The Palesky Impact

(from Maine Townsman, May 2004)
By Jeff Austin, Legislative Advocate, MMA

 
Carol Palesky is the driving force behind a property tax initiative that will be on the ballot in November.  Officially, the sponsor of the proposal is the Maine Taxpayers Action Network.  To everyone following the issue, it’s the Palesky Initiative.  The initiative will appear in November alongside an initiative to ban “bear baiting” and with all political elections.

The initiative is a cap on property taxes that could be raised by a municipality.  The heart of the cap is a 10 mill (or 1%) limitation on tax rates.  Approximately 85% of Maine’s municipalities have mill rates above 10 – using the state certified “full values” rather than the local assessed values.  Accordingly, if passed, the cap will immediately impact the services these towns can provide and the quality of life in these communities.

Background

The Legislature

Citizen initiatives emerge from the Maine Constitution’s petition process which allows citizens to make law directly.  Maine Municipal Association used this process to get Question 1A before the voters last November. 

Ms. Palesky has been trying for ten years to gather enough signatures to place her initiative on the ballot.  In 2003, she gathered enough signatures to finally proceed. 

Under the Maine constitution, the initiative must first be offered to the Legislature before it is placed on the ballot.   The initiative is treated like all other bills in that it is presented at a public hearing and reviewed during work session(s).

The Legislature may either enact the initiative, word for word, or reject it.  If rejected, the initiative is placed on the ballot.  The Taxation Committee did not support the Palesky initiative by a unanimous vote, and the full Legislature chose to reject it.

The Legislature contemplated placing the initiative on the June primary ballot, but decided in the end to let it be placed before the voters in November at the general election.

California

The 2,818-word initiative is a remarkably misguided and confused piece of legislation.  This is so, not simply because of its impact, but because of its structure.  To fully explain the structural flaws and utter confusion that the initiative represents would take more time than this article allows.  Please refer to the MMA website (www.memun.org) which directs you to many materials on the Palesky initiative, including discussions of its legal and technical flaws.

There are three basic reasons the proposal is deeply flawed from a structural perspective.  First, it has not been updated since it was first written back in the mid-1990s.  Thus, many of the dates that were in the future from the perspective of 1996 are now in the past. 

The Palesky initiative is very closely modeled after California’s notorious 1978 property tax-cap limitation referendum known as Proposition 13.  California law provides for certain local authorities that Maine law does not.  Accordingly, the second structural problem with the initiative is that it references activities and options that California towns have which Maine towns do not.  These provisions have no effect in Maine and the impact of the initiative is therefore that much more severe.

Lastly, and most significantly, Proposition 13 not only changed California law, it amended California’s constitution.  The Palesky initiative only amends Maine law.  As such, like all other laws, it must conform to the Maine Constitution.  The third structural flaw of the initiative is that some of its parts are clearly unconstitutional.  Since so much of the initiative is unconstitutional (and still other parts may be), there is a question whether the remainder can go into effect.

The Initiative

The initiative has 5 primary elements:

First, it rolls back all assessed property values to their April 1, 1996 level.

Second, it limits annual valuation increases to no more than 2%, unless the property is transferred, in which case the town may make a one-time adjustment to bring the value up to market.

Third, it caps the mill rate at 10, but allows the cap to be exceeded for the purpose of paying debt that was approved by the voters before July 1, 1999.  The average municipal mill rate to cover this type of qualifying debt is one-half of one mill.

Fourth, it attempts to grant towns new authority to raise other taxes or fees which are not based upon property values.

Fifth, it prohibits the Legislature from amending this new taxation system.  All changes would have to be approved by a 2/3 vote at a statewide referendum.

The Court

The Taxation Committee recognized the Palesky initiative’s flaws and the Legislature decided to ask the Justices of the Maine Supreme Court to review the proposal’s most glaring constitutional problems: the value rollback and the 2% cap on valuation increases.   The Justices did, and summarily identified these provisions as unconstitutional.

The Justices indicated that the other provisions may or may not be constitutional and that they would reserve judgment at this point.  Further, if it ever reviews the proposal again, the Court would attempt to “sever” the unconstitutional portions in order to save the others.  However, it kept in mind that at some point, the unconstitutional provisions may be determined so integral to the whole scheme that the entire initiative may need to be struck down.  [Note:  The Opinion of the Justices and related materials are on the MMA website.]

The Court opinion has changed how MMA approaches analyzing the impact of the Palesky Proposal.

The Revenue Impact

The MMA website provides two estimates of the impact of the Palesky initiative.

One revenue impact estimate is of the initiative “as written.”  However, this is the most complicated estimate to make because it involves accounting for sales of property that have occurred from 1996 to 2004.  “As written” the initiative would cut approximately $950 million a year from property taxes.

A second estimate gives a “likely” impact of the initiative since so many of its provisions are unconstitutional.  This second estimate is based upon the initiative’s 10 mill cap based on 2003 data. (Note: the 2003 estimates are new; the website formerly carried impact estimates based on 2002 data. For municipal officials who previously retrieved our impact information, please feel free to check the website again to see the update.)  In order to calculate the estimate, 2003 tax commitments for all the towns and cities and their municipal values were collected.  Since many communities are not at 100% assessment, an adjustment was made.  The adjustment calculates an assessment ratio using the most recent state certified value and the corresponding assessed values.  This ratio was then used to adjust the actual assessed values to their “full” or “equalized” value.  The “likely impact" of the Palesky initiative is a loss of local revenues of $510 million for 2003.

For purposes of planning and community education, we encourage towns to use the best value, commitment and debt service numbers available.  Local officials may even want to adjust those best numbers forward to reflect what the impact to your community would be in 2005, when the Palesky initiative would first take effect.  Projecting the aggregate data to 2005 based on historical trends, MMA estimates the  initiative’s impact would be $600 million statewide next year.

The Service Impact

The next step is to translate the revenue loss figures into service delivery impacts. There is no way to make an aggregate statewide “service impact” estimate that is analogous to our estimate of $510 million in lost revenue in 2003.  However, that is the most important consideration for voters.

There are three basic variables that affect how Palesky would impact services:  local mill rate, statutory mandates and required payments, and other revenues.

Local Mill Rates

As indicated above, the best estimate is that 86% of Maine communities currently have “full value” mill rates above 10.

Statutory Mandates and Required Payments

Statutory mandates are claims on the municipality that must be paid or services that must be provided pursuant to law.  For example, the county tax is a claim that must be paid pursuant to the law.  Palesky provides no allowance for the county tax, which is out of the control of municipal officials.  Therefore, the revenue raised by 10 mills must pay the county tax first.

An example of a mandated service is education.  The Maine constitution provides that towns must provide education services.  Federal laws (e.g., special education and No Child Left Behind), Maine laws (e.g., Learning Results), and local policies govern how those services are provided.  Thus, education services must be provided and paid for under the 10 mill cap.  According to the Department of Education, 360 towns devoted more than 10 mills to education in FY 03-04; another 57 are above 9 mills.

In short, the county tax and education will consume the entire property tax for the vast majority of municipalities under Palesky.  This will lead to no property tax revenue for other services such as police, fire, road work and snow removal, parks, welfare administration, building permits and inspections, economic development programs, planning, libraries, waste management, emergency medical services, animal control, harbormasters, cemeteries and general administration (tax assessing, collecting, treasurer etc.).  The pressure to dismantle our local public education system, one of the best in the country, will be enormous.

Several towns have already begun to make a “service” impact analysis of what the Palesky initiative would mean in their communities.  We encourage all municipalities to make this analysis in order to help inform the electorate what is being proposed.

Other Revenues – The Death of Local Control

 Except for motor vehicle excise taxes, the only other significant source of municipal revenue is from state government.  Maine municipalities do not have the authority to raise a sales, income or business tax. 

Local fees offset the costs of some municipal functions such as clerks and building inspectors.  However, many of these services are not fully self-funded and other departments don’t have fees at all for core services (police, fire, snow removal, parks and education come to mind).  Thus, fees could grow exponentially under Palesky, but if they do they still won’t be sufficient to cover the generally provided, non-feeable services. 

Furthermore, the Palesky initiative attempts to prohibit the imposition of fees without a 2/3 vote of support.  Supermajority votes are quite difficult to obtain.

Palesky supporter, Phil Harriman (former State Senator from Yarmouth) has written to the public on the issue of other revenues available to municipalities in a manner that fails to reveal an important fact.  He has written:

“Groups opposing the 1% property tax cap claim that public safety services and schools will suffer when this proposal passes.  This is simply not true.  These claims are fear tactics, and are coming from the very people that live off our tax dollars. Any local spending approved prior to the passage of this [Palesky] bill can be added to the 1% rate, and the 1% tax cap initiative does not prohibit local governments from raising additional revenues.  It ensures that two-thirds of the people must vote in favor of special assessments or taxes.”  (Community Leader, April 1, 2004; emphasis added)

This is like saying the Trojan Horse was really a gift to the people of Troy; it is literally true, but deceptive.  The tax cap does not prohibit towns from raising additional taxes, but the Maine Constitution does. 

Article 9 §9 of the Maine Constitution states that “The Legislature shall never, in any manner, suspend or surrender the power of taxation.”  Thus, whatever the Palesky initiative does or does not do on this matter is irrelevant.  Local government is constitutionally prohibited from raising taxes (sales, income, business etc.) and any misleading comments to the contrary should be withdrawn.

Consequently, if the state represents the only significant source of revenue available to towns after Palesky to cover local services police, fire, parks, snow removal, welfare administration, ambulance services, public administration etc., local control in Maine will be dead. 

“Local” budgetary decisions will be made in Augusta.  There will be no point in having town meetings and budget committees if the property tax is totally devoted to counties and education and the state provides the funding for any other non-self-sustaining municipal service. It is not hard to imagine that there will be a State Planning Office-governed process for every municipal function; a process that exists solely to review and process local applications for state funding for each local service.

If that seems far-fetched, keep in mind that in this past session the Legislature enacted new laws regarding what type of fire equipment towns must purchase, the policies police should have for questioning suspects and the manner by which clerks process freedom of information requests — and the state provides virtually no money now that is earmarked for these services.  If the state actually starts paying the bulk of the town expenses in these areas, the state will clearly be calling the shots.

Of course, an alternative is that Augusta will not provide any additional money to offset the half-billion dollar loss in local revenues, in which case local control may be retained but there won’t be much left to control at the local level.

Does Palesky impact towns under 10 mils?

How should people in the approximately 75 towns which have mil rates under 10 vote?  Obviously, every voter should vote his or her conscience and vote what is best for Maine.  Many of the towns that are under 10 mils have very high values.  The Palesky initiative attempted, but failed, to limit values.  Thus, Palesky would appear to have no direct impact on these towns and their citizens.

However, there are at least two impacts to consider.   First, is the community participating in a school district, such as an SAD, with towns that are above 10 mils?  If so, consider the impact that Palesky might have on these towns and the corresponding impact on the school services you jointly fund.  The more general question is whether you believe that curtailing local control over budgeting, and essentially turning that function over to the state, even if it doesn’t happen to your town (for now), is the best way to govern in Maine.