Excise Tax Increase
Originally Published: March 29, 2023
Warning: This post is long, but worth it
The Short Version:
The Commissioners are changing the Impact Fee to an Excise Tax. This tax is charged on new development and helps fund Capital Improvement Projects (schools, road improvements, parks and recreation, public safety). Because of historically being too low, the Impact Fee is not at the amount it should be to adequately keep up with growth. As a result, the newly proposed Excise Tax will be an increase of 84 to 442% compared to the current Impact Fee.
Revenue from the new Excise Tax is not yet included in next year’s budget plan because the Tax amount hasn’t been decided. It could potentially free up $6.7M to be used elsewhere in the budget.
There is a public forum about the proposed Excise Tax on April 18th at 6:30PM in the Chesapeake Building in Leonardtown. If you can’t make it, email your comments to csmc@stmaryscountymd.gov.
One week later, on April 25th at 6:30PM, the public hearing on the proposed budget for next year will be held at Chopticon High School. For residents to review it in full the proposed budget must include potential revenue from the Excise Tax. Under the current timeline, that revenue projection will not be added to the budget until it is finalized in May. Residents deserve the opportunity to comment on the budget, in full, especially if the Excise Tax is going to free up more funding that could benefit from public input.
Read the Excise Tax Presentation beginning on page 2: https://go.boarddocs.com/.../BWS%20Material%20for%2003.21...
Watch the Excise Tax Presentation: https://www.youtube.com/live/y1QN8xCosjI?feature=share&t=215
See the Draft Tax Schedule and Revenue Projection in the comments.
LONG VERSION:
What is an Impact Fee and an Excise Tax?
In St. Mary’s County, an impact fee (tax) is charged on new development of dwelling units (residential housing), including apartments, condos, townhomes, and single and multi-family homes to support Capital Improvement Projects (CIP) for schools, roads, and recreation and parks. An Excise Tax is a tax charged on new development of dwelling units and commercial space (retail/commercial, office/institutional, industrial/flex). Excise taxes allow for greater flexibility in spending the revenue generated to support CIP.
What is the history of the Impact Fee in St. Mary’s County?
Prior to this year, St. Mary’s County collected an Impact Fee. The impact fee of $4500, set in 2000 by the Commissioners, remained in place for the next 17 years. In 2017, the Commissioners decided to increase the impact fee after analyzing the amount of revenue needed to support the CIP budget for Fiscal Year 2018 (FY18–Note that the FY runs July 1 - June 30. In March of 2017, the Commissioners were planning for FY18 which would begin on July 1, 2018).
The Impact Fee amount was inadequate. The estimated cost of a new dwelling unit on public infrastructure was found to be $23,356. A public forum was held, and based on feedback the Commissioners decided to create an Impact Fee Focus Group. The Focus Group recommended the impact fee be based on the CIP budget for schools, roads, and parks.
How is an Impact Fee calculated?
The value of the five year CIP plan for schools, roads, and parks is divided by the county population to find an estimated cost per person. That number is multiplied by average persons per household to find the estimated cost per new dwelling unit for the CIP categories. Those three numbers are added together to find the total Impact Fee. The total Impact Fee is then reduced by two numbers: the average cost per dwelling unit on bonds/debt associated with the CIP, and the transfer tax charged for each new dwelling unit.
To pay for the CIP budget, the County will buy and sell bonds. Basically it’s a loan, and we pay interest on the amount borrowed. Transfer taxes are paid on a transfer of real property recorded by the County’s Land Records. The tax amount is 1% of the value of the property.
The impact fee is based on dwelling size (under 1199 sqft, 1200-2399 sqft, and 2400 sqft or more). The smaller dwelling size pays 80% of the fee, the mid-range size pays 90%, and the largest size pays 100%. It was thought that by charging a smaller fee for smaller homes it would encourage developers to build smaller, affordable homes.
What’s the math?
The Commissioners increased the Impact Fee in 2018 by $1,000, to a $5,500 baseline. The total Impact Fee associated with each new dwelling unit for FY20 was $24,538. That amount was reduced by $12,526 to account for Bond Debt associated with the CIP plan. It was further reduced by $2,920, the estimated transfer tax for each new dwelling unit. The final Impact Fee amount is then $9,092.
The difference between $9,092 and the baseline Impact Fee of $5,500 is phased in over the course of 5 years. This is supposed to reduce the burden of the Impact Fee charged to our residents. Remember, the Impact Fee is in place to pay for the CIP budget, which continues to grow as the county grows and residents need more services.
Why are we switching to an Excise Tax?
In 2021, the Commissioners asked the St. Mary’s County Delegation to sponsor HB528, which repealed the Impact Fee and authorized the implementation of an Excise Tax. The Excise Tax will allow them to tax not only residential development, but commercial as well. This was supposed to bring in additional revenue for the county’s budget. HB528 became law and the Commissioners initiated a study to determine the Excise Tax amounts for residential and commercial development.
What did the Excise Tax study find?
The study recommends applying Excise Tax revenue to four categories: schools, roads, parks, and public safety. Residential new dwelling units will pay toward all four categories. New commercial development will pay toward roads and public safety.
For residential development, the proposal lists two ways to apply the tax: by Type of Unit (single or multi-family) or by Size of Unit (under 1200 sqft, 1201-1500 sqft, 2001-2500 sqft, and 2501 sqft or more). For commercial development, the recommendation charges a specific rate per unit, by development type (Retail/Commercial, Office/Institutional, or Industrial/Flex).
When compared to the current Impact Fee, the Excise Tax will increase by 84% to 442% depending on the size of the home. The phased in approach the Commissioners used to increase the Impact Fee over the last five years has not achieved the desired goal. Otherwise, the increase needed to implement the Excise Tax would not be so high.
Why is the Impact Fee/Excise Tax still so far behind?
During the budget process for FY21, the Board of Education’s school capacity projects were removed from the Impact Fee calculation. FY21 was the third year of the overall five year phase in plan. Taking the school projects out of the calculation caused the Impact Fee to be (-$481). If this continued, by FY23 there would have been a $0 Impact Fee. When planning for FY22 school projects were added back into the calculation. Also in FY22, the County began using the actual cost of the school buildings and improvements, rather than just the County’s portion of the cost (used in previous years.) These two things drastically changed the calculated Impact Fee amount.
As the county grows in population more residential and commercial development happens. School enrollment goes up and more resources and services are needed from the county government to improve infrastructure. Charging the Tax on development generates revenue which the county uses to fund capital improvements. If the balance is properly maintained, an Impact Fee/Excise Tax should reduce the need to borrow money to fund the CIP, and save the taxpayers from paying interest.
Currently, total county debt is $146,210,674, and by FY2029 it is projected to be $273,057,119, an increase of 87%. The amount needed on hand to pay off that debt will have ballooned to nearly $25M by FY2029.
The County’s Debt policy states: “Before issuing debt, the County should consider other sources of funding available for capital project costs, including but not limited to transfer taxes, dedicated land preservation funding, impact fees, and pay-go, prior to issuing debt.” How much money could we be saving in debt if we charged the actual Impact Fee (or Excise Tax)?
Over seven years, the newly recommended Excise Tax is projected to bring in $28.1M in revenue, about $4M per year. $25.9M will be generated from residential housing ($3.7M/year) and $2.25M ($321K/year) from commercial development. The Excise Tax idea was originally sold by the Commissioners as a “revenue neutral” idea from the residential side. The current budget lists $1.035M as income from the Impact Fee. Notably, the Excise Tax calculation is based on the local share of the funding needed for school projects, while the Impact Fee was based on the total value of school assets for the last several years. Prior to FY21, the Impact Fee calculation was also based on the local share of the funding needed. This back and forth of methodology affects the Tax amount.
FY24’s budget, which is currently being worked on, has $6.74M allocated towards the CIP plan from fund balance (also called Pay-Go). There are no revenue projections included for the Excise Tax because the final decision on the rate of the tax has not been made. But, if the Excise Tax brings in at least $6.74M or more, that would free up the fund balance money used in the CIP plan to be used elsewhere in the budget.
See above for public hearing information on this subject.
