By Adam Pagnucco.
A big majority of county council members have spoken out against the tax increases recommended by County Executive Marc Elrich. Almost all of them voted against his 6.3 cent property tax hike with only Council Member Kristin Mink abstaining. All of them except Council Member Sidney Katz, who is term limited, are running for office this year and are no doubt responding to Democratic primary voters who overwhelmingly oppose tax hikes.
So why is the council on the verge of raising taxes on low income homeowners?
Last week, I explained that Council President Natali Fani-González wanted to restructure the county’s income tax. On April 29, the council’s Government Operations and Fiscal Policy (GO) Committee, comprised of Chair Kate Stewart and Council Members Sidney Katz and Shebra Evans, unanimously adopted and changed certain elements of it. Specifically, the GO Committee did two things:
1. They adopted a new progressive income tax structure with three brackets: a 2.5% rate on the first $50,000 of adjusted gross income (AGI), a 2.8% rate on AGI of $50,001 through $150,000 and a 3.3% rate on AGI above $150,000. The current rate is 3.2% on all income. Elrich has proposed raising that rate to 3.3% on all income, an option the GO Committee rejected.
2. They voted to repeal the Income Tax Offset Credit (ITOC), which is a tax credit received by homeowners on residences they occupy. That credit is a flat $692 for homeowners who apply for and receive it.
According to council staff, the progressive income tax brackets lose $65 million while repealing the homeowner credit raises $140 million. The combined impact is a $75 million tax increase on homeowners.
Supporters of this plan depict it as progressive taxation. Let’s test that allegation by running some numbers.
Let’s start with a homeowner who has AGI of $50,000. An example of such a person would be a senior who bought a home many years ago and now relies on Social Security and pension income to survive. Another example is a person who once earned decent wages but has taken a hard hit from a layoff or hour cutbacks and is now trying to make ends meet with a reduced income.
The table below shows that this person would pay $350 less in income taxes under the new brackets. However, they give up their $692 homeowner credit. On net, this person would have a tax increase of $342.
Now let’s look at a homeowner who has AGI of $100,000. This person could be a teacher who can afford to own a townhouse. The table below shows that this person would pay $550 less in income taxes under the new brackets. However, they would also give up their $692 homeowner credit. On net, this person would have a tax increase of $142.
The interaction of the new rates and the loss of the credit produces a bell curve of outcomes. Homeowners with AGI of $135,590 through $207,600 would get small net tax cuts. The largest tax cut occurs at an AGI of $150,000, at which the homeowner would get a $58 net tax cut.
Is that juice worth the squeeze?
The council’s own staff has told them that lower income homeowners will pay more under the GO Committee’s plan. In a memo just released, the staff wrote, “Filers that report less than $135,500 in taxable income and previously received the ITOC will pay more in aggregate income and property taxes when compared to FY26. The aggregate change is $0 at taxable income of $135,500.”
Finally, consider the case of a homeowner with $500,000 in AGI. The table below shows that this person would pay $400 less in income taxes but would lose their $692 homeowner credit, a net tax increase of $292.
The homeowner making $50,000 would have to pay a larger tax increase ($342) than the homeowner making $500,000 ($292).
Let’s pause to let that sink in for a moment.
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There are net beneficiaries from this plan. Renters don’t get a homeowner credit, so almost all of them would be better off. However, among those of them who try to buy a home, those making less than $135,000 would face bigger tax payments than under the current system. This plan would disincentivize those renters from buying homes. Is that what county leaders want?
Other beneficiaries are commercial property owners. They don’t get homeowner credits. They will also be spared from the county executive’s property tax rate increase which the council just voted down. The largest property owners in the county include Pepco, Washington Gas, the owner of Westfield Montgomery Mall and a group of big developers. They would have to pay for increased assessments, as would nearly all property owners, but they would otherwise emerge unscathed from the GO Committee’s plan while low income homeowners would face tax hikes.
How is this progressive taxation?
This is a textbook case of rushed policy. This concept originated in a memo by the council president on April 17. It was changed in one council committee work session. There have been no hearings on this proposal and minimal press coverage. No one has asked low income homeowners if they would like to get a tax hike. I am sure if they did the answer would be a loud NO.
Progressive taxation is a worthy goal but this plan does not provide it. The council needs to junk it and return to the issue when they have the time to get it right.
If they don’t, they risk balancing the budget on the backs of people who can least afford to pay up.