Can a Maryland city fund a special taxing district with a tax based on construction costs?

Plain-English summary

In 1989, the City of Frederick wanted to fund improvements around its Carroll Creek Linear Park, storm drains, public parking, pedestrian malls, streets, and lighting, by creating a special taxing district and levying a tax equal to two percent of construction costs on property closest to the creek, and one percent elsewhere in the district, exempting single-family and duplex homes. The Mayor asked the Attorney General whether the city had this authority. The opinion concluded the city could create the special taxing district itself: Article 23A, §44(a) of the Maryland Code expressly lets municipalities set up special tax districts for exactly these purposes, storm drainage, parking, pedestrian malls, and street or area lighting. But the opinion found the city could not fund the district the way it proposed. §44(a) only authorizes municipalities to levy an "ad valorem" property tax to support these districts, a tax based on a property's assessed value. A tax pegged to a percentage of construction costs, the opinion reasoned, is really an excise tax on the activity of building, not a tax on owning property, so it falls outside what the legislature authorized. The opinion also noted that even framed as a property tax, a construction-cost-based levy would not be "ad valorem" and could not be assessed by the city itself rather than the state's own assessment authorities.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

In 1989, could a Maryland city create a special taxing district to fund storm drains, parking, or street lighting? Yes, according to this opinion. It concluded Article 23A, §44(a) of the Maryland Code expressly authorized municipal corporations to establish special taxing districts for those specific purposes.

Could the city fund that district with a tax based on a percentage of construction costs? No. The opinion concluded that §44(a) only authorized funding such districts through an ad valorem property tax, a tax on the assessed value of property. A tax calculated as a percentage of construction costs was, in the opinion's view, an excise tax on the activity of building rather than a property tax, and so fell outside what the statute allowed.

How did the opinion tell the difference between a property tax and an excise tax? It applied the Court of Appeals' test from Weaver v. Prince George's County: a property tax is a charge on ownership alone, regardless of use, typically computed by assessors based on the property's value, while an excise tax is a levy on an act, occupation, or privilege, typically computed as a percentage tied to an activity rather than an assessed value.

Could Frederick have designed the tax differently to make it valid? The opinion did not draft an alternative for the city, but its reasoning pointed toward an ad valorem property tax, assessed on property value by the State Department of Assessments and Taxation using the same assessment procedures as other property taxes, as the only funding mechanism §44(a) actually authorized.

Background and statutory framework

Frederick's proposed ordinance would have created the "Carroll Creek Linear Park Tax District" to finance storm drain systems, public parking facilities, pedestrian malls, streets, and lighting tied to the Carroll Creek revitalization project. The tax itself would have been levied directly as a percentage of construction costs, two percent for property immediately adjacent to Carroll Creek or adjacent city-owned real estate, one percent for the rest of the district, with an exemption for single-family and duplex residential construction.

As a municipal corporation, Frederick has home rule status under Article XI-E of the Maryland Constitution, but Article XI-E, §5 bars a municipality from levying any tax or fee not in effect on January 1, 1954, unless the General Assembly has expressly authorized it by general law applying to all municipalities of the same class (all municipalities being grouped into a single class under Article XI-E, §2 and Article 23A, §10). The opinion identified Article 23A, §44 as the only such express authorization for special taxing districts, noting that the statute's reference to "commercial district management authority" financing had been added by Chapter 752, Laws of Maryland 1984, after an earlier AG opinion found the original statute did not cover that purpose.

§44(a) authorizes municipalities "to levy on all real and personal property located within these special taxing districts an ad valorem tax" sufficient to cover bond payments and operating costs for the district's facilities. The opinion found Frederick's proposed purposes matched §44(a) closely, but the funding mechanism did not: because the tax was levied directly by the city council rather than through property assessment, and was measured by construction cost rather than property value, the opinion concluded it functioned as an excise tax on the act of building, not a property tax on ownership, drawing the property-versus-excise distinction from Weaver v. Prince George's County and an analogous Illinois Supreme Court case, Continental Illinois Nat. B. & Tr. Co. v. Zagel, which held a tax measured by a utility's invested capital was still an excise tax on the privilege of doing business, not a property tax.

The opinion also addressed the fallback argument that the tax might be a property tax even if an unusual one. It found that even so, §44(a) requires an "ad valorem" property tax, meaning one based on the property's actual value as defined in the Tax-Property Article, and a tax based on construction cost rather than assessed value would not qualify. It further noted that Article 15 of the Maryland Declaration of Rights requires ad valorem, uniformly applied property taxation, a requirement the construction-cost tax would also have violated since it would tax similarly situated properties differently depending on construction activity. Finally, the opinion pointed out that §44(a) requires special-district property taxes to be levied on the same assessments used for ordinary property taxes, which under the Tax-Property Article are made by the State Department of Assessments and Taxation, not by the city itself, so Frederick could not adopt its own separate valuation method for the district.

Citations and references

Statutes:

• Article XI-E of the Maryland Constitution, granting home rule to municipal corporations, and §§2 and 5, limiting new municipal taxes to those authorized by general law applying to all municipalities of the same class
• Article 23A, §10 of the Maryland Code, grouping all municipal corporations into a single class
• Article 23A, §44 and §44(a), the express statutory authorization for municipal special taxing districts funded by an ad valorem property tax
• Article 23A, §2(b)(35), authorizing commercial district management authorities, added along with the §44 amendment
• Chapter 752, Laws of Maryland 1984, adding commercial district management authority financing to §44
• Article 15 of the Maryland Declaration of Rights, requiring ad valorem, uniform property taxation
• Tax-Property Article §1-101(11), defining "value" as full cash value
• Tax-Property Article §2-202(4), the Department of Assessments and Taxation's authority to prescribe assessment standards
• Tax-Property Article §6-203(b) and §6-203(b)(2), limiting municipal property taxes to state-made assessments, with an exception to prevent property from escaping taxation before assessment
• Tax-Property Article §8-105(a), authorizing capitalization-of-income or other appropriate valuation methods for income-producing real property

Cases:

• Weaver v. Prince George's County, 281 Md. 349, 356, 379 A.2d 399 (1977), on the distinction between a property tax (charged on ownership alone) and an excise tax (charged on an act, occupation, or privilege)
• Mayor & Council of Mt. Airy v. Sappington, 195 Md. 259, 263, 73 A.2d 449 (1950), on strictly construing statutes granting powers to municipal corporations
• Continental Illinois Nat. B. & Tr. Co. v. Zagel, 401 N.E.2d 491, 502 (Ill. 1979), holding a tax measured by a utility's invested capital was an excise tax on the privilege of doing business, not a property tax
• Bornstein v. State Tax Commission, 227 Md. 331, 337, 176 A.2d 859 (1962), on "full cash value" as the price a willing buyer would pay a willing seller

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1989/Volume74_1989.pdf (this opinion appears at printed pages 268-274 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

TAXATION

Municipalities - Special Taxing District - Property Tax - Excise Tax - City of Frederick Lacks Authority To Impose Tax On Construction Costs

March 15, 1989

The Honorable Ronald N. Young
Mayor of Frederick

You have requested our opinion on whether the City of Frederick has the authority to establish a special taxing district supported by a tax based on construction costs.

For the reasons given below, we conclude that, although the city has authority to establish the special taxing district, it does not have authority to impose a tax on construction costs for the support of the district.1

I

Proposed Ordinance

The City of Frederick wishes to create a source of revenue to finance its program to stabilize and revitalize the Carroll Creek Linear Park area. To that end, it is considering the establishment of a special taxing district to be known as the Carroll Creek Linear Park Tax District.

The proposed ordinance would generally levy a tax of two percent of construction costs on construction "on or within a lot of record which in any part is immediately adjacent to Carroll Creek or real estate owned by the City which is adjacent thereto." Proposed Resolution, §2A. Within the remainder of the district, the ordinance

1 Thus, we agree with the advice previously given to you by the City Attorney.
Letter from W. Milnor Roberts, Esquire (April 27, 1988).

would levy a tax of one percent of construction costs on construction. Proposed Resolution, §2B. However, the tax would not apply to the construction of single-family or duplex residential structures. Proposed Resolution, §3. "Construction" would be defined to include not only the erection of any structure, but also alteration, repairs, renovation, demolition or removal of any structure and excavation, filling, and grading for construction. The revenue to be generated by the tax is to be placed in a separate account and expended solely to finance the design, acquisition, construction, and maintenance of storm drain systems, public parking facilities, pedestrian malls, streets, and lighting.

II

Authority to Levy Taxes

As a municipal corporation, Frederick enjoys home rule status under Article XI-E of the Maryland Constitution. However, §5 of Article XI-E limits the power of municipalities to levy taxes and fees in the following terms:

No such municipal corporation shall levy any type of tax, license fee, franchise tax or fee which was not in effect in such municipal corporation on January 1, 1954, unless it shall receive the express authorization of the General Assembly for such purpose, by a general law which in its terms and its effect applies alike to all municipal corporations in one or more of the classes provided for in Section 2 of this Article.2

The only "express authorization" for municipal corporations to establish special taxing districts and levy taxes for their support is found in Article 23A, §44 of the Maryland Code. 68 Opinions of the Attorney General 295, 299-300 (1983).

Article 23A, §44(a) expressly authorizes municipal corporations to establish special tax districts for the purpose of financing storm

2 Pursuant to Article XI-E, §2 of the Constitution, all municipal corporations have been grouped into a single class. Article 23A, §10 of the Maryland Code.

drainage systems, public parking facilities, pedestrian malls, street and area lighting, or a commercial district management authority.3 To provide financial support for special tax districts, §44(a) confers on municipal corporations the following power:

[T]o levy on all real and personal property located within these special taxing districts an ad valorem tax at a rate sufficient to provide adequate annual revenues to pay the principal and interest on any bonds or other obligations of the municipality issued for these purposes as the principal and interest become due, and to pay the costs of operating and maintaining these facilities and activities. These taxes shall be levied in the same manner, upon the same assessments, for the same period or periods, and as of the same date or dates of finality as are now or may hereafter be prescribed.

(Emphasis added.)

III

Validity of Proposed Ordinance

At least with respect to the purpose of the special tax district, Frederick's proposed ordinance was evidently drafted with reference to §44(a). The purposes specified in the proposed ordinance are essentially the same as those mentioned in §44(a), except that there is no reference in the proposed ordinance to a commercial district management authority.4 However, because §44(a) authorizes only ad

3 The reference to commercial district management authorities in §44 was added after this office concluded in 68 Opinions of the Attorney General 295 that the statute did not authorize the establishment of a special tax district for this purpose. The same act also enacted §2(b)(35), authorizing the establishment of commercial district management authorities. Chapter 752, Laws of Maryland 1984.
4 The proposed ordinance refers to the financing of "street and lighting areas," while §44(a) refers to financing "street and area lighting." We assume the wording of the proposed ordinance is inadvertent. To the extent that the proposed ordinance dealt with streets and not merely street lighting, it would exceed the purpose specified in the State statute. See Mayor & Council of Mt. Airy v. Sappington, 195 Md. 259, 263, 73 A.2d 449 (1950) (statutes granting powers to municipal corporations are strictly construed).

valorem property taxes, the question arises whether a tax based on construction costs is an ad valorem property tax.

In Weaver v. Prince George's County, 281 Md. 349, 356, 379 A.2d 399 (1977), the Court of Appeals noted that "[t]he line that separates an excise tax from a property tax is a difficult one to draw, and courts have not fully succeeded in developing a truly useful definition of either concept." However, "[t]he consensus of opinion appears to be that a property tax is a charge on the owner of property by reason of his ownership alone without regard to any use that might be made of it ...; a tax on the mere right to own or hold property is a property tax." 281 Md. at 357 (citations omitted). By way of contrast, an excise tax is a levy on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. Id.

Property and excise taxes may be distinguished by the ways in which they are computed and imposed:

Thus, it has been held that where a tax is levied directly by the Legislature without assessment and is measured by the extent to which a privilege is exercised by a taxpayer without regard to the nature or value of his assets, it is an excise tax. Where, however, the tax is computed upon a valuation of the property and is assessed by assessors, and where the failure to pay the tax results in a lien against the property, it is a property tax, even though a privilege might be included in the valuation.

281 Md. at 358.

A tax is not a property tax merely because the tax is calculated by reference to a value that is related to property. For example, Illinois imposed a tax on utilities "engaged in" certain activities, levied as a percentage of the utilities' "invested capital", their book values, in other words. Yet the Illinois Supreme Court held that this was not a property tax: "That the tax is measured by a utility's invested capital does not render it a property tax, since it is in all significant respects a tax imposed on the privilege of engaging in specified occupations." Continental Illinois Nat. B. & Tr. Co. v. Zagel, 401 N.E.2d 491, 502 (Ill. 1979) (emphasis in original).5

The tax to be imposed by the proposed ordinance is a stated percentage "of all construction costs for all construction." Thus, the tax would be levied directly by the legislative body of the town, rather than by assessment. In addition, the amount of the tax would be measured by the cost of construction, not the value of the property on which the construction might take place. Put another way, the proposed tax would be imposed on a particular activity engaged in on the property, not on the property itself. In light of these factors, we think that the proposed tax would be an excise tax, rather than a property tax. See Weaver, 281 Md. at 358-59 (tax on use of property, as distinguished from tax on ownership, is excise). Accordingly, it is not authorized by Article 23A, §44.

Even if we could conclude that the proposed ordinance would create a property tax, we would be compelled to conclude that the tax would be invalid. Article 23A, §44(a) authorizes municipal corporations to impose only an "ad valorem" tax, that is, a tax levied on property according to its actual value.6 Because the tax to be imposed by the proposed ordinance would be based on the cost of construction, rather than the value of the property, it would be outside the ambit of Article 23A, §44 even as a property tax.7

Article 23A, §44(a)'s requirement of an ad valorem tax reflects the requirement implicit in Article 15 of the Maryland Declaration of Rights that taxes imposed directly upon property as such be based upon the actual value of the property. See Weaver, 281 Md. at 354 n.3.

5 The Illinois Supreme Court also held that, even if the tax were a property tax, it was not ad valorem, "[s]ince the method of taxation ... does not assign a cash value to utility property and then levy a tax on that value ...." 401 N.E.2d at 503. See text accompanying note 7 below.
6 Under the Tax-Property Article, "value" means "full cash value." §1-101(11).
Ordinarily, this is the price that a willing buyer would pay to a willing seller in the open market. Bornstein v. State Tax Commission, 227 Md. 331, 337, 176 A.2d 859 (1962).
7 See note 5 above.

Article 15 of the Declaration of Rights also requires that taxes on property be imposed uniformly on each class of property. The tax imposed by the city's proposed ordinance would apply differently to properties of the same type, depending upon the type and extent of construction activity. Therefore, if it were a property tax, it would violate the uniformity requirement.8

Moreover, Article 23A, §44(a) requires that taxes imposed on properties in special taxing districts be levied "in the same manner, upon the same assessments, for the same period or periods, and as of the same date or dates of finality" as other property taxes. Supervision of the assessment of property for tax purposes is committed to the State Department of Assessments and Taxation, which prescribes the "standards or units for assessing various kinds of property." §2-202(4) of the Tax Property Article ("TP" Article).9 In general, a municipal corporation's property taxes may be levied only on assessments made by the Department of Assessments and Taxation. TP §6-203(b).10 Therefore, the City of Frederick does not have authority to determine for itself a special basis for assessing the value of property within its proposed special taxing district.

8 However, the ad valorem and uniformity requirements of Article 15 of the Declaration of Rights apply only to property taxes. 281 Md. at 355.
9 Especially with respect to commercial property, the assessing authorities may consider various factors to determine the property's value, including both the original and reproduction cost. Bornstein, 227 Md. at 337. In assessing income producing real property other than agricultural land, the supervisors of assessments are explicitly authorized to use "the capitalization of income method or any other appropriate method of valuing the real property." TP §8-105(a).
10 However, until a property has been assessed by the Department of Assessments and Taxation or the supervisor of assessments for the county, the governing body of a municipal corporation may assess the property to prevent its escape from taxation. TP §6-203(b)(2).

IV

Conclusion

In sum, it is our opinion that, although the City of Frederick has authority to establish the proposed special taxing district, it does not have authority to impose a tax on construction costs for the support of the district.

J. Joseph Curran, Jr.
Attorney General

Richard E. Israel
Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice