Tax Hikes Include $36M Increase on Business Loans

By Len Lazarick,

ANNAPOLIS (May 15, 2012)—The Maryland Senate is expected to give final approval today to a package of tax hikes that will raise more than $300 million a year, with the bulk of it coming from increases of 5% to 15% on incomes of taxpayers making more than $100,000 per year.

But a little noticed provision will also raise $36 million in new taxes from companies that back mortgages on commercial development and homebuilding. Opponents say it will add to the cost of construction and harm Maryland’s business rankings.

The proposed tax hikes will require businesses to pay county governments a recording tax on “indemnity mortgages,” in which third parties guarantee to pay a mortgage if a builder or developer fails to pay a construction loan or other debt.

“This is just another impediment to put in front of business,” said Sen. Allan Kittleman, R-Howard, offering an amendment to strip the new tax from the bill. All the money in the additional recording tax will go to local governments, partially offsetting a shift in the cost of the teacher pensions to county governments.

Sen. James Robey, D-Howard, floor manager of the tax hikes for the Budget and Taxation Committee, resisted the change, saying there was a provision in the bill to study the impact on business and report before the next session.

Kittleman’s amendment failed, as did every Republican attempt to stop each of the tax and fee increases in the revenue act. The dozen GOP senators were often joined by a few Democrats opposing the tax hikes.

Bankers, builders testify against tax

At a committee hearing a few hours before the floor debate, representatives of banks, developers, landlords, contractors and homebuilders all testified against the recording tax. The O’Malley administration described the current exemption as a “tax loophole which allows entities to avoid paying taxes on real estate transactions.”

“This is a very high tax compared to surrounding states,” said Tom Ballentine, representing NAIOP, the Commercial Real Estate Development Association. Among neighboring states, only Virginia has a similar but lower tax on indemnity mortgage transactions.

In written testimony, Ballentine pointed out that commercial developers pay repeated mortgage taxes on the same property during the construction process as various loans are used to finance different aspects of the development. The indemnity mortgages are also used to back lines of credit.

Nick Manis, representing Associated Builders and Contractors, pointed out that the committee had killed the bill in the past and “we are still in some very difficult times.”

“This is just another new tax,” Manis said.

Katie Maloney, of Maryland State Builders Association, said the new tax “will have a chilling effect” on efforts to get credit for new construction.

The tax applies only to mortgages of more than $1 million. The recording taxes on real estate taxes are set by county governments and currently raise over $250 million a year.

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