Governor Baldacci’s Tax Reform Proposal

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

LD 1, which is currently being reviewed by the Joint Select Committee on Property Tax Reform, is Governor Baldacci’s proposal to implement the citizen-initiated School Finance and Tax Reform Act of 2003 (a.k.a., Question 1A), apply a system of spending limits on government, and otherwise provide property tax relief. The property tax relief in this plan is phased in over a four to six year period. This bill cannot be fairly characterized as providing any type of tax reform. The 68-page multi-faceted proposal would do the following.

Direct amendments to Question 1A. The Governor’s bill amends the text of Question 1A in two ways. First, it establishes that the 55% state funding requirement applies to the “total allocation” as defined by the Essential Programs and Services (EPS) school funding model rather than 55% of the total state and local expenditures for K-12 education, which was the wording of Question 1A. Second, it amends the language of 1A regarding 100% state reimbursement for special education expenditures to establish the EPS school funding model as the measure of all special education costs.

Implementation of 55% state education funding. The Governor’s plan would implement the requirement that the state provide at least 55% of K-12 education spending over a four-year period, from FY06 through FY09. The most recent projections of total state and local spending on public schools for FY06 according to the EPS model is $1.77 billion. If the state were to pay 55% of that total ($974 million) in the next fiscal year, the state’s current year appropriation of $740 million would have to be increased by $234 million. Instead of going immediately to the 55% funding level, the Governor is proposing to phase-in that increase with the following four-year ramp-up: $83 million increase from FY05 to FY06, $69 million increase from FY06 to FY07, $63 million increase from FY 07 to FY 08, and $60 million increase from FY 08 to FY09, when the state would finally reach the 55% level, as measured by the EPS model.

The phased-in proposal would retain the complicated ramp structure in current law whereby the state would not be recognizing 100% of the EPS model for school funding distribution purposes until FY09. For the next fiscal year (FY06), the state would be recognizing only 84% of the EPS model for funding distribution purposes. In FY07, the state would recognize 90% of the model. In FY08, the state would recognize 95% of the model, and in FY09, 100% of the model.

State spending “limits.” Although the bill is loosely fashioned after the initiative proposed by the Maine State Chamber of Commerce with respect to a system of spending limitations on state, county, school and local governments, it significantly deviates from the Chamber’s proposed initiative with regard to the state spending limitation. The Chamber’s initiative would limit year-to-year state appropriations for General Fund revenue to the average real annual increase in “Total Personal Income” (currently 2.58%), capped at 2.75% growth annually. The Governor’s bill would establish a much less strict limitation system with respect to state appropriations, and the effective limit would be entirely controlled by the Legislature. The Governor’s proposed limitation on year-to-year appropriations from the General Fund would be the average real annual increase in Total Personal Income, adjusted for projected inflation values (Consumer Price Index). That limitation today would be approximately 4.6%. Further softening the effect, a series of expenditures would be exempt from the limit, including: unfunded or under-funded federal mandates, losses in “other-source” revenue, the financial demands of citizen initiatives or court orders, any increases in demands for governmental services unrelated to newly created programs or program expansions, and whatever other expenditures the Legislature may designate as “exceptional circumstances”.

Municipal spending limits. Conversely, the Governor’s bill would establish meaningful and enforceable limits on municipal expenditures, which includes municipal expenditures related to municipal school systems but would not pertain to municipal expenditures provided to school administrative districts or community school districts. The spending limitations established in the Governor’s bill adopts word-for-word the limitations established in the Chamber of Commerce’s proposed initiative.

Specifically, the municipal limitation would apply to the growth of the town or city’s property tax commitment. Expenditures of non-property tax dollars would not be controlled by the limitations. Growth of commitment from one year to the next would be limited to the previous year’s commitment multiplied by 1-plus-the average real growth in Total Personal Income (currently 2.58%)-plus-the municipality’s “property growth factor”. [NOTE: After the first year of implementation, the allowed growth from one year to the next would not be based on the previous year’s property tax commitment but, rather, on the previous year’s allowed limit.]

The “property growth factor” is defined as the value of newly-constructed, taxable property created in a municipality in any one year relative to the value of all taxable property, measured as a percent. To place that combined limit in context, based on a random survey of municipal “property growth factors”, the combined formula would provide a total allowance in year-to-year commitment growth that would typically range from 2.6% to over 6%, depending on the municipality.

In addition, the property tax commitment growth allowance must be reduced to the extent the municipality received “net new funding” from the state for any state-supported municipal programs. The value of “net new funding” would be calculated as the current-year state support for any municipal program (e.g., state support for schools, roads, etc.) minus the previous year’s funding from the state for that program adjusted by the municipality’s total growth allowance figure. Unlike the system proposed for the Legislature, there would be no municipal expenditures funded out of the property tax commitment exempted from the growth limitation except Tax Increment Financing (TIF) payments.

Except for act-of-God-type emergency circumstances, the municipality could not raise property taxes in excess of its maximum limit except by a special election. The wording of the Governor’s proposal is unclear about the exact nature of the municipal “election”, but it would likely be interpreted to mean that that all local overrides of the property tax commitment limitations must be accomplished by secret ballot referendum. If a municipality exceeds its limitations without referendum approval, the municipal officers are obligated to divert the excess appropriations to property tax relief, although to do so would violate the separation of legislative and administrative authority at the local level.

County spending limits. In a system identical to the system restricting municipal year-to-year spending, the Governor’s bill would limit county spending. Specifically, any county’s annual assessment against its participating municipalities could not increase from one year to the next more than its previous year’s assessment, multiplied by 1-plus-the real growth in total personal income (currently 2.58%)-plus-the property growth factor of all the municipalities in the county. [NOTE: As would be the case with municipalities, after the first year of implementation, the allowed growth from one year to the next would not be based on the previous year’s total assessment but, rather, on the previous year’s allowed limit.] Except for act-of-God emergencies, the county budget would have to be approved by a majority of county voters at referendum in order to exceed the growth limit allowance, and no county expenditures would be exempt from the limit.

School spending limits. The school spending limits in the Governor’s plan is structured in a completely different way than both the municipal/county limits or the school budget growth limitation system in the Chamber’s initiative. Instead of a school system’s budget being monitored for growth according to a formula-driven growth allowance, it is measured entirely by the Essential Programs and Services allocation model. Specifically, for any school system budget that would appropriate state and local resources in excess of what the EPS model says is necessary, the budget would have to be adopted by a referendum vote, presented to the voters with a specifically-worded warrant article describing the breach with EPS. The referendum requirement would apply to both municipal and district school systems, regardless of how the school budget is otherwise adopted.

For school systems with total state-and-local budgets that do not exceed the EPS model, the limitation formula would be the preceding year’s budget multiplied by 1-plus-the average annual increase in the Consumer Price Index over the last three years (currently 2.4%)-plus 25% of the difference between that total budget and the full EPS budget for that school unit. If the proposed school budget was greater than that limit, even though the entire budget was still less than the EPS model, the budget would have to be adopted by referendum vote.

Statewide cap on EPS. In addition to the EPS-based limitations on each school administrative unit, the aggregate, statewide EPS projection of the annual cost of K-12 public education would be capped at a year-to-year growth maximum of the average annual real growth in Total Personal Income (currently 2.58%).

Tax burden management. Question 1A calls for the adoption of a comprehensive tax burden management plan. The Governor’s bill would establish as state policy the goal of reducing Maine’s overall tax burden to the national average by the year 2015. An “independent commission” of undetermined size and membership would be appointed by the Governor to monitor the state’s progress toward that goal, and the commission would issue annual report cards regarding the compliance of the state, counties, municipalities and schools with respect to their spending limitations.

Special education in EPS model. The Governor’s plan would move the following special education funding model into the EPS modeling system. It is on the basis of this model that the state would be meeting, in a legal sense, its requirement to provide 100% of the costs of special education. Specifically, 100% of the EPS allocation for special education would be provided to each school administrative unit as state school subsidy. The greater of the minimum subsidy allocation (required by state law for school funding) or 100% of special education costs under the EPS model would be guaranteed to any school system.

Base special education allocation. The EPS model would provide communities with base special education funding for each special education student at 220% - 240% of the EPS allocation for general education students, up to a maximum identification rate percentage of 15%. For example, if the EPS allocation is $5,500 for general education students, each district would be allocated $12,100 for each special education student up to the 15% maximum special education count.

High identification allocation. For any school unit whose special education identification rate exceeds 15%, the EPS allocation for each special education student over 15% of the total student count would be 138% of the regular allocation. Again using $5,500 as the general education student allocation, the additional “high ID” allocation would be $7,590 for each special education student over the first 15% of the total student count.

High cost allocation. For any individual special education student who requires much higher than normal services, the EPS model would allocate 100% of the actual costs. For in-district, high cost placements, that allocation level would kick-in when the actual costs are more than 3 times the EPS model special education allocation. Using the same base student cost of the example above, the cost threshold in this category would be at or above the $36,000 range. For out-of-district, high-cost placements, the state’s obligation would kick in when the actual costs exceeded 4 times the EPS model for a special education student, which would be at or above the $48,000 range, in the example above.

Funds for the Efficient Delivery of Local Services. Question 1A capitalized two funds designed to provide financial incentives to local governments and schools willing to enter into partnerships or otherwise change the way their services are delivered to produce efficiencies. The Governor’s bill establishes the responsibility for managing both funds with a state agency (the Department of Education for "The Fund for the Efficient Delivery of Educational Services" and the Department of Administrative and Financial Services for "The Fund for the Efficient Delivery of Local and Regional Services"), but otherwise does not develop either the guidelines or management system of either fund beyond the broad guidelines established in Question 1A.

One change from the wording of 1A regarding the education efficiency fund is provided in the Governor’s bill. Question 1A capitalized the educational efficiency fund with 2% of the total state appropriation to education each year. Presumably because the Governor’s bill phases in the 55% state funding obligation over four years, the set-aside of the total appropriation into the efficiency fund is phased in as well. Half a percent of the total education appropriation would be put into the educational efficiency fund in FY 06, 1% in FY 07, 1.5% in FY 08 and 2% in FY 09.

Circuit Breaker expansion. A section of the Governor’s bill is devoted to an expansion of the so-called “circuit breaker” property tax and rent rebate program, but the wording of the expansion makes it hard to quantify the expansion in any measurable way, either in terms of increased costs to the state or in terms of increased benefits to recipients. The clearest change is that the maximum household income levels that determine the basic eligibility threshold are increased in the bill from $30,300 (for single-member households) to $50,000, and from $46,900 (for multi-member households) to $75,000. There is also language in the bill authorizing increases in the value of the maximum benefit (currently $1,000) to be implemented automatically by the State Tax Assessor based on the availability of revenue in the Circuit Breaker Reserve Fund, but when those maximum benefits are actually increased, and by how much, is not specified by the bill. Instead, the State Tax Assessor is directed to study how the maximum benefit could be increased to $2,000 by FY 09 and $3,000 by FY 2011.

Property tax deferral. The bill directs the Maine State Housing Authority to develop a program, funded by bonds, that would position the state to pay, upon the homeowner’s application, the portion of Maine resident’s property taxes that exceed 6% of that applicant’s income. The state’s payment would be protected by a lien on the applicant’s property that would foreclose at the time the property was transferred.

Funding the BETR program. The Governor’s plan calls for restructuring the way the Business Equipment Tax Reimbursement Program (BETR) is financed. Currently, the BETR program reimburses businesses for 100% of their personal property taxes on qualifying business equipment with an appropriation from the state’s General Fund. Under the restructuring, the reimbursement funds would be provided from a special reserve account that would be automatically funded with state revenues before those revenues accrue to the General Fund.

This system parallels a similar change enacted by the last Legislature regarding the funding of the state’s “circuit breaker” program, which is no longer funded by an annual appropriation but, instead, funded directly from the state’s income revenue stream in the same manner as income tax refunds are funded. The Governor’s proposal would deappropriate from the General Fund $78 million in FY 06 and $82 million in FY 07 that would normally be appropriated for BETR reimbursements, and dedicate the same amount of revenue each year from the pre-General Fund revenue stream. Since 5.1% of that revenue would otherwise be dedicated to the Local Government Fund for municipal revenue sharing purposes, the effect of this restructuring would be to reduce what would otherwise accrue to the Local Government Fund by $4 million in FY 06 and $4.3 million in FY 07.