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July 14, 2003

Is The County's Tax Rate Where It Should Be?

Alan Imhoff

On July 1st we began a new Fiscal Year for the county, the school system, all the municipalities and the State of Maryland. Everyone can breathe a sigh of relief, or can we?

The budget battles are behind us, the public servants are ready to tackle another year and, within just a few short months, begin the budget cycle all over again. No rest for the weary, I suppose, not to mention any relief on the old pocketbook.

One of the interesting things I find totally ridiculous every year is this stupid notion that we have to subscribe to the state-calculated Constant Yield Tax Rate to measure whether or not we are being taxed too much.

I mean really, have you planned this year to spend the exact amount of money as you received in pay LAST year?

The state magicians have worked up this wonderful way for all politicians to look bad. No one could not keep the amount of money we receive at the same level as last year, so all responsible people need to "raise" the property tax rate from the Constant Yield to the same rate as we charged last year to meet the budget.

Case in point. Last fiscal year our property tax rate was $1.00 per hundred of state-appraised market value. This year the state calculated our constant Yield rate at $0.962 per hundred. Which means our county commissioners "raised" the tax by $0.038, just by keeping it the same rate as last year, at $1.00.

However, I would like to propose we create a new measure. Instead of a property tax rate based on revenue, I would like to base it on the expense side of the equation.

Why?

Since government very rarely cuts expenditures, we need to find out what we should charge our property owners to meet the needs of government spending. For the past several years I have been tracking the property tax rate in this manner and have some interesting numbers for you. I call this new method the "Consistency Yield".

While I have not updated my analysis on the county's new budget, which by the way rose 10.02% in expenses while revenues grew only 4.93%, the running average for the past several years indicates we are taxing ourselves below a "consistency yield" of $1.06 per hundred.

I can hear the outcry already, another tax and spend liberal!

Consistency Yield is based on the principle that the expense budget has been -- and is still -- crafted in a manner that was used when we assessed on a 50% of market value, a methodology put into use over 20 years ago.

So, instead of a liberal bias, it is as a fiscal conservative looking at the same problem from the opposite side of the equation.

If Frederick County's rate rose 6 cents, we would generate approximately $8.8 million more in property tax revenue.

Why, do you ask, do we need it?

Remember what I said earlier about expenses rising at 10.02% while revenues grew only 4.93%, so that 5.09% difference equates to about $25,000,000 of expenses over revenue that has to be met somehow.

In budget terms it is called "Budgeted use of Fund Balance", in other words a shortfall that has to be covered by money gotten from some "rainy day" type account. Last year we only budgeted approximately $9.7 million to balance the books.

So, if we had another 6 cents on the property tax we would only be using a "Budgeted use of Fund Balance" of $16.2 million.

If we took this one step further, to truly meet the budgeted expenses without this Fund Balance sleight of hand, our property tax rate would need to be in the vicinity of $1.17 per hundred.

Now is the time for the outcry!

Is this rate out of line?

A quick check shows that Loudoun County was $1.08, but reduced it to $1.05. (Don't forget they also have a personal property tax at $4.20 per hundred, which we don't.).

Cherokee County, just outside of Atlanta, used in our Office of Economic Development comparison analysis, has a rate of $1.103 per hundred.

So maybe the $1.06 is not unreasonable.

Next year we will not have a $16 million windfall to count on for the "Fund Balance" transfer. The effects of a slower than normal year in new construction will be more evident in lower revenue projections, but I can guarantee that expenses won't go down.

So maybe a property tax rate of $1.10 or higher might be in the making?



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