Eight Legislative Tax Plans of 2004

(from Maine Townsman, May 2004)
By Geoff Herman, Director of State & Federal Relations, MMA

What follows is a brief description of the various “tax relief” or “tax reform” plans developed this legislative session, in rough chronological order of appearance.

Speaker’s plan. Speaker of the House Rep. Pat Colwell (Gardiner) submitted a bill early in the session that would repeal the $7,000 Homestead property tax exemption but apply the “Homestead” name to a rebate program calculated to provide a check to each homesteader equal to their municipality’s mill rate multiplied by the first $14,000 of the homestead value.  The plan would double the effect of the Homestead exemption but covert it from an up-front exemption that lowers peoples property taxes to a check in the mail from Augusta sometime after the full property taxes are paid.  The Circuit Breaker program would have also been expanded, particularly for elderly households. This bill was ultimately converted into the House Democrats’ plan (see below) and was killed in the House at the end of the session.

Governor’s plan. Governor Baldacci also submitted a bill early-on that was hard to reconcile with any property tax relief. The Governor’s bill would have repealed the Homestead property tax exemption and split those state “savings” between the Circuit Breaker program, which would have been expanded in scope, and an underfunded commitment to public education. The bill also would have repealed the personal property tax in a going-forward manner, saving state reimbursement obligations under the Business Equipment Tax Reimbursement program (BETR) but forcing municipalities to eat multi-million dollar and compounding revenue losses each year. This bill was never really worked on at the Committee level and was killed by the full Legislature.

Republican plan. Although it never became an actual bill, the Republican legislators in both House and Senate advocated for a constitutional amendment that would limit the year-to-year appropriation increases of all governments (state, county, school and municipal) to the consumer price index (CPI) plus the population growth rate.  The proposal is based on a citizen-initiated amendment to Colorado’s constitution. The suggestion was that if the Legislature was willing to adopt this proposed constitutional amendment, the Republicans would be willing to open up to comprehensive tax reform.

Chamber of Commerce / Service Center Coalition plan. This plan, which was advanced at the time of the public hearing on the Governor’s bill but never emerged in any detail, had four major elements. It called for a repeal of the personal property tax as the Governor proposed, moving most of the financial burden for county government to the state, a redesign of the municipal revenue sharing program, and a governmental spending cap system of some kind.

Working Group plan.  The Legislature’s presiding officers (the Speaker of the House and the Senate President) appointed a group of 10 legislators, from both chambers and all political parties, which was called the “Tax Working Group”. The Working Group’s recommendation focused on properly funding K-12 education. Specifically, the Working Group made a finding that the foundation of any sustainable property tax relief plan must be an appropriate school funding commitment from the state, and identified the precise way the Legislature could implement the new Essential Programs and Services (EPS) school funding system to meet that commitment.  The Working Group’s recommendation was to commit to a  so-called  “straight line” ramp-up of the state share of school funding, as measured by the full cost of EPS school funding model, with the state paying 46.5%of EPS in FY 06, 48% in FY 07, 50% in FY 08, 52.5% in FY 09 and 55% in FY 10.  To create an entry ramp to that ramp, the Working Group recommended a school subsidy appropriation for FY 05 – one fiscal year before EPS goes on-line – of $769.6 million, $40 million  more than the FY 04 appropriation.

Coastal / Rural Caucus plan.  Certainly the most comprehensive of all, this plan was incubated within two bipartisan rank-and-file legislative caucuses. The plan as a comprehensive whole never made it to the full Legislature. The plan had seven major elements including two proposed constitutional amendments.

Education funding.  The plan incorporated the educational funding recommendation of the Tax Working Group as its foundation (see above).

Restoration of Homestead exemption.  The plan would restore the Homestead property tax exemption to its flat $7,000 level, reversing the cuts to the Homestead exemption enacted by the Legislature last year.

Circuit Breaker expansion.  The plan would rename and expand the current “Circuit Breaker” property tax rebate program.  The new name would be the “Homestead Tax Cap” program.

Revenue Sharing Adjustment.  The municipal revenue sharing program would be expanded and redesigned so that  low mill rate towns  would continue to get historical levels of revenue sharing, but expanded revenue sharing would be distributed to the highest mill rate communities

Constitutional Cap on Spending.  Different in detail from the Republican spending cap plan, this constitutional amendment would cap the year-to-year growth in state appropriations to the average “real” annual growth in total personal income, adjusted by the current inflation rate.  If that limit were in place today, the state budget from one year to the next could not grow more than 4.7%.  Only by a two-thirds, “super majority” vote in both House and Senate could the Legislature appropriate more than its allowance.

Constitutional Change in “Homestead” Assessment.  The plan also calls for a proposed constitutional amendment that would authorize (but not require) municipalities to cap the year-to-year growth in the value of all homesteaders’ land at the rate of inflation.  The valuation limitation system would not apply to any physical structures and it would only pertain to the amount of the land reasonably necessary to support a personal residence.

Penny on the sales tax. To finance the property tax relief plan, the general (5%) sales tax rate would be increased to 6%, with all of the newly generated revenue dedicated to property tax relief and no other budget-balancing purpose.

House Democrats’ plan. At the very end of the legislative session, House Democratic leadership advanced the following plan, which was debated in the House, and then killed there.

• Increase the excise tax on cigarettes (and other tobacco products) from $1.00 a pack to $1.50 a pack, the sales tax rate on liquor sold in bars and restaurants from 7% to 10%, and generally doubling or tripling the per-gallon excise tax imposed on the wholesale sale of beer, wine and hard cider. All of these changes would generate approximately $50 million in new state revenue each year.

• Increase the FY 05 appropriation for K-12 education to bring the total appropriation to $765.4 million, which is $4 million short of the Working Group plan (see above).

• Restore the value of the Homestead property tax exemption to a flat $7,000 for all non-elderly homesteaders this year, and increase this year’s value of the Homestead exemption to $10,000 for homesteaders who are 65 years of age or older.

• Increase the value of the Homestead exemption for next year to $10,000 for nonelderly homesteaders and $15,000 for elderly homesteaders.

• Expand the Circuit Breaker property tax and rent rebate program in a number of ways.

• Establish a “spending limitation” system on county and municipal government.

Senate Democrats’ plan. Also in the last days of the session, Senate Democratic  leadership prepared the following plan, although it never came up for a vote. The plan would:

• Increase the general 5% sales tax to 6%, generating approximately $120 million a year, dedicating all of that revenue to a variety of property tax relief systems, including:

• Fully funding the “Working Group’s” school funding plan (see above), not only with respect  to the FY 05 appropriation but over time.

• Increasing the value of the Homestead property tax exemption to $11,000.

• Expanding the Circuit Breaker property tax and rent rebate program in several ways.

• Increasing the state’s Tree Growth reimbursement rate from the so-called “90% per acre tax revenue loss” to a 100% level.

• Funding a small business property tax refund system whereby the state would provide small businesses with a property tax refund based on the number of people employed by the small business.

• Amending poverty abatement law to specify that abatements could only be provided with respect to the property taxes on the primary residence of the applicant and not the applicant’s business property, all in response to a recent decision of the Maine Supreme Court.

• Establishing a “spending limitation” system on county and municipal government.