Monday, August 24, 2009

The Economic Engine of Maryland, Part Four

Montgomery County and Fairfax County are the economic engines of their respective states. Over the last 25 years, Fairfax has passed Montgomery on nearly every economic measure. But over the last 5 years, Montgomery has fared better. Today we look at one aspect of how the two counties compete: their relative tax rates.

One fact that is not commonly acknowledged is that Montgomery charges lower property tax rates than Fairfax. Here are the rates in effect during Fiscal Year 2009:

While Montgomery’s rates are lower, the gap narrows when residential rates are compared to home values. During the 2005-07 period, Montgomery charged 0.7% of its median home value in taxes while Fairfax charged 0.8%. Few homeowners would notice such a tiny difference.

But the primary reason Montgomery’s property tax rates are lower than those in Fairfax is that Montgomery’s revenue base is much more diverse. For example, Fairfax receives no income tax. Here are a variety of other tax rates for Fiscal Year 2009:

On every other measure, Fairfax residents and businesses pay lower taxes than their counterparts in Montgomery. The biggest gap is in income tax rates, especially at the top. We do not have the comparative tax burden between the two counties, but on the state level Maryland (ranked 4th in the nation by the Tax Foundation) far exceeds Virginia (ranked 18th). There is no way that Montgomery County, a high-tax county in a high-tax state, can compete with Fairfax on the basis of low taxes.

But there is one factor on which Montgomery is intensely competitive with Fairfax: the quality of the public schools. We’ll examine this in more detail in Part Five.