not always able to update the occupancy status in a timely
manner, and therefore this legislation clarifies that the Director of Finance
has
the
authority to update this status, for the purpose of correctly providing Income Tax Offset
Credits.
2.
An
estimate of changes in County revenues and expenditures regardless of whether the
revenues or expenditures are assumed in the recommended or approved budget. Includes
source of information, assumptions, and methodologies used.
The Department of Finance's Compliance Unit has identified approximately 6,000
property tax accounts as being rental properties and not owner-occupied. Only owner­
occupied properties are eligible for the income tax offset credit (lTOC). The value of
6,000 credits is $4,152,000 (6,000 x $692). Removing the lTOC from 6,000 property
accounts would not necessarily increase County property tax revenues because ofthe
Charter limit on real property tax revenues.
1
The Department of Finance assumes that most taxpayers
will
appeal removal ofthe ITOC
and about half of the appeals will be successful, in that the taxpayer will be able to
demonstrate that the property is owner-occupied (using driver's license, income tax
return, etc.). This assumption is based on prior experience with the State Department of
Assessments and Taxation (SDAT). Since 2012, the Department has transmitted the
Compliance Unit's fmdings to SDAT to update the assessment data and remove these
credits, but over half ofthe credits that SDAT initially rellloved have been reversed based
on successful challenges by taxpayers. If taxpayers appeal removal of the credit and that
half are successful, the value of the denied credits would be reduced to $2,076,00.
It
is anticipated that managing the process of removing the ITOC will cause additional
workload for the Department of Finance and MC311. The Department will have to issue
tax refunds for successful appeals of the removed/denied credits, and MC311 will likely
experience an increase in questions from taxpayers who have been found ineligible for
the lTOC. Many of the contacts that MC311 must deal with
will
result in a Service
Request (SR) that will be handled by the Department of Finance.
It
is difficult to estimate
the additional workloads on MC311 and Finance, but if each contact takes two minutes,
Section 305 of the County Charter limits the growth in real property
tax
revenues in a fiscal year to the rate of
inflation, excluding new construction, newly rezoned property, development districts, etc. The Council may override
this
limitation
with
an affmnative vote of nine Councilmembers.
1
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and 6,000 contacts are made, then 200 hours of work will be spent on direct customer
service at MC311 alone.
For Finance, the additional workload will impact other priorities, including processing
other
tax
refunds and other tax credits, as well as posting tax payments, thereby reducing
the level of customer service to the public (assuming no additional resources are provided
to
manage this process).
3. Revenue and expenditure estimates covering at least the next six fiscal years.
The amount of the Income Tax Offset Credit is expected to be reduced between $2.1
million to $4.2 million per year, or $12.6 million - $25.2 million over six years.
As
explained in #2 above, this is not expected to change County property
tax
revenues.
4.
An
actuarial analysis through the entire amortization period for each bill that would affect
retiree pension or group insurance costs.
Not applicable.
5.
An
estimate of expenditures related to County's information technology (IT) systems,
including Enterprise Resource Planning (ERP) systems.
The Department of Finance has been working with the Department of Technology
Services to implement coding changes that are necessary to implement local
determination of eligibility for the ITOC. The Department anticipates that these changes
will be delivered and tested in time to implement by next tax year.
6. Later actions that may affect future revenue and expenditures if the bill authorizes future
spending.
Not applicable, the bill does not authorize future expenditures.
7.
An
estimate of the staff time needed to implement the bill.
Not including the coding changes to be made by DTS, the bill should take less
than
40
hours to implement. This includes testing by Treasury functional staff, after delivery of
the updated software.
8.
An
explanation of how the addition of new staffresponsibilities would affect other duties.
See #2 above. This work is now substantially done by the Treasury Division, except for
Treasury staff changing the status ofthe credit in the Tax Assessment System. Currently
this work is given to the State Department of Assessments and Taxation for input into the
tax roll, but SDAT is not able to make these changes in a timely manner. This bill
clarifies that County staff may make these changes, and this is the purpose of change to
the Tax Assessment System.
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9.
An
estimate of costs when an additional appropriation is needed.
Not applicable.
10. A description of any variable that could affect revenue and cost estimates.
The number of properties that are ineligible for the credit can either increase or decrease.
The number of taxpayers appealing the removal of the rTOC may also
be
different
than
assumed.
11. Ranges of revenue or expenditures that are uncertain or difficult to project.
See #2 and #3 above. The number of successful appeals for removal ofthe credit cannot
be projected. Successful appeals increase refunds to taxpayers, and increase the workload
of the Department of Finance.
. 12.
If
a bill is likely to have no fiscal impact, why that is the case.
Not applicable.
13. Other fiscal impacts or comments.
None.
14. The following contributed to and concurred with this analysis:
Mike Coveyou, David Platt, Dennis Hetman, Department of Finance
Jane Mukira, Office of Management and Budget
Date
J
)
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Economic Impact Statement
Bill 48-16, Taxation - Credit to Offset Certain Income Tax Revenues - Amendments
Background:
Bill 48-16 clarifies the eligibility for the property tax credit to offset certain income tax
revenues - the income tax offset credit (!TOC). Montgomery County implemented the
ITOC law in County Code §52-86 such that an eligible taxpayer is any homeowner
whose property qualifies as an owner-occupied dwelling under Maryland Code, Tax­
Property Article, Section 9-105 (Homestead Tax Credit, or HSTC) or successor'
provision. The County law also states that a taxpayer need not file an application to
receive the !TOC. After the County enacted the !TOC, the State of Maryland amended
Tax-Property Article, Section 9-105 by adding a new requirement to the HSTC law that
in order to qualify for the HSTC, a homeowner must submit an application to the State.
While this change to the HSTC law has resulted in some confusion about eligibility for
the County's ITOC, the County has consistently interpreted its ITOC law to mean that
eligibility is based on owner-occupancy not on whether a property owner is qualified for
or receives the State Homestead Tax Credit. The proposed legislation clarifies the
County's interpretation of current law and also clarifies that the Director of Finance must
not grant the ITOC if the Director finds that the property is not an owner-occupied
property of a homeowner.
1.
The sources of information, assumptions, and methodologies used.
The sources of information and data are from Treasury Division (Treasury), Department
of Finance. According to Treasury, as of the Fall of2016, there are approximately 6,000
property tax accounts identified as rental properties. As rental properties, these property
accounts should not receive the income tax offset credit of $692, which equates to
property tax revenue of$4,152,000.
Under current property tax law and procedure, a taxpayer may appeal the change from
owner-occupied status to not-owner-occupied status. The Department estimates that
most taxpayers will appeal the change and approximately fifty percent of the appeals will
be successful; that is, retain the status of owner-occupied residence. The reason for the
success rate of such appeals is based on previous experience when the Department
transmitted changes in status to the Maryland State Department of Assessments and
Taxation (SDAT) and such changes were reversed by SDAT.
Assuming half of these properties successfully appeal a change in their status and retain
the !TOC, the estimated change in property tax revenue is reduced from $4,152,000 to
$2,076,000.
2. A description of any variable that could affect the economic impact estimates.
The variables that could affect the economic impact estimates are: 1) the number of
accounts currently receiving the credit but are ineligible, and 2) the amount of the credit,
which is currently $692.
Page 1 of2
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Economic Impact Statement
Bill 48-16, Taxation - Credit to Offset Certain Income Tax Revenues - Amendments
3.
The Bill's positive or negative effect, if any on employment, spending, savings,
investment, incomes, and property values in the County.
Bill 48-16 would not have an economic effect on employment, savings, investment, and
property values in the County. The legislation would have a minimum impact on total
County incomes and spending. Assuming the Charter Limit, taxpayers whose real
property classification is no longer classified as owner-occupied property would
experience a slight increase
in
property taxes, but taxpayers whose real property is
classified as owner-occupied property would experience a slight decrease
in
property due
to a lower property tax rate or higher ITOC.
4. H
a Bill is likely to have no economic impact, why is that the case?
See #3
5. The following contributed to or concurred with this analysis: David Platt,
Michael Coveyou, and Rob Hagedoorn, Finance.
Alexandre Espinosa, Director
Department of Finance
Date
Page 20f2
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TESTIMONY ON BEHALF OF COUNTY EXECUTIVE ISIAH LEGGETT ON BILL 48-16, TAXATION - CREDIT TO
OFFSET CERTAIN INCOME TAX REVENUES - AMENDMENTS
January 17, 2017
Good afternoon. My name is Alex Espinosa, Director ofthe County Department of Finance, and I
am here on behalf of County Executive Isiah Leggett to testify in support of Council Bill 48-16, Taxation ­
Credit to Offset Certain Income Tax Revenues - Amendments.
Council Bill 48-16 amends current County law to clarify eligibility for the County's income tax
offset credit. The County law implementing the income tax offset credit refers to an eligible taxpayer as
"any homeowner who qualifies for a homestead property tax credit under Maryland Code, Tax-Property
Article, Section 9-105, or any successor provision," and further states that a taxpayer need not file an
application to receive the income tax offset credit.
Several years after adoption ofthe County law, the State amended its Homestead Tax Credit law
to require a homeowner to submit an application to the State to qualify for the Homestead Tax Credit.
This change to the State Homestead Tax Credit law has caused some confusion about the County's
income tax offset credit. Council Bill 48-16 clarifies that eligibility for the income tax offset credit is
based on whether a property is the owner-occupied dwelling of a homeowner, not on whether the
homeowner qualifies for the Homestead Tax Credit. While the County has consistently interpreted and
applied the income tax offset credit law this way, the County Executive supports these amendments to
remove any ambiguity.
The Department of Finance is working with the Department of Technology Services to program
and test enhancements to the Tax Assessment System to implement local determination of eligibility for
the income tax offset credit for tax year 2017 starting next July. The Department of Finance's
Compliance Unit has identified 5,706 property accounts as being rental properties, which may result in
removal ofthe income tax offset credit from these accounts. According to the fiscal impact statement,
the value ofthe income tax offset credit could change between $2.1 million and $4.2 million next year,
depending on the number of successful appeals. While County revenues won't increase due to the
Charter Limit on property tax revenues, the County Executive believes this is important nonetheless to
support tax fairness.
Administering this eligibility process locally is expected to impact call volume at MC311 and the
workload of the Department of Finance. Other proposed legislation creating new tax credits will also
impact the Department's workload. We will continue to monitor these impacts on the Department's
priorities, including the timely processing of other tax credits, tax payments, and refunds.
I urge the County Council to support Bill 48-16. Thank you for hearing my testimony on behalf of
the County Executive on this important matter.