Personal Property Taxation In Maine and Beyond

(from Maine Townsman, January 2004)
By Geoff Herman, Kate Dufour and Jeff Austin, MMA State & Federal Relations

        “Maine is the only state in the nation that taxes personal property.” “No state taxes personal property like Maine does.”

       These were the first whisperings that began to come out of the State House in the mid-1990s, a short time after the 1995 enactment of the Business Equipment Tax Reimbursement program (BETR).  It is under the BETR program that the sales and income taxpayers in Maine began reimbursing industrial corporations and other businesses for 100% of the taxes those businesses pay on their newly installed personal property.

       As the state’s annual appropriation for the BETR reimbursement grew from an initial $4.7 million in 1995 to $63.5 million for the current year, the claims were made more often, more loudly, more aggressively.

       Sometimes one legislator or another might make the claim, or add to it. We heard, for example, that “the towns don’t need their personal property taxes; they’re giving them away already through Tax Increment Financing.” We heard that “the greatest impediment to capital investment in Maine is the personal property tax,” and this from some representatives of the industrial corporations that, in final effect, have not been exposed to the tax for their new investments for most of the last decade.

       From time-to-time these claims are repeated in a story by the Maine press; unverified, unresearched and loosely attributed.

       And finally, in the never-ending quest for that killer sound bite, we were told by no less than the State Economist that the taxation of personal property is “evil”…that it is an “evil tax.”

       During the legislative session which is now one-third concluded, lawmakers will be asked to support a bill submitted by Governor Baldacci that would repeal the personal property tax – not all at once but in a going forward manner. The proposal is that no tax would be assessed against any new personal property coming into the state if that new property would be eligible for BETR reimbursement under current law.

       Over the next decade under this proposal, the state’s annual appropriation for the BETR program would dwindle and fully extinguish on the 12th year out. Municipal revenue from personal property taxation would drop off incrementally each year; in 25 years or so, it would drop to zero.

       Although promoted as a big step in expanding economic development, the proposal to exempt personal property provides no substantial new advantage to businesses.  The net change to a business’ exposure to the property tax under the proposal would also be zero since the BETR program effectively exempts the new personal property from taxation already, at least for the first 12 years. The advantage of repealing the pesonal property tax is to the state, the disadvantage is to the towns…the businesses are held substantially harmless.

       Some history. The taxation of personal property is rooted in Maine’s Constitution which holds that all real estate and tangible personal property be taxed at its market value.  Despite that constitutional vision of the broadest possible property tax base (which produces the lowest possible property tax rate), the Legislature has never been shy about granting various interest groups property tax exemptions.  History suggests that for the Legislature the granting of a property tax exemption is a net-positive, politically. The special-interest beneficiaries are immediately grateful, there is no state-level financial consequence, and the shift in tax burden at the local level (from the property of the special interest onto the property of residential homeowners and small businesses) is incremental. Over the years it gets “lost in the sauce” of the multiple ingredients that produce a property tax bill.

       The voters of Maine tried to put the brakes on property tax breaks in 1978 by amending the Constitution to require the Legislature to reimburse municipalities for at least 50% of the property tax revenue that the municipalities lose because of any new property tax exemption granted by the Legislature. Until now, that strategy has been largely successful. Although a tremendous amount of new property still becomes exempt each year under the terms of the old, pre-1978 exemptions, the Legislature has been generally unwilling to create new exemptions since 1978 because of its exposure to the 50% reimbursement requirement.

       The growth of the state’s obligation to reimburse businesses under the BETR program is beginning to change that legislative reluctance to create new exemptions. From the state’s perspective, the 100% reimbursement to the businesses required by BETR would be replaced with a 50% reimbursement obligation to the municipalities. At 50% reimbursement,  the towns and cities would be forced to either eat the lost revenue or shift the unreimbursed burden to the other property taxpayers in town who don’t get property tax exemptions, or both. On the state side, the Legislature’s exposure to this economic development incentive program would initially appear to be cut in half.

       As this debate moves forward this session, it is all-the-more important to separate fact from fiction. The purpose of this article is to review the system of personal property taxation in Maine and the degree to which the delivery of local governmental services is dependent on the personal property tax base. In addition, the article will compare and contrast the approaches different states employ with regard to personal property taxes on businesses, nationwide and with particular focus on our neighbors in the northeast corridor.

       Maine’s personal property tax in context. In 2002, there was $85 billion of taxable property in Maine. The local taxation of that property generated $1.55 billion which financed 57% of elementary and secondary public education, 71% of the 16 counties’ operations and 63% of municipal services.

       Taxable property in Maine is made up of real estate (land and buildings) and personal property. Of the $85 billion of taxable property in Maine in 2002, $8.84 billion was personal property, representing 10% of the total property tax base (see Figure 1)

       The personal property tax base can be broken down into three categories. Industrial personal property, largely made up of “business machinery and equipment”, makes up 67% of that total ($5.9 billion in value). Commercial personal property, which is a more eclectic combination of equipment, removable fixtures, computer and technical property and other smaller items, makes up 27% of the total base ($2.4 billion). The personal property of utilities that municipalities are allowed to assess  accounts for 6% of the total base ($521 million).

       The general rule under the current BETR program is that all personal property, placed in service after April 1, 1995, is eligible for BETR reimbursement for the first 12 years of its existence. After 12 years in the program, the property taxes paid on that personal property is no longer reimbursed to businesses by the state taxpayers. The exceptions are narrow. The property of a group of companies providing public utilities and communication services is not eligible for BETR reimbursement. Office furniture or lamps and lighting fixtures are also ineligible.

       On the basis of this information, it is easy to see where the trend of the BETR program is going, and why state government would be financially advantaged by replacing the BETR program with a personal property tax exemption, at least for the short term.

       About $170 million in tax revenue is generated each year off personal property in Maine that by its type would qualify for BETR reimbursement and would, therefore, be exempt when replaced (or first introduced) under the current proposal to repeal the tax. Holding everything constant to 2004 dollars, if we move ourselves through time to the full implementation of: (1) the BETR program; and (2) the full implementation of  the exemption of BETR-eligible property — the state comes out  ahead financially with the exemption.

       In five years, the cost of the BETR program is expected to stabilize because it will then be 12 years since the program’s inception.  The ratio of personal property (BETR eligible) that is under 12 years old to personal property that is more than 12 years old should reach its plateau.  Estimates are that the state’s annual exposure under BETR will stabilize at about $100 million. This state-funded tax rebate program has a natural limiting factor because property can be BETR-eligible only for its first 12 years of existence . . . a policy mechanism intended to stimulate reinvestment.

       If all future eligible BETR property is exempt, however, the state’s 50% reimbursement obligation to the affected municipalities would max out at about $85 million a year (half of the $170 million total). The $15 million difference, crudely calculated, represents the "margin of profit" the proponents of the exemption seem to be shooting for.

       Where is personal property located? Even though personal property makes up 10% of the total property tax base in Maine, that proportion of 90% real estate-to-10% personal property is not constant in all the towns and cities in Maine. There are hundreds of municipalities that have very little personal property to tax; it is a type of property that is concentrated in the communities that host major industrial manufacturers and in the service center communities that host a wide variety of retail, commercial and light industrial businesses.  Figure 2 shows the top 50 “personal property” municipalities in Maine in 2002. 85% of all personal property in Maine is located within those communities.  50% of all personal property is located in just the first 11 towns and cities on the list.

       The uneven concentration of personal property in Maine translates to an uneven political response to the proposal to repeal the tax. Without completely understanding all the impacts of repeal, those municipalities with little personalty to assess might offer little protest. Those smaller towns won’t escape the financial impact of the repeal, however. The gradual devaluation of the industrial towns and service centers, relative to the rest of the state, places additional financial pressure on the towns without personal property. That financial pressure is felt through decreased educational subsidy, decreased revenue sharing and increased exposure to the county tax.  Those increased financial burdens on the towns without personal property would not be softened or otherwise addressed by the state’s reimbursement obligations to the directly-affected personal property municipalities.

       What the other states do.  Contrary to the claims advanced by some of the proponents of repealing the personal property tax, most states in the nation do levy a personal property tax. Thirty-nine states tax personal property; 11 do not (see Figure 3). As a starting point, most of the states that tax personal property apply the tax in the same effective manner, or even more aggressively, as Maine. It is true that some states do not tax personal property at 100% of its market value, but those same states typically do not assess any classes of property at 100% of market value, and the assessed value ratio those states apply to personal property is usually as aggressive or more aggressive than the assessed value  ratio applied to residential property.

       Alabama, for example, taxes business property at 20% of is market value, but residential property is assessed at just 10%. In Colorado, business personalty is assessed at 29% of value and residential property is assessed at less than 10%. Arizona, California, Louisiana, Michigan, Mississippi, South Carolina, Tennessee and Wyoming are examples of other “split  rate” states that assess business personalty at a higher rate than residential property.  Rhode Island law holds that the tax rate for personal property may not be greater than 50% more than the tax rate for other classes of property.

       Very few states swing the other way, at least in part. In Montana, some selected types of personal property are given a favorable assessed value ratio (relative to real estate), but much of that state’s personalty is not. Virginia and Vermont exclude personal property from some levels of property taxation.

       And many states offer limited exemptions  and employ various types of incentive programs that relieve the tax in certain ways, such as through tax-free “empowerment zones” or with time-restricted BETR-like programs. The vast majority of states, however, have elected to retain the tax as a starting point in business tax policy, and then relieve the tax in targeted ways to either stimulate capital investment or economic development in certain geographic areas.

       Another variation among the states that should be noted is the definition of personal property. The common theoretical definition of personal property is tangible property that is neither land nor “affixed” to the land. A building is “affixed” to the land by its foundation but heavy industrial machinery is also bolted to the land in many cases more positively and inextricably than most residential buildings. Maine has never had to grapple with this definitional dividing line because the Constitution requires all real estate and personalty to be taxed the same. Other states have gone in different directions. Hawaii defines business machinery and equipment as real property and purports to have no personal property tax. Vermont and Rhode Island define boilers and all piping as real estate.  Connecticut assessors employ an “owner’s intention” test to differentiate real estate from personalty when potentially removable property is affixed to the ground. 

       The northeastern states.  When it is pointed out that the nationwide norm is the taxation of personal property, the proponents of repealing the tax move the focus to New England and the northeast corridor, suggesting that if Maine is not unique with respect to the nation, it is nonetheless out-of-synch with its most immediate neighbors.

       But that’s an overstatement as well. Figure  4 lays out the structure of personal property taxation in the six New England states and New England’s neighbors. Throughout New England, only New Hampshire applies no tax to personal property, joining New York and Pennsylvania. All the other New England states tax personal property in some way, shape or manner.

       Connecticut has something like Maine’s BETR program, but the industrial tax break is structured as an exemption that lasts for only five years (instead of 12 in Maine) and the municipalities, rather than the businesses, are reimbursed 80% of their losses. Rhode Island and Vermont define some machinery and equipment as real estate, begin with the general rule of personal property taxation at 100% of market value, and then allow for some local-option approaches to both exemptions or alternative rate taxation. Massachusetts employs a personal property tax that captures much of the business equipment associated with the white collar, service economy the Bay State is noted for (e.g., the personalty of law firms, banks, accountants, mutual fund companies, etc.), but it exempts “manufacturing equipment” from the personal property tax. 

       The sharing of burden.  Tax codes are complicated, tend to become very state-specific, and can be designed to make certain tax obligations appear to exist when they really do not and other tax obligations appear to not exist when they really do. Perhaps the best way to fairly assess the design of a property tax code is to measure the financial burden that is borne by the owners of each classification of property after all the breaks and rebates are taken into account.

       After all is said and done in Maine, the state’s property tax burden – which is indisputably too high – is nonetheless distributed among the several classes of property with remarkable equilibrium. Total commercial and industrial property represents 30% of taxable property in Maine and this property also shares 30% of the property tax burden, after accounting for the net tax obligation.   This property tax value/burden analysis is determined after BETR and Tax Increment Financing reimbursements are netted out for business and after the Homestead Exemption and Circuit Breaker are substracted from residential property taxes.

       What this tells us is that businesses and (Maine) residential property owners are getting roughly equal property tax relief and municipalities that have significant amounts of personal property have tax rates that in the aggregate match the statewide average.

       It may not seem surprising that each class of property is paying its share of the tax under Maine’s tax code, but that does not appear to be the norm in other jurisdictions. It is not easy to find property tax incidence studies of other states, but our preliminary research indicates that it is not uncommon for the business sector to pay a larger share of the total property tax commitment than its proportionate share of total property value.

       For example, business property is 28% of the tax base in Idaho, but contributes 31% of total commitment. In Massachusetts, business property is 20% of the base but contributes 31% of total commitment. In Minnesota, business property is 14% of the tax base but contributes 36% of all property taxes.

       Conclusion.   When the Legislature initiated the BETR program in 1995, tension was quickly established between the municipalities, who were continuing to receive their business tax revenue, and the state, which was appropriating the tax reimbursements at a rapidly expanding demand year-to-year. That tension is driving a proposal to repeal the personal property tax altogether, ultimately extinguishing the state’s direct financial exposure to the BETR economic development program but pushing some negative financial consequences onto Maine’s towns and cities.

       On its face, the proposal would incrementally reduce Maine’s property tax base over the next 20-25 years, at which time 10% of the property tax base would be completely gone. If an equivalent proposal were suggested for the state’s sales tax, which generates $900 million per year for the Legislature’s General Fund, it would need to approximate a phased-in repeal of the sales tax on all building supplies (lumber, building materials, hardware, plumbing, roofing, commercial contractors, concrete, brick, steel, etc.). “Building supplies” is a sales tax category that generates $86 million a year – roughly 10% of the total — and is one of the cornerstones of that tax base.

       Contrary to the claims advanced by proponents of repeal, Maine’s current approach to personal property taxation is certainly not unique throughout the United States or throughout New England. The majority of states have retained the personal property tax, and many state-specific programs exist that tailor the tax to the state’s particular economic structure and economic development incentive goals.

       The bottom-line municipal position is that the repeal of personal property taxation cannot result in any shifting of Maine’s top-in-the-nation property tax burden from the commercial/industrial sector to the residential sector. In that regard, businesses are not being treated at all unfairly under the current system, and additional burden on residential property owners is simply out of the question.