Delinquent property taxes increased dramatically in Fairfax and Montgomery counties in the last two years, leading local officials to complain that some major landowners and builders are deliberately withholding taxes because their money can earn more in interest than the suburban governments can charge in penalties.
Fairfax failed to collect $2.40 million in property taxes in 1980, a 32 percent increase over the $1.83 million delinquent total in 1979, county officials disclosed yesterday. The amount owed by major property owners, those owing $1,500 or more, increased even more dramatically, from $1.16 million to $1.75 million, a 50 percent jump.
John F. Herrity, chairman of the Fairfax board, said yesterday that the county's relatively low penalty rate on delinquent taxes has put the government in the position of bankrolling many businesses. "You have people who are going broke, who can't borrow money, and here's friendly Fairfax offering loans at 10 percent," he said. "It could be the most serious issue facing local governments in terms of funding their operations."
Montgomery, which now charges the lowest penalty on delinquent property taxes of all Washington area jurisdictions, also saw a whopping increase in the amount of delinquent taxes on properties auctioned at the county's annual tax sale last June. Although the total number of delinquent properties declined, the taxes owed on those properties increased 43 percent -- from $1.7 to $3.2 million -- between 1980 and 1981, according to the county Finance Department.
Although other Washington jurisdictions have not reported a significant increase in delinquencies, some said high interest rates could force developers to borrow from the local tax collector, rather than from the bank.
"Certainly with the economy the way it is and builders stuck with large tracts of lands and interest rates higher than the prime rate, even a 20 percent penalty is going to look attractive," said Richard W. Bradley, deputy director of finance in Prince George's County.
Both Montgomery and Fairfax are looking for ways to up their penalties on delinquent taxes, to make it less appealing for developers to "borrow" from local governments. In Montgomery, where delinquent taxpayers are charged only an 8 percent annual interest penalty, legislation is being prepared for the County Council to add an additional 9 percent a year -- or 3/4 of 1 percent increase -- surcharge to late tax bills.
"We don't want to penalize those who really have a hard time paying. We just want to discourage others from borrowing from the county at 8 percent," said Leonard J. Horan, assistant chief of revenue in Montgomery.
Fairfax charges an initial 10 percent penalty for any 1980 taxes not collected by Dec. 5 and charges interest at a 10 percent annual rate for as long as the tax remains unpaid. County officials say that 10 percent is not enough, when it can cost more than 20 percent to borrow money commercially and when an investor can earn 15 percent from U.S. Treasury notes.
Virginia does not allow higher interest rates or penalty charges, however, and the county's attempt to change that in the General Assembly this year was unsuccessful. "Apparently there are some people who have influence with the General Assembly and are able to block this kind of approach," said Herrity, who argues the county's rate should be allowed to float up and down with commercial interest rates.
To Horan in Montgomery, this year's increase in delinquent taxes suggests that developers are letting a new category of property fall delinquent as they play what he calls the "interest game."
"It looks like the developers are letting more valuable property go unpaid ," said Horan."I can't blame them. If I was in business, I'd do the same thing."
Of the 1,261 delinquent properties put up for auction at Montgomery's annual tax sale last June, 572 parcels, owing $1.3 million in taxes, were owned by developers. Although 581 developers' parcels had gone to tax sale in 1980, the taxes owed on them were $700,000, almost one-half as much.
The 8 percent penalty charged by Montgomery is the minimum mandated by Maryland law. In Prince George's, the county several years ago supplemented the 8 percent penalty with a 1 percent a month interest fee, for a total 20 percent a year penalty on delinquent bills.
In the District, delinquent taxpayers are charged a 10 percent penalty and a 1 percent a month interest charge, amounting to a 22 percent levy against a delinquent bill in the first year.
In spite of the economic pressure, Prince George's saw a drop in its delinquent tax bills from 1980 to 1981, from $2.9 million to $1.9 million.
Martin Galliot, secretary-treasurer of Hilltop Sand & Gravel Co., Inc., agreed that the 10 percent penalty charged by Fairfax is low. "That's very cheap for companies that are paying prime, or prime plus one or two," Galliot said. He said the interest rate was not a factor for Hilltop, which still owes about $14,500 in 1980 taxes.
James P. McDonald, deputy Fairfax executive for management and budget, said that Fairfax still collects more than 99 percent of the taxes due in 1980. He said that because three-quarters of the county's tax bills go to banks or mortgage companies that automatically pay a homeowner's tax bill, even this year's skyrocketing interest rates are unlikely to jeopardize the county's financial standing.
Conrad J. Marshall, a Democratic candidate for delegate in the 49th District, was listed by the county as owing $1,516.09 with his wife. But Marshall said he paid the tax and penalty yesterday morning.
Walter C. Robbins Jr., who until last month served on the Fairfax Economic Development Authority, was listed as owing $6,900 on two pieces of land. A spokesman for Walt Robbins Inc., a real estate firm, said Robbins believes the listing to be in error and will seek an explanation from county officials.
The owner of the land on which the Congressional School sits also owes approximately $24,700. William W. Devers, who leases the land to the private school outside Falls Church, said he would pay the taxes "in a couple of days" if the county listing is correct.