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Md. Jurisdictions Wonder What to Do With All That Money

By Peter S. Goodman
Washington Post Staff Writer
Friday, December 26, 1997; Page B01

A thriving economy and gains from the stock market boom of the 1990s have left Maryland's local governments awash in unanticipated income tax revenue, potentially yielding a healthy crop of budget surpluses.

For county executives, many of them heading into reelection campaigns, the new year brings a politician's dream: A pile of dollars is projected to land at their feet, no strings attached.

Now they get to figure out whether to spend it, apply it to lowering taxes or stash it away.

Indeed, just as Maryland Gov. Parris N. Glendening (D) is puzzling over how best to use the state's projected $260 million surplus, county executives in the Washington suburbs are sorting through their options for spending extra millions of their own.

In Montgomery and Anne Arundel counties, there is talk of tax cuts. In Howard County, the conversation is focused on spending more to clean up leaky landfills. Nearly everywhere, it seems, there are proposals for stepping up support for education.

But amid the pleasure of inheriting a potential windfall, county officials are soberly reminding themselves that the unexpected funds are partly the result of a volatile stock market. Many are loath to assume continued flows of increased revenue as they make their spending plans.

"A lot of this is one-time money, dependent heavily on what's happening in the stock market," said Timothy Firestine, director of finance for Montgomery County, which now expects to collect $35 million more in income tax revenue this year than initially anticipated. "Income tax is most prone to these wild fluctuations."

Though no one knows for sure, there is wide acceptance that budget surpluses are partly a product of the stock market, which has expanded at an unprecedented clip despite recent troubles. People are cashing in on the market and paying higher taxes as a result. Most of the surpluses come from income tax revenue -- much of it from capital gains taxes -- which are passed on to counties by the state. In Maryland, not only the state assesses income taxes, but local governments assess their own piggyback income tax.

Virginia's local governments are not sharing in this boom because they do not collect local income taxes in addition to the state assessment. But a healthy economy has still translated into more sales tax revenue there, resulting in some projected budget surpluses.

Prince William County, for instance, counted $775,000 in extra revenue in the first quarter of this fiscal year, thanks to larger-than-expected collections of real estate and sales taxes.

The Maryland county with the largest budget surplus is also the county that produces the highest income: Montgomery. The county collected $46 million in unanticipated income taxes last fiscal year and is expecting a surplus of $35 million by the end of this fiscal year in June.

County Executive Douglas M. Duncan (D) has proposed a tax credit for low- to middle-income homeowners next year at a cost of about $8 million. He also is leaning toward supporting a school district request for more than 200 new teachers to alleviate school crowding at a cost of roughly $9 million, Firestine said. In addition, Duncan wants to eliminate a tax on cellular phones.

In the short term, the county can afford to hand out tax relief, Firestine said, but long-term planning demands caution. With an average annual household income of more than $100,000, Montgomery depends on income taxes for a larger chunk of its overall tax revenue than do its neighbors. And income tax revenue tends to be volatile, moving up and down with the market or employment rates. Property taxes, on the other hand, are a far more stable source of revenue because land is reassessed only once every three years.

Moreover, wealthier taxpayers derive more of their income from capital gains on their investments, which fluctuate, and less on their salaries and wages, which are more predictable -- another source of volatility, Firestine said.

Prince George's County, which draws more of its tax revenue from wages and salaries and less from capital gains, has taken a smaller harvest from stock market gains, said Budget Director Douglas A. Brown.

Last year, Prince George's wound up with about $5 million more than expected. When this year's books are closed, officials expect to see a similar surplus, Brown said.

Anne Arundel, with its own share of high-income taxpayers, finds itself with $24 million more than expected, said Financial Officer John Hammond. More than half comes from income tax revenue. The rest is unspent money from last year's budget.

County Executive John G. Gary (R) already has earmarked most of the money for school construction and renovation. In a recent interview, Gary said he would not have a detailed plan until the governor produces his own plan for state support of school construction projects.

Gary also wants to lower the property tax rate next year, although he said the reduction probably would not amount to "more than a few pennies." County property taxes are now $2.38 per $100 of assessed value.

Gary attributes the county's surplus to more than the stock market; he contends that it reflects a healthy local economy funneling new money into the system in the form of wages and investments. Consequently, Gary said, the county will be able to afford a tax cut even if the recent market slump dampens revenue down the road.

Howard County has a potential $8 million windfall to spend, but a tax cut is not a possibility. A law adopted in 1992 precludes the county from spending surpluses on anything but one-time expenses.

That law resulted from past budgetary shortfalls: In the 1980s, rising property values and a booming economy boosted tax revenue that the county plowed into new programs. When the boom ended and revenue dropped, the county had to slash services to square its books.

Staff writer Dan Eggen contributed to this report.

© Copyright 1997 The Washington Post Company

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