Revenue Sharing Changed By LD 1

(from Maine Townsman, March 2005)
By Kate Dufour, Legislative Advocate, State & Federal Relations, MMA

Historically, municipal revenue sharing has been a very stable law, infrequently amended by the Legislature. The last significant amendment was in 2000, and now LD 1 has amended the revenue sharing distribution system again. Neither the 2000 amendment nor the changes in LD 1 have changed the total amount of municipal revenue sharing distributed to all municipalities. Both changes only had the effect of increasing the distribution to the higher mill rate communities and decreasing the distribution to the lower mill rate communities.

Since 1971, the municipal revenue sharing system has been Maine’s way of distributing a small portion of the state’s broad-based income and sales tax revenue to all municipalities in Maine for the purpose of reducing the property tax burden. If municipal revenue sharing were to disappear tomorrow, Maine’s property taxes would increase by 7.5%.

When first enacted, municipal revenue sharing diverted 4% of Maine’s sales and income taxes into the Local Government Fund, from which revenue sharing is distributed. Since the inception of the revenue sharing system, the distribution formula was simplicity itself. Each municipality’s share of the revenue sharing pie was based on a factor determined by multiplying the municipality’s population times its full value mill rate. Municipalities with the greatest populations and highest property tax rate would receive the largest distribution from the Local Government Fund.

In 1985, the percentage of sales and income tax revenues diverted to the Local Government Fund increased from 4.75% to 5.1%, where it has remained ever since.

A law enacted in 2000 divided the revenue sharing program into two parts, the Local Government Fund (now commonly referred to as Revenue Sharing I) and the Disproportionate Tax Burden Fund (commonly referred to as Revenue Sharing II). The Revenue Sharing II distribution system ignores the first 10 mills in each municipality's full value mill rate. The purpose of the two-tiered program was to redistribute some of the state tax revenue provided to all municipalities under the revenue sharing program to communities with relatively high mill rates.

Under the two-tier system, a dollar threshold of $106.9 million was created in FY 01 for the Revenue Sharing I program. For FY 01, any additional revenue generated above the $106.9 million threshold would be dedicated to the Revenue Sharing II program. As enacted, the law ensured that the Revenue Sharing I program would continue to grow by annually adjusting the $106.9 million cap by an inflationary factor, at a maximum. In other words, the growth in the Revenue Sharing I program was limited to a consumer price index (CPI) adjustment. All other revenue in excess of the Revenue Sharing I cap would be distributed under the Revenue Sharing II formula.

In the first year of its existence a one time $3.5 million appropriation was enacted to kick start the Revenue Sharing II program. However, economic hard times hit the state and the Revenue Sharing I threshold was not naturally exceeded until FY 04. In FY 04, $2.1 million was distributed through the Revenue Sharing II program. In FY 06, $6.5 million would have been distributed through its Rev II system.

Revenue Sharing Now

Faced with the need to address property tax burden issues, the LD 1 tax relief package includes an amendment to the revenue sharing program to boost Revenue Sharing II distribution for the benefit of high mill rate communities. As adopted by the Legislature, the only change made to the existing bifurcated revenue sharing program is that starting in FY 06 the Revenue Sharing I threshold is reset at $100 million, down from its current setting at $114 million. Although under LD 1 the Revenue Sharing I program would continue to benefit from CPI adjustments, the LD 1 change will have a financial impact on municipalities that currently have lower than average or average full value mill rates.

The change to the revenue sharing program in year one (FY 06) decreases the Revenue Sharing I funds from an estimated $114 million to $100 million. Using Maine Revenue Services projections, it is estimated that over the next four years the Revenue Sharing I program will lose an average of $14.4 million annually due to the change adopted in LD 1. In FY 06, the projected Revenue Sharing II distribution will increase from an estimated $6.5 million to $20.5 million.

For the purposes of determining the LD 1 revenue sharing impact on municipalities, MMA compared the estimated revenue sharing distribution that a municipality would have received in FY 06 under existing law to the estimated revenue sharing distribution under LD 1.

According to MMA calculations, 10 of Maine’s largest communities are poised to collectively gain an additional $1.2 million in FY 06 revenue sharing distributions. The biggest winners include, in order of benefit, Lewiston, Portland, Auburn, Bangor, Waterville, Augusta, Presque Isle, Orono, Brewer and Houlton. Under the MMA calculations, the 10 hardest hit communities under the LD 1 would lose collectively over $426,000 in revenue sharing funds. Those communities include York, Wells, Standish, Kennebunk, Kittery, Scarborough, Buxton, Eliot, Bar Harbor and Biddeford.