The Last Competing Measure on the Table
(from Maine Townsman, July 2003)
by Geoffrey Herman, Director of State & Federal Relations, MMA

In the first week of June, Governor Baldacci released his so-called “fiscal reform” proposal that was designed to be the competing measure to the citizen initiated School Finance and Tax Reform Act of 2003.  The Governor’s bill was printed as LD 1629, Resolution, Proposing a Competing Measure under the Constitution of Maine To Create Municipal Service Districts, To Reduce the Cost of Local Government, To Provide Property Tax Relief and To Increase Economic Competitiveness.  (Sponsored by Rep. Lemoine of Old Orchard Beach).

The Governor’s “fiscal reform” package would:

• Repeal the Homestead Property Tax Exemption.

• Expand the Circuit Breaker property tax rebate program.

• Exempt almost all personal property from taxation in a “going forward” manner.

• Create financial incentives to create “Municipal Service Districts” to serve as small county-like governmental entities, with populations of at least 20,000 people, that would effectively replace municipal government within those district jurisdictions.

• Authorize local option sales taxation within service center districts or the new “Municipal Service Districts” to finance regional infrastructure projects such as civic centers.

• Retard the automatic, inflation-based indexing to the four income tax brackets in order to replace those across-the-board benefits with a reduction in the highest marginal income tax rate.

As the Governor’s bill was designed, the repeal of the Homestead Exemption would pay for the expansion of the Circuit Breaker program.  The exemption of personal property would save the state the costs of providing 100% personal property tax payment reimbursements to businesses under the BETR program.  The saved state revenue would be used to reimburse the affected municipalities for 50% of their revenue losses associated with the repeal of personal property taxation, (as required by the Constitution) and provide the financial incentives to create the “Municipal Service Districts.”

One week after the public hearing on the Governor’s proposed competing measure, a divided Taxation Committee reported out an amended version of the Governor’s bill.  Although the Committee’s work never was taken up by the full Legislature before final adjournment on June 14th, what follows is a description of the competing measure the Legislature was working on before it adjourned.  When or even whether the Legislature will reconvene in 2003 to continue its development and adoption of a competing measure is anyone’s guess at the moment.

Element #1: Municipal Spending Reform.  This element would establish the “Regional Service District” (RSD) framework for the purpose of achieving savings at the local level through voluntary municipal cooperation and consolidation, encouraged by state incentives apparently funded from the state’s savings associated with eliminating the personal property tax in a going-forward manner and thereby converting its 100%-to-the-business obligation (BETR program) to a 50%-to-the-muncipality obligation, which is required by  the constitution. The proposed statutory language regarding this element of the competing measure plan would be as follows:

Regional Service Districts

Purpose. The purpose of this chapter is to enhance the ability of municipalities to cooperate and consolidate on the basis of mutual advantage in the efficient and effective exercise of municipal obligation and home-rule authority pursuant to this Part through voluntary creation of and delegation to regional service districts or through other cooperative agreements that achieve similar cost savings, including, but not limited to, cooperative agreements with county governments. The goal and results of cooperation and consolidation are to achieve significant property tax relief and to increase municipalities’ ability to fund public education.

By January 2, 2004, the Executive Department shall present legislation to the Joint Standing Committee on State and Local Government to carry out the provisions and intent (of this chapter). The Joint Standing Committee on State and Local Government shall review this legislation.

Element #2: Education Funding. The state’s obligation to fund 55% of the Essential Programs and Services (EPS) education funding model would be phased in over 5 years, beginning in FY 06. For the first year out, the state would agree to commit to paying 49% of 84% of the total “EPS” allocation, and each year thereafter, according to this proposal, the state percentage share would work up toward 55% and the “percentage reduction” of EPS would increase toward 100%.  (The “percentage reduction” methods that are being proposed have been used for many years in Maine to legally justify the state’s underfunded contribution to K-12 education, particularly with respect to certain “program costs” like special education.  Congress   also uses a “percentage reduction” system to avoid paying its stated commitment to cover 40% of the special education mandate it enacted three decades ago.)  In the short term, there would be no significant increase in education funding from the state. What increase there would be, apparently, would be provided by refinancing the state’s bonds to cover the state contribution to school construction debt service, although it is not clear how much saved state revenue would be provided through refinancing.

Element #3: Personal Property Tax Repeal. Starting with tax year 2004, all personal property first installed in the state that would qualify under current law as being eligible for the BETR program would be exempt from property taxation. Also, property that is currently enrolled in the BETR program would be tax exempt after it comes out of the BETR program. Under current law, the state reimburses the businesses paying the tax for 100% of their tax payments. Under this proposal the state would reimburse the affected municipalities for 50% of the lost municipal tax revenue and save the other 50%, apparently to fund the incentive programs that lead to the creation of the “Regional Service Districts”.

Element #4: Local option sales tax. Regional Service Districts and municipal “Service Center” communities would be authorized to adopt a local option sales tax of up to 1% across the general (5%) sales tax base and/or the meals and lodging (7%) base and/or the short-term auto rental (10%) base. The local option tax would be adopted by referendum vote, for renewable 5-year periods, and the sales tax revenue would be available for non-educational purposes. 15% of the revenue generated by the local option tax would be transferred to the state to fund the Circuit Breaker program.

Divided report. Unlike the first three elements of the proposed competing measure, the local option sales tax is included only in the Democrats’ Committee report.  Local option sales taxation is not part of the Republicans’ plan.

Element #5: Homestead exemption and Circuit Breaker programs. Starting with tax year 2004, the state would only reimburse municipalities for 50% (rather than 100%) of the municipal revenue lost because of the property tax homestead exemption. The municipalities would have to shift the burden associated with the unreimbursed exemption over to the remaining, non-exempt property tax base. The state would use the $18 million of “savings” (as well as 15% of the local option sales tax revenue) to expand the eligibility criteria for the Circuit Breaker property tax and rent rebate program.

Divided report.  As was the case with the local option sales tax proposal, this element of the proposed competing measure was adopted only by the Democrats on the Taxation panel.