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Montgomery County’s Revenue Decline: What It Means for Everyone

It’s been awhile since the U.S. economy has been as strong as it is right now. GDP growth is up, unemployment is down and the stock market is booming.

In the midst of all this economic good news, though, Montgomery County is facing a serious revenue shortfall. The county is projecting a $120 million shortfall in the fiscal 2018 operating budget. Even more startling, county officials have revised the six-year revenue forecast down by more than $400 million due to lagging income tax revenue.

How Did We Get Here?

How did our county find itself in this kind of financial predicament given the strength of the economy? At a recent meeting, county finance officials attributed the revenue shortfall mainly to wealthy households reporting significantly less capital gains in anticipation of tax reform.

In 2016, the top 50 taxpaying households in the county realized 50 percent less in capital gains ($600 million) than they did in 2015 ($1.2 billion). This resulted in $21 million less in income tax revenue for the county.

But in 2016, most people expected that Hillary Clinton, not Donald Trump, would be President. And few people expected significant tax reform under a Clinton administration, much less the kind of reform that would prompt the wealthy to withhold realizing capital gains.

Unfortunately, now that tax reform is a reality, the county’s fiscal situation could get even worse. The county’s budget director stated in a memo to the county council that the changes enacted to the federal tax code by the Tax Cuts and Jobs Act — more specifically, changes to federal, state and local tax deductions — could accelerate the revenue decline even more.

And income taxes aren’t the only kind of revenue that’s falling in Montgomery County. The forecast for energy tax revenue was reduced by $100 million over the next six years due to possibly warmer weather and the construction of more energy-efficient buildings. And the forecast for property tax revenue was reduced by $35 million over the next six years due to low inflation, which keeps property values (and thus taxes) from rising.

How Residents Are Affected

Revenue shortfalls like this have a very real impact on the services delivered by the county to residents. For starters, County Executive Ike Leggett has called for 2 percent cuts at county departments this year while departments have been asked to identify 3 percent cuts for fiscal year 2019. Public safety agencies, including local police and fire departments, have been asked to trim their budgets by 1.5 percent.

In late January, the county council approved a plan to trim more than $53 million from the 2018 operating budget. Nearly half of this, or $25 million, will be cut from Montgomery County Public Schools, while $4.4 million will be cut from Montgomery College. In addition, the county council president has indicated that priorities like expanding early childhood education could be put on hold or trimmed back due to the revenue shortfalls.

We’re a Wealthy Community …

Montgomery County is a strong, vibrant community and one of the wealthiest counties in the nation. The county currently has the 11th highest median household income in the country: $94,965.

Digging deeper into the statistics, there are more than 140,000 households in the county that earn at least $100,000 per year, more than 54,000 households that earn at least $200,000 per year, and more than 10,000 households that earn at least $500,000 per year.

These high-earning households pay the vast majority of county taxes: Those earning at $100,000 per year account for 80% of total net taxable income, those earning at least $200,000 per year account for 57% of total net taxable income, and those earning at least $500,000 per year account for 31% of net taxable income.

These statistics confirm what County Council Senior Legislative Analyst Jacob Sesker stated in a recent article in The Sentinel: “We are significantly dependent on income tax revenue over a very small number of county taxpayers.”

… But How Do We Stay This Way?

All of this brings to mind a quote attributed to Nelson Mandela: “A nation should not be judged by how it treats its highest citizens, but it’s lowest ones.”

As noted above, any community is dependent on its wealthiest citizens to pay a large portion of the taxes that support vital services used by everyone. However, the top 50 taxpaying households in our community have either left the county or are not realizing tax income and capital gains as they did previously.

Whatever the reason, it’s in the best interest of our community to continue to attract and retain these wealthy individuals and families to Montgomery County if we want to keep our community financially healthy. Otherwise, everyone — including the least among us — will suffer.

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