In May of this year, the County Council approved County Executive Harkins's request for an increase in Harford County"s "piggyback" tax on personal income from 40% to 50% of the state tax. The increase was needed to cover a shortfall in the county budget for fiscal year 2000-2001 - something that was quite remarkable given the strength of Maryland's economy over the past several years. County Executive Harkins explained that the county's budgetary woes were the product of its rapid residential development over the past decade. Mr. Harkins acknowledged what many have understood for years: residential development is not a source of economic growth. The infrastructure (roads, schools, utilities, police etc.) that is needed to support this growth represents a huge drain on the county's budget. Since there is no mechanism in the county's current taxing or regulatory structure to recover the costs of that development, the sucking sound you hear is tax money going to support new development.
Friends of Harford hopes to bring this issue before the County Executive and the County Council again before the start of the 2001 legislative session. If we want to avoid an annual repeat of last year's tax increase, the citizens of this county must present our elected officials with a clear demand to put the costs of development where they belong: on the projects that create them.
The following is a general overview of how the county obtains the authority to tax new developments, what kinds of taxes different jurisdictions have used to solve this problem, and what other counties in Maryland are doing to recover the costs created by new developments. We will analyze which of these solutions is best for Harford County and ask for your help to put this issue on our elected officials' "Top Ten List" for 2001.
Harford County cannot simply decide to implement a new tax. Instead, it must first receive the power to tax from the State of Maryland through enabling legislation. As a general rule the county's state senators and delegates, acting on a request from the county council and county executive, introduce legislation granting the county council, or the county's citizens, the power to implement a new tax. The enabling legislation sets forth the type of tax the county can impose and may place limitations on the application, scope or nature of that tax. In the case of a tax to cover the costs of development, the legislation generally says what type of development may be taxed and how those taxes are to be spent. Currently, every heavily populated county in the state, except Harford, has received the power to tax new residential development to recover the costs engendered by development. Not surprisingly, each of these counties has acted on this legislation and implemented a tax structure to recover at least a portion of those costs. In the last legislative session, Cecil County won the right to place an excise tax on all new residential development on the ballot for approval by its voters in November.
Three basic types of taxes or fees have been developed over the past twenty-five years to recover the costs of development. They are "developer exactions", "impact fees" and "excise taxes". Developer exactions require the developer to pay the costs (or a portion of the costs) of the infrastructure that relates directly to its project. For example, if a new development requires that a sewer extension be laid or a bridge be built or widened, the developer pays all or some of the costs for that infrastructure. While this approach is used to a limited extent in Harford County (most notably with sewer hookup charges), it does not solve the cost recovery problem because so many of the infrastructure costs (police, schools, road, libraries) are spread over many projects and are not directly attributed to one project. In addition, these exactions are usually set so low that they do not recover the true cost of the infrastructure they are used to build.
Impact fees are an attempt to allocate the costs of this infrastructure over a number of projects. Essentially, the county determines the infrastructure costs related to each new unit of development and sets the tax at that amount. The tax is normally collected at the time the development plan is approved or the building permit is issued. Nationally, impact fees range from $2,000 a unit to over $17,000. The costs incurred by the developer are rolled into the price of the home and are of course, ultimately borne by the purchaser. Impact fees are a relatively simple way of prorating the costs of development and have become the most popular way for local jurisdictions to recover the costs of development. Despite their popularity with citizens and tax collectors, impact fees have not been popular with developers. A number of these fees have been successfully challenged in court as unconstitutional "takings" of a developer's right to develop its property. Recent Supreme Court decisions make clear that, in order to survive constitutional scrutiny, impact fees must accurately reflect the actual costs of the infrastructure that will serve the new development.
In Maryland, at least nine counties, including Anne Arundel, Montgomery, Carroll and Frederick County currently use impact fees. These fees range from $3,500 to $7,500 per unit (per home, condo or townhouse). In Frederick County legislation is currently pending to raise its impact fee from $3,500 per unit of residential development to more than $12,000 per unit. Some counties make exceptions for low income or senior housing or have set up a trust fund to help these projects pay these impact fees. The nature of various Maryland counties' impact fees will be discussed more fully in this next issue of this newsletter.
Excise taxes are an increasingly popular method of recovering the costs associated with development. Essentially, excise taxes are a publicly approved tax on the activity of development instead of an attempt to allocate the costs of development over a number of new units. Examples of existing excise taxes are cigarette and gas taxes imposed by the state or licensing fees imposed by the state and local jurisdictions. Excise taxes must be approved by the public and are not, therefore, required to pass the same constitutional scrutiny as impact fees. As a result, they are much more flexible and can be allocated to pay any county expense, not only the costs of hard infrastructure related to new development. Currently, only Howard County uses excise taxes to recover a portion of the transportation costs associated with new development. Cecil County won the right to put a development excise tax on its ballot this November. Nationally, Boulder, Colorado has used a development excise tax for a number of years.
It's clear from this brief survey of current laws that there are a number of methods Harford County could be using to recover the costs of new development. An analysis of which method is best for Harford will appear in the next issue of this newsletter. In the interim, let us know if you have any questions about this issue and, more importantly, let your elected officials know that you expect this issue to receive significant attention in the months to come.