Monday, December 08, 2008

Is Now the Time for the CARR Bill?

Last February, I wrote in favor of a property tax bill proposed by Delegate Al Carr (D-18), commonly known as the Commercial Assessment Rate Review (CARR) bill. The CARR bill would allow county governments to establish different property tax rates for residential and commercial property, as is the case in both the District of Columbia and Northern Virginia. The bill died in the Ways and Means Committee in the last general session, but Delegate Carr has now reintroduced it as a local bill applying only to Montgomery County. Is this still a good idea?

In supporting the bill, I noted how the residential share of assessed property value in Montgomery County had climbed from 69.6% in 1991 to 76.8% in 2007. The commercial share of assessed value fell from 30.4% to 23.2% over the same period. I also noted how the District of Columbia charged more than double the tax rate for commercial over residential property but still had a relatively low vacancy rate in its office market. Those facts remain true. And overall, the notion that property used for profit generation should be taxed at a different rate than property used to raise children and create nest eggs has as much merit now as it did then.

But a lot has happened over the last ten months. Consider the following:

1. The Economy Has Collapsed
Montgomery County’s residential construction industry has crashed. The region’s commercial office market is following suit. Credit for development projects of all kinds is drying up. Maryland’s hotel industry is suffering, including companies like Bethesda-headquartered J.W. Marriott and Silver Spring-based Choice Hotels International. Seventy percent of Maryland retailers expect their sales to fall this month and next from last year. Business bankruptcies in Maryland increased by 11 percent during the first half of this year over the same period in 2007. All of this is taking place during a national recession that is a year old and in the wake of the worst jobs report in 34 years.

The pain has spread down into Wheaton’s Central Business District, the largest commercial area in District 18. Many restaurants there are on the verge of closing. Even successful restaurants like the Royal Mile Pub are suffering from “killing” increases in beer, food and wine costs. Economic changes of this magnitude MUST be considered in adopting tax policy.

2. The State’s Business Reputation Has Taken a Hit
The Tax Foundation ranks Maryland’s business climate as falling from 24th to 45th among U.S. states over the last year. No other state fell more than 3 places. The Tax Foundation states:

Maryland managed a remarkable drop – from 24th in last year’s index to 45th in this year’s – by raising its individual income tax, corporate income tax, sales tax and cigarette tax all in the same year. Maryland added four new tax brackets to the individual income tax, increasing the top rate by 1.5%, adding new complexity and introducing a big new marriage penalty. In fact, we now rate Maryland’s as by far the worst individual income tax in America, displacing California for that dubious distinction.
Delegate Carr opposed the passage of the state’s three-year millionaire surcharge (which I supported) on the grounds that it would be injurious to business owners. By that reasoning, another tax hike on business in bad times would be even more injurious.

Whatever you think of the Tax Foundation’s report or the millionaire tax, their effects on the state’s business reputation must be weighed.

3. The CARR bill is Now a Local Bill
The previous bill would have given tax-raising authority to every county in the state. The new local bill would give it only to Montgomery County. If county government had the authority to raise commercial property taxes and actually used it, the biggest beneficiaries would be Prince George’s and Frederick Counties. Each would have a new advantage in attracting new and existing businesses over Montgomery.

4. The County Government Does Not Support the Bill
At the County Council's work session on local bills, the County Executive recommended no position on this bill. Of the six County Council Members in attendance, two expressed support (Phil Andrews and Marc Elrich), two opposed it (Nancy Floreen and Don Praisner) and two expressed no position (Mike Knapp and Valerie Ervin), resulting in no position taken by the Council. The fact that the very entity intended to exercise the tax-raising authority envisioned by the bill chose not to support it means a lot. If the county officials are not requesting this authority, why give it to them?

Regular readers may be surprised by my use of these arguments. After all, I have spent my entire career in the labor movement, criticized the special session's tax package as regressive, supported the millionaire tax, supported the progressive nature of County Executive Ike Leggett’s property tax proposal and opposed the Ficker Amendment.

Over and over again, I have argued for progressive taxation. And the basic principle of progressive taxation is to tax people who can afford to pay more. Business will always argue against the CARR bill regardless of its intrinsic merit. But the truth is that in this crumbling economy, many businesses legitimately cannot afford a property tax increase. That is especially true of the small and fragile businesses in Wheaton. In a moment of economic depression, it is very hard to make the case that raising taxes that are targeted exclusively at people who create jobs provides a path to recovery.

The bill has considerable support from the county's public employee unions. That is understandable given the fact that three of them have given up their cost-of-living adjustments and the others are likely to follow. But the unions need to think long and hard about two things:

1. The long-run well-being of public employees depends on the economic health of the private sector. A robust, growing private jobs base is necessary to generate the tax revenues needed to fairly compensate public workers. And as I wrote back in April, Montgomery's public employees are NOT overpaid. Discouraging private job creation will prolong the time needed for economic recovery and perhaps even delay the point at which adequate COLAs can be resumed.

2. Now that the Ficker Amendment is in effect, all nine County Council votes are required to break the charter limit on property taxes. Those nine votes are not there, either for a broad increase or for a targeted increase on business as provided for in the CARR bill. So if the CARR bill is passed now, its most likely use would not be for a big tax hike on business, but for a lowering of the residential property rate combined with an increase on the rate for business property. That would be enjoyed by some homeowners and also by some politicians seeking re-election. But it would not only discourage job creation, it would result in no new additional revenue for the county government. That would produce the worst of all worlds for public employee unions: a stagnant economy with NO NEW TAX REVENUE to show for it.

Timing is everything. And while the CARR bill should someday become law, now is not the right time for it.