County Council Member Affirms $100 Million Estimate from Tax on New Construction

By Kate Masters Published 10-16-2019 in Bethesda Magazine
https://bethesdamagazine.com/bethesda-beat/government/county-council-member-affirms-100-million-estimate-from-tax-on-new-construction/

Studio and one-bedroom apartments are the least likely residences to add students to Montgomery County’s school system. But developers still must pay $6,791 to $19,937 per unit in school impact taxes, to generate money for school construction and improvements.

Council Member Evan Glass/Photo via Twitter

But when a company demolishes an existing home to build a bigger one in its place, it pays nothing in school impact fees, Council Member Evan Glass said in a phone interview on Monday. That’s despite the fact that each dwelling contributes roughly half a student to the school system — 20 percent more than existing single-family homes, according to the Montgomery County Planning Department.

“I don’t think that’s fair,” Glass said.

To close what he views as a “loophole” in the county’s tax structure, he proposed a bill on Tuesday that would levy new fees on those replacement houses, better known within the building industry as “teardown homes.”

“This legislation is all about fairness and equity within our growth policy,” Glass said. “Newly rebuilt homes are not affordable, they have some of the highest student generation rates among all housing types in the county, and yet they contribute nothing to our infrastructure. This has a real impact on our communities, and I think it’s time to address it.”

The bill has already attracted opposition from the building industry, which says the proposal would penalize small business owners and fail to raise the promised funds. Other council members expressed their own doubts after the legislation was introduced on Tuesday, promising a “lively debate” over the bill.

Currently, Glass and Council Member Will Jawando are the only two sponsors. It’s unusual for a council, which — so far — has been largely supportive of each other’s legislation.

But Glass, former vice chairman of the Montgomery Housing Partnership — one of the county’s largest affordable housing developers — is confident about an estimate he previously released on how much the bill would raise. In an initial press release, sent last week, Glass wrote that the new taxes would generate $100 million for affordable housing and school construction over the next 10 years.

He did not respond to a request for further comment at the time of the release. But in a press conference on Tuesday, Glass explained that the figure was based on the 2,000 residential demolition permits issued by the Department of Planning over the past decade. If the county applied his proposed taxes to those homes, he said, it would have raised approximately $57 million for school construction and $43 million for affordable housing.

The proposed bill would collect new taxes in two ways. One section of the legislation would apply existing school impact taxes to all “teardown” homes that replace dwellings built before March 1, 2004, when the county first started implementing those fees on new development.

Current school impact taxes start at $23,062 for a single-family home, plus $2 per square foot for all floor plans that exceed 3,500 square feet, up to 8,500 square feet.

The second section of the bill would levy a new affordable housing tax for “teardown” homes that exceed the total square footage of the previous residence. The legislation suggests a tax rate of $9 for each square foot that the floor area of the new home exceeds the floor area of the old one.

Proceeds would go to the Housing Initiative Fund, a reserve established in 1988 and dedicated to financing affordable housing projects.

Both taxes would apply to total and partial demolitions in which 50% or more of the original home is torn down.

“This is about making sure that all homeowners support our growing infrastructure needs,” Glass said at a press conference Tuesday. The bill is specifically targeted at much larger replacement homes.

“According to the Planning Department, the average home that’s torn down in Montgomery County was built in 1948, measures 1,700 square feet, and sells for $700,000,” Glass added. The average replacement home, on the other hand, measures 4,200 square feet and sells for $1.75 million.

Activists argued during the press conference that taxes on those homes would provide vital funding for school improvements and affordable housing. Ali Daniels, a math teacher at Eastern Middle School, said the bill would help fund renovations at a long-outdated facility with roaches, mice, and malfunctioning HVAC systems.

Liz Purcell, the mother of a daughter with special needs, said the legislation would help more than 3,000 residents currently on the waiting list for the rental assistance program run by the county’s Housing Opportunities Commission.

“Our daughter benefitted from that program and is just one example of why affordable housing is needed in all areas of the county,” Purcell said. “It’s only fair that some of the biggest homes in the county support affordable housing for people who truly need it.”

But detractors argue that the bill would unfairly tax small businesses while failing to raise the anticipated funding.

The suggested taxes would add approximately $50,000 to $60,000 to the cost of a replacement home or major renovation, deterring builders and consumers, said Larry Cafritz, owner of a small local building company and chairman of the Custom Builders Council of Montgomery County. He explained his opposition to the bill in a separate phone interview after the press conference on Tuesday.

Cafritz also disagreed with Glass’s argument that homeowners, eager to live in Montgomery County, would bear most of the cost of the new impact taxes. Most buyers won’t pay more than market rate for a home unless it comes with visible improvement or amenities, he said, which means that builders would have a hard time recouping those losses.

“If it’s a hidden tax, there’s no perceived additional value, so it would be really hard to get it back simply by raising the price of the house,” Crafitz continued. “You’re asking small builders to absorb this cost, and that would pretty much knock any speculative home project out of viability.”

For Cafritz and Lori Graf, CEO of the Maryland Building Industry, the bill would simultaneously slow the rate of teardown construction and reduce the property taxes that homeowners would otherwise have paid on the larger replacements. Cafritz estimated that taxes on “teardown” construction generally triple from roughly $7,000 to $21,000 per year.

Graf also objected to presenting the lack of existing impact fees as a “loophole” rather than an intentional exception. “We would argue that when these fees were introduced in 1986, this exemption was on purpose,” she said in a phone interview last week.

Unlike completely new homes, “teardown” dwellings exist on lots that have contributed property taxes for years. The replacement home also doesn’t require the addition of any new infrastructure such as water or sewer lines.

Both she and Cafritz also disagreed with Glass’s assessment that replacement homes add more students to the system than previous dwellings.

But for Glass, the decision to treat “teardowns” differently than new residential construction no longer made sense, especially given the county’s well-documented shortage of affordable housing.

“These are new homes with new pipes, new nails, new roofs and new foundations,” he said at the press conference. “They should be treated just like all the other new homes in Montgomery County.”