ANNAPOLIS — Good news and bad news from the state’s top tax collector is on the way this week to nearly every incorporated subdivision in Maryland.
Letters and calls will go out over the next two days alerting 86 municipalities that they will receive part of $12.7 million that was misallocated to other subdivisions dating back to 2010. Other subdivisions, 83 in all, will receive similar notifications that they received money they shouldn’t have and will be put on a 10-year payment plan.
Comptroller Peter Franchot, in a legislative briefing, attributed the misallocation to a software and technology issue that failed to properly associate properties with their proper taxing jurisdictions.
“It’s a problem of where we put the money,” Franchot said. “There are two buckets and $12.7 million … got either put in the municipal bucket that should have been put in the county bucket or it got put in the county bucket and it should have been put in the municipal bucket.”
Franchot said the misallocations could amount in some cases to “hundreds of thousands of dollars” to some jurisdictions. Those that are owed money will receive payments from a state’s local income tax transfer fund.
Even so, the comptroller noted that despite the $12.7 million in misallocated funds, his office properly allocated tax revenue 99.9 percent of the time since 2010.
Maryland is the only state in the country where the state collects local taxes and then distributes them to local and municipal governments.
Franchot told legislators that in response to the problem, his office has implemented a series of short-term and long-term fixes he called Project Perfect.
Included in that project is a new system that will review each address to make sure it is properly attributed to its appropriate tax jurisdiction.
Shifting from a bar coded address label system in 2010, the same year the state went to fully electronic returns, caused the problem, Franchot said. In some cases, taxpayers may have inadvertently listed they lived in the wrong municipality and the computer system, which was at least 20 years old, failed to pick up and correct the errors.
Franchot said that problem is now expected to be fixed with a patch to the system and a new computer system that the state expects to buy in the next year. The cost of that system is projected to be around $100 million.
The list of jurisdictions that can expect to receive a check and those to be put on a payment plan starting in 2024 is not yet public.
“We need to to make sure they know first what’s going on,” Andrew Schaufele, director of the Bureau of Revenue Estimates, told reporters after the briefing.
The process of cutting checks has already started. A spokesman for the comptroller said the notification process — calls and letters — should be complete by the end of the week.
Schaufele said no individual taxpayers are affected.
The problem was first identified when some local jurisdictions in Montgomery County noticed fluctuations in their local tax disbursements from the state from one year to the next.
The comptroller’s office initially identified $8.7 million in tax revenues sent to the wrong jurisdictions. Those funds already have been sent to the appropriate jurisdictions.
A recently completely audit by an outside firm identified an additional $12.7 million in misallocated payments.
Sen. Richard Madaleno, D-Montgomery County, following the meeting said he was concerned about how smaller municipalities might handle having to repay the state, and he raised concerns that those jurisdictions might have to raise taxes.
“I’m satisfied that they’ve figured out what went wrong. I’ve no reason to believe their solution won’t work. They’ve put in a safeguard to ensure that it does function. I’m very hopeful when the whole new tax system comes online that they were talking about, a lot of these issues go away much easier and can be monitored and found quicker.”
Madaleno was mildly critical of Franchot’s 99.9 percent success rate, saying that it did not include the $8.7 million in problems previously identified in Montgomery County alone. The senator conceded that even if the figure had been included the success rate would have been 99.85, which he said could reasonably be rounded to the comptroller’s stated figure.