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Md. towns could be off the hook for repaying local tax misallocations

George Edwards (The Daily Record / Bryan P. Sears)

Sen. George Edwards, R-Western Maryland (The Daily Record / Bryan P. Sears)

ANNAPOLIS — Small towns around the state who received overpayments in local tax collections could be off the hook for repaying the state under a bill being considered in the Maryland Senate.

The Senate on Tuesday gave preliminary approval to Senate Bill 397, which would exempt municipal governments from repaying the state as much as $30 million. The bill is sponsored by Sen. George Edwards, R-Western Maryland.

“It’s a fairness issue,” Edwards said.

Much of the money, as much as $24 million, was paid out in error to small towns around the state as the result of a glitch in the computer system that tracks tax returns within the Office of the Comptroller. About $9 million in overpayments went just to incorporated subdivisions solely within Montgomery County.

Under the bill that received preliminary Senate approval, local jurisdictions who had already started to repay the state not only would not have to complete those repayments but any money already remitted to the state would be refunded.

The Senate could take a final vote on the measure later this week.

A similar bill, House Bill 1433, remains in the House Ways and Means Committee.

And while the bill came out of the Senate Committee by a unanimous vote, some legislators such, as Sen. Andrew Serafini, R-Washington, expressed concerns.

Serafini, a fiscal conservative, questioned the fairness of not requiring towns to return money they were not owed and for using a local income tax fund that can have wildly fluctuating balances to absorb the costs of making other jurisdictions whole. Serafini said he struggled with the issue of being fair to local government and being true to his internal political compass.

In the end, Serafini said he voted for the measure in committee because requiring the repayment would do more harm to small towns than it would to the state to absorb $24 million in mistaken payments.

“There’s a lot of places $24 million could go,” Serafini acknowledged. “I looked at the bigger picture. (The legislature) has done a lot of things to local governments over the last few years that has made it harder on them and in the end (the overpayments) were our mistake.”

Under a plan offered by Comptroller Peter Franchot last summer, towns and cities that were underpaid were made whole immediately. Jurisdictions that were overpaid would be put on a payment plan that would start in 2024 after most of those jurisdictions completed repaying.

Jurisdictions that would have to repay the state could do so over the course of a decade in 40 quarterly payments with no interest.

The issue came up following a 2015 Supreme Court ruling that struck down a state law barring Marylanders from deducting from city or county taxes any income tax they paid to other states on money earned there.

The Officer of the Comptroller did not take a public position on the bill in committee. Joseph Shapiro, a spokesman for Franchot, said the office does “support the intent of the bill.”

Some local jurisdictions testified that the financial burden of repaying the funds would be too much to bear. In most cases the payments have remained private because of confidentiality laws, but some towns told the Senate Budget and Taxation Committee last week that repaying the state was a budget buster. In some cases, the amounts paid out exceeded their annual budgets.

Laytonsville and Brookeville in Montgomery County were mistakenly paid a total of $360,000 and $275,000, respectively. The amounts represent 179 percent and 125 percent of the two towns’ respective annual budgets.

Hagerstown, in Serafini’s district, would have to pay back about $800,000.

In addition to making the payments, the leaders of some incorporated subdivisions said they were worried about also reducing their budgets that had been previously been built on faulty revenue assumptions made by the state

Some towns said carrying the debt on their books for the better part of two decades could hurt their ability to borrow money for capital projects.

Elaine Jones, the director of finance for the city of Frostburg, said the $147,000 in overpayments to her jurisdiction would result in annual payments of $15,000 from an annual budget of about $500,000. The money, she said, was the equivalent to the costs of two years of operating one snowplow in her city — an area that typically records the second-highest annual snowfall in the state.

Jones said many jurisdictions questioned the overpayments when they came in and were told the payments were correct. She asked that small towns not be penalized for relying on a mistake made by the state.

“The city needs to assume that the income tax revenue can be available for expenditure without concern that the state will require repayment in the future,” Jones told the Senate committee.

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