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