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Ocean City

City finalizes homestead tax cap reduction

(Nov. 21, 2014) Provided the state gets the town’s notice by Tuesday, Ocean City will become the fifth jurisdiction in Maryland to fully freeze property assessment increases for owner-occupied homes.

The city council passed an emergency ordinance Monday night that lowered the limit line for the city’s property tax credit from the current 103 percent to 100 percent.

The Maryland Department of Assessments and Taxation must receive notice of the change by Nov. 25 in order for it to be implemented on the coming year’s assessments. Most of Ocean City’s properties were re-assessed this past year, and new values will be released at the end of next month.

Although counter-intuitive, lowering the credit cap will actually save resident homeowners from paying on any further property value increases, although their final bill will still be dependent on the rate set by the city.

“If you lower the assessment cap, but continue to raise the tax rate, it becomes a moot point,” former Councilman and professional tax assessor Vince Gisriel told the council Monday.

“If we’re not going to have a corresponding reduction in the tax rate, it’s of no benefit,” Gisriel said. “But if there is a reduction, it’ll send a clear message that an effort is being made to help the local residents.”

In Maryland, owner-occupied properties are extended what is known as the Homestead Tax Credit, which is intended to buffer primary residences from tax assessment increase that would threaten to make the homes unaffordable.

Regardless of the tax rate in a given jurisdiction, the homestead credit caps any rise in assessed property value of a home. Currently, homeowners in Worcester County pay taxes on no more than 103 percent of the home value that they paid on last year. Taxes on the difference between that 103 percent benchmark, and the actual assessed market value of their home, are credited back to them on their tax bill.

Any municipality within a given county will have its cap set the same, unless it actively moves to raise or lower it. Ocean City’s tax cap went to 103 percent with the county in 2005 by default.

However, the city can ask the state to lower the rate for Ocean City property taxes below the county’s rate – all the way down to a 100 percent cap. This would essentially freeze the value on which owner-occupied property is taxed.

The city has 2,425 owner-occupied properties with a value of just over $272,000 each, for a total assessment of $660 million. The city, however, is not collecting on all of that value, given that many homeowners are still closing the gap between their taxable value and their market value, at a rate of three percent per year.

Putting a freeze on that now, according to city Finance Administrator Martha Bennett, would reduce tax income to the city by about $80,000. In return, the city would hope to see an economic stimulus from that money being back in the pockets of those who live in town.

“It will encourage people to live in Ocean City, and they’ll be spending that tax savings at our businesses,” said Councilman Dennis Dare.

“We’ve had a lot of residents move across the line for tax purposes, but you get what you pay for,” Dare said, noting that the value of complementary city services, in areas such as trash pickup, still far outstrips the rest of Worcester or Sussex counties.

“We need to encourage people to stay here not just for the service level, but from an affordability standpoint as well.”

However, the lower homestead tax cap would only affect those whose property values increase in the coming round of assessments, or those whose taxable value has still not caught up to their market value at the current increase rate of three percent.

This would also assume that the city’s tax rate, which is currently 47 cents per $100 of assessed value, stays the same in the coming budget cycle.

If values decline, the city will hike the rate in order to reap the same total dollar value of tax income, and vice-versa if values increase, in a formula known as the constant yield.

However, given that the vast majority of the city’s tax base is in commercial and rental property, residential home values typically do not track to the resort’s overall values. If commercial values rise, everyone would see a constant yield reduction in their tax rate, including homeowners whose values may have stayed flat.

But if commercial values dip, everyone would shoulder a rise in the tax rate – including homeowners, in which case the homestead credit would not insulate them from paying more in real-dollar terms.

“The gift only comes into effect when property values go up,” noted local landlord and political activist Tony Christ. “If they keep down-trending, as they have been, the impact will be nowhere near $80,000.”

The expectation is that values in the coming cycle will not change dramatically as the real estate economy continues its recovery.

“It’s going to level off, but it will start increasing again in the coming years,” Dare said. “This ordinance [to lower the tax cap] is far-reaching.”

Currently, only four jurisdictions in Maryland have set their homestead credit cap at 100 percent – the Town of Mount Airy, the City of Salisbury, the Town of Upper Marlboro, and Talbot County, according to the MDAT.

Out of Maryland’s 24 primary jurisdictions – 23 counties, plus Baltimore City- 21 have lowered the cap below the state-mandated maximum. Only in Calvert, Montgomery, and Somerset counties are residents subject to the full 110 percent.

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