Working Waterfront: Legislature working on voter-approved tax break

(from Maine Townsman, February 2006)
By Doug Rooks, Freelance Writer

When voters approved Question 7 last November to support Maine’s “working waterfront”, they reversed in dramatic fashion the result on a virtually identical constitutional amendment five years earlier, which narrowly failed to be ratified.

In 2000, coastal municipalities strongly supported current use taxation for commercial fishing properties, while inland communities mostly voted against it. This time, statewide support was overwhelming, with 72 percent of voters saying "yes".

There has been much speculation about why the results of the two votes were so dramatically different. There was much greater awareness of the impact of property taxes on various land uses, thanks to several statewide referendum questions on the subject. A campaign by waterfront users also raised awareness. But it was probably the soaring residential property values along the coast – something virtually every coastal community from Kittery to Eastport has experienced – that highlighted the problem of supporting traditional uses like fishing, and convinced voters something needed to be done.

Question 7 was the only one of several proposals to amend property assessment practices considered by the Joint Select Committee on Property Tax Reform last year to make it successfully through the Legislature. It marks the fourth exception made to the Constitution’s overall requirement that all taxable property be assessed at “just value,” which the courts have taken to mean its current market value.

The question the voters saw on the ballot seems straightforward enough: “Do you favor amending the Constitution of Maine to permit the Legislature to authorize waterfront land used for commercial fishing activities to be assessed based on the land’s current use in a manner similar to treatment now available for farms, open space and forestland?”

The Legislature in particular, and the Taxation Committee in particular, now have the responsibility to craft legislation that will put into effect the means of identifying and assessing the waterfront property in question.

That process may not be as simple as one might expect. The crucial phrase in the amendment would seem to be “waterfront land used for commercial fishing activities.” But the legislation the Taxation Committee began reviewing with a public hearing on February 13, LD 1972 – a draft concept bill – put its slightly differently. In describing the November 2005 vote to amend the Constitution, it refers to “land that is used for or that supports commercial fishing activities.”

As David Ledew, director of the Property Tax Division of Maine Revenue Services, points out, “The amendment created the exception to ‘just value’ that’s necessary to change the assessments on these properties. But the Legislature has to put a system in place for it to actually happen.”

Sen. Dennis Damon, who co-chaired last session's Joint Select Committee on Property Tax Reform, is the sponsor of LD 1972 and a former commercial fisherman himself. He says the draft concept bill is a better idea than trying to create precise language before the public hearing on such a bill.

“I don’t want to put in any preconceived notions about exactly how this will work. We know how some of the existing programs, like Tree Growth, have functioned, but we have to understand the impact on coastal communities before we act,” he said.

In particular, Damon is concerned about a possible shift in tax liability to non-waterfront property that may occur in some communities. Of the three existing current use programs – forestland, farming, and open space – only forestland qualifies for state reimbursement to towns through the Tree Growth program. But the other two programs have a much smaller enrollment of properties, and there are relatively few complaints from municipalities that these reductions in assessed value are harming other taxpayers.

At this point in time, it is unknown whether or not the legislature intends to reimburse municipalities for working waterfront property, but according to Damon, “We should be looking at all possibilities.”

The actual effect on particular coastal towns and cities may be highly variable. In a legendary fishing town like Stonington, there is actually little taxable property that supports the commercial fishing fleet.

In Northeast Harbor, where Damon once fished, virtually all fishing boats head out from a municipally owned pier, which is tax exempt property under existing law.

There are towns with substantial private property that could qualify, however. Vinalhaven is one example, with most of the island’s harbor in private hands, typically owned by families who’ve fished for generations.

Yet the town assessor in Vinalhaven, Jackie Robbins, doesn’t seem too worried about any shift to other taxpayers. “I supported the amendment wholeheartedly,” she said. “It seems to be what the fishermen need to survive, and it will benefit the community to be able to keep them in business.”

Robbins, who comes from Monroe, where the farmland program has helped keep several family farms in businesses, says the working waterfront effort has an equally strong justification.

When the Taxation Committee gets down to business, however, it will have to turn a broad intent into specific statutory language. Two particular areas of interest are who will qualify for the program, and how appropriate values for commercial waterfront uses can be established.

The first task will be broader if the committee adopts the concept of uses that “support” commercial fishing as well as land that is “used for” fishing. Boatyards that produce lobster boats would probably qualify in support roles, while those that specialize in pleasure craft probably would not. What about yards that produce both kinds of vessels? “We’d have to have a minimum percentage requirement we could agree on,” Damon observed.

One recent daily newspaper editorial would spread the benefits far more widely, suggesting that “if this procedure works and helps maintain commercial fishing, it could be extended to other businesses that characterize the Maine waterfront – marinas, pleasure boat building, even waterfront restaurants.” Most legislators, and the assessors interviewed for this story, don’t think restaurants would meet the intent of the amendment, nor do they see pleasure boat industry as a threatened use.

The reason for the amendment, David Ledew said, is a profound shift in how coastal property is valued and used. “Twenty years ago, we wouldn’t even have thought that commercial fishing could be priced out of the market. Usually, commercial uses bring higher values that other uses.”

What’s changed is the escalation of coastal real estate prices for second homes and now year-round homes that have recently driven up valuations of many coastal towns by as much as 20 percent a year. In many places, working waterfront will be converted for residential use if market forces are allowed to work unhindered, Ledew said.

The very endangered qualities of working waterfront also present difficulties for establishing values in a current use program, however.

Bill Healy, town assessor in Cumberland and Yarmouth, and currently president of the Maine Association of Assessing Officials, says that there are few if any recent sales of waterfront property to other commercial fishing users, so it’s difficult to establish values by the usual means of sales prices.

This problem is not unique to working waterfront property. In southern Maine, farmland is rarely sold to new farmers, but is usually converted to residential or other commercial uses. The state, over the years, has established per acre values for farmland that local assessors rely on, said Healy.

Pastureland, for instance, is valued at an average of $325 per acre, with a range of $100-$525 an acre. Cropland averages $400, with a range of $150-$600, while blueberries average $400 with a range of $200-$800 per acre. One of the reasons the values are so low, providing what Healy called “a significant savings” to farmers in Cumberland County, is that the state figures were established in 1996 and have not yet been updated. The state has also set a minimum of $2,000 annual income from farming to qualify for the program.

The forestland or Tree Growth program, which involves state reimbursement, does have values that are set annually, by county, and vary by species composition, with softwood stands the most valuable and hardwood the least.

In Cumberland County, which has the highest rates, the current value for softwood is $369.60 per acre, mixed growth $215.60 and hardwood $132.50. In Washington County, which has among the lowest values, softwood stands are pegged at $82.70 an acre, mixed wood is $78.70 and hardwood just $44.00 per acre.

Healy hopes that the state will eventually provide similar guidance for waterfront properties, and offer training for assessors who need to learn about the new program.

That may not be as easy as it looks, according to Anne Gregory, town assessor in Falmouth. A system for current use valuation of waterfront properties will have to work differently than the existing programs for forest, farm and open land, which are based primarily on acreage.

“How do you establish a value for the activity that’s going on in that particular parcel?” she asked. Since the economic activity is dependent on what happens off shore rather than on land, the waterfront definition would seem to defy conventional assessing practices, which are based on land, buildings, and machinery used to produce income.

“Maybe there are some measures that determine what the business produces on a continuing basis, but I don’t think it’s something most assessors are familiar with,” Gregory said.

The usual alternative to assessing by market property values is an income-based approach. But this is something Maine has tried to avoid in its other current use programs. Potential applicants are leery about intrusion into their financial affairs, and assessors prefer to have broad valuation techniques that aren’t dependent on the year-to-year operations of a particular business.

“I’m not saying it can’t be done,” Gregory said. “You might be able to take a lot on the shore that’s used for fishing and value it at the rate of an inland lot in the same area, with safeguards that require the owner to actually be occupying the property.” She also suggested that cooperative arrangements between several fishermen who may own land in common or lease access to a pier might be recognized as tax-exempt uses.

David Ledew admits that the waterfront amendment does raise questions the state hasn’t dealt with before. “Our hope is that some very wise people can craft some very good language that will be useful to those who will have to carry this out.”

The Taxation Committee will start its work by reviewing the three existing current use programs, and Ledew said that the committee may find some helpful clues in the way they operate.

"The Tree Growth law is based on the idea that the crop being grown is only harvested over long cycles of 20, 30, 40 years or more,” he said. “The return on that kind of investment is going to be a lot different than for the market value of the land if you cut all the timber at once.”

The advantage of using a statewide approach to valuing such land is that it makes the program popular where it’s most needed but doesn’t attempt to extend it to areas where there’s much less pressure on land values.

“In Aroostook County, using land for farming is often its highest and best use, producing the highest return on investment,” he said. “There, the current use is also the most valuable use. That’s also true for the blueberry barrens in Washington County.” In Cumberland County, of course, farmland often lags far behind the value of land for residential and commercial development, and that’s where the program is helpful, he said.

Ledew cautioned not to expect a perfect solution even when the Legislature agrees on an enabling law for working waterfront values. He demurred even on the question of whether the waterfront program will be up and running for the 2007 tax year, saying that the legislative process must run its course.

“Our experience shows that these programs grow and change over time, as we get more familiar with how best to accomplish the goals,” Ledew said. He pointed out that the Tree Growth program was originally mandatory for all owners of more than 500 acres of commercial forestland. It is now a voluntary program with a 10-acre minimum. The farmland program has a five-acre minimum, while open space has no particular acreage, but a set of criteria to determine how it fits the program’s objectives.

“Over the years, we’ve been able to craft good language for Tree Growth that has made it more predictable and easier to use and understand,” he said. While the program doesn’t prevent landowners from converting forestland to other uses – they pay a penalty if they do – it doesn’t force long-time owners to sell because they can’t afford to pay the taxes.

That’s also the purpose of the waterfront amendment. Making sure it works will take a good law, he said, and also the experience that will come from several years of running the program.