Funding the Gap: The Challenge of Renew Baltimore’s Property Tax Cut Plan

Renew Baltimore is advocating for a Charter Amendment to slash the city’s property tax rate from 2.248% to 1.2%. While this proposal may appeal to homeowners, it threatens to create a significant budget deficit for the city. Projections for Fiscal Year 2024 indicate that property taxes will contribute over $1.1 billion to the city budget. A 47% reduction could result in a loss exceeding $500 million.

Although Renew Baltimore contends that the tax cut could stimulate growth and increase property values, thereby offsetting some of the lost revenue, evidence from similar tax caps in Oregon suggests otherwise. Moreover, Renew Baltimore has not presented a concrete plan to address the potential shortfall. In a 2022 interview with the Baltimore Sun, a spokesperson stated, “We’re not taking on the responsibility to devise solutions.”

Given that Baltimore already levies the maximum income tax allowed by state law and cannot currently impose a local sales tax, the options for filling the budget gap are limited. If the amendment passes, intervention from the Baltimore City state delegation will likely be necessary to provide the city with additional revenue-generating tools. This post delves into the limited and challenging options for mitigating the potential $500 million budget gap that Renew Baltimore’s proposed amendment could create.

Raising Income Taxes

Currently, Baltimore imposes a flat 3.2% income tax rate, the highest permissible amount under Maryland state law. If voters choose to enact the Renew amendment, the Baltimore City state delegation may push for new legislation to raise this cap.

Local income taxes provided Baltimore’s budget with approximately $448 million for Fiscal Year 2024, roughly $140 million per percentage point. To offset a $500 million deficit with income tax alone, Baltimore would have to raise the rate from 3.2% to 6.8%. This estimate is based on a static analysis, dividing the $500 million gap by the $140 million per point ($503 million / $140 million).

Introducing a Local Sales Tax

Baltimore could also explore a local sales tax to generate additional funds. Although Maryland imposes a 6% state sales tax, local governments are currently prohibited from adding their own. Similarly to the income tax case, Baltimore would need state approval to impose an extra sales tax rate

However, this approach could be financially burdensome. Data from the Comptroller’s Office indicate that Baltimore City contributes approximately $416 million in sales tax revenue to the state, or roughly $69 million per percentage point. Based on a static analysis, an additional 7.3% sales tax would be required to cover the $500 million deficit ($503 million / $69 million). This would elevate Baltimore’s total sales tax rate to an unprecedented 13.3%, making it the highest in the nation.

Reducing City Services

While alternative funding sources may alleviate some of the financial burden, it’s unlikely that they will completely offset the shortfall created by the Renew amendment. As a result, a reduction in city services is almost inevitable if the amendment passes. Baltimore’s largest budgetary expense is public safety, with approximately $594.5 million allocated to the Baltimore Police Department. Given its significant share of the budget, public safety could be a primary target for substantial cuts.

Education, the second-largest budget item, is protected by the Blueprint for Maryland’s Future, which legally mandates increased education spending over the next seven years.

This narrows the possibilities to a variety of other programs that would likely suffer, including public transportation, libraries, housing assistance, waste management, and parks and recreation. Such reductions would exacerbate existing challenges; for instance, several city pools failed to open this past summer, and recycling is currently only collected every other week. The cuts would come at a time when many residents already perceive these services as inadequate.

Weighing the Costs of Property Tax Cuts

While the prospect of lower property taxes may be enticing, the Renew Baltimore proposal offers no comprehensive plan to make up for the projected $500 million shortfall. As voters consider the proposal, they should understand the full implications. A property tax cut will result in either steep hikes to other taxes or significant cutbacks in essential city services.

Appendix

Tax Rate Scenarios for Addressing Baltimore’s Potential $500 Million Shortfall