LEGISLATIVE OVERVIEW: Tighter financial picture greets 120th
by Geoffrey Herman, Director of State & Federal Relations, MMA
(from Maine Townsman, December 2000)
The 120th Maine Legislature has been elected and sworn into service; preparations are well underway for the first session to kick off in earnest after the first of the year.
MMA's 70-member Legislative Policy Committee convened a week after Thanksgiving and hammered into place the seven planks of a 2001-2002 legislative platform it has been working on since mid-summer.
Legislative leaders list as top priorities providing greater access to health care and higher education, finding additional funding for K-12 education and resources to further support public and private "R & D" (research and development), and combating sprawl and domestic violence. Where the money will come from to address these priorities is unknown; current forecasts describe a $225 million gap between the cost of operating state government for the two fiscal years (if there is no change made to current law), and the revenues that will be available for that purpose. By most accounts, we are cycling out of those times of remarkable revenue surplus, and some credible economic forecasters are suggesting the possibility of a bumpy or hard landing in 2001 from the flight of good economic times the nation has been enjoying in recent years.
The municipal focus will be on the state's tax policy, specifically as it applies to the high burden placed on the property tax and the property tax breaks the Legislature grants to certain property owners that exacerbate that burden for the full-freight property taxpayers.
Follow through on Revenue Sharing II
During the last legislative session a half-step was taken to relieve the extraordinary property tax burden that is a hard fact of life in too many towns and cities in Maine, particularly in the state's so-called "service center" communities. As presented to the Legislature last session, Revenue Sharing II would have slightly raised the percentage of state sales and income tax revenue that is distributed to municipalities through the Local Government Fund and subtly adjusted the revenue sharing distribution formula so that those extra revenue sharing funds would be distributed to the communities in Maine that have above-average full value mill rates.
As is so often the case with legislative initiatives, the policy changes were adopted but the money didn't follow. Instead of structurally increasing the revenue going to the Local Government Fund to provide a sustained benefit, a one-time appropriation of $3.6 million was provided to give the Revenue Sharing II system a trial run during the current 2000-2001 fiscal year. Starting July 1, 2001, Revenue Sharing II, in effect, goes dormant.
There are multi-faceted public policy benefits to the structural implementation of Revenue Sharing II. First, the policy recognizes that regional-center municipalities generally have higher-than-average property tax rates because they must provide services to a population that is far greater than the municipality's residential population. Second, Revenue Sharing II implicitly recognizes that many communities with significantly higher property tax rates play host to large, tax-exempt institutions which demand much in the way of public services. Third, Revenue Sharing II represents a tax policy contribution to a set of strategies dealing with the phenomenon of land use sprawl. One factor driving the out-migration from the state's urban areas to the suburban and rural countryside is the sharply different property tax rates among those respective communities.
The municipal perspective is that as a matter of policy the state should be moving away from such a sharp dependency on property tax revenues to support governmental services. One path toward that goal is to provide a modest increase to Revenue Sharing, especially where that increase is targeted to the communities with the highest tax burden.
Revenue Sharing II also attempts to address a basic issue of equity and fairness in our tax system. Communities that serve as regional centers for employment and retailing do not benefit from the income and sales taxes generated by these businesses. Yet, these communities do shoulder the cost of a heavy service demand placed on them by those who are employed by or shop at these businesses.
Accordingly, the Legislative Policy Committee is recommending that the percentage of sales and income tax revenues devoted to the Local Government Fund be increased from 5.1% to 5.5%, with that .4% increase representing approximately $8 million more per year. $8 million is a modest sum when compared with the $1.2 billion raised annually through the property tax, but when targeted through Revenue Sharing II, it provides some meaningful relief and begins to address the public policy issues discussed previously and that are at the center of the sprawl debate.
Honest state reimbursement for all current use programs
For the last 30 years, there have been three "current use" taxation programs in Maine providing reduced property assessment for forested land, farmland and open space land.
Current use" assessing differs from the "just value" assessing methods that must be used for all other real estate and personal property. While the "just value" methods find the property's market value, the "current use" method places a value on the property without consideration of any alternative or speculative use to which the property may be put. The current use method typically results in a substantially reduced assessed value for the enrolled property, which results in an advantage to the property owner and reduced property tax revenues for the municipality.
Of the three current use programs, the state provides reimbursement to the affected municipalities for the lost property tax revenue for only one, the Tree Growth program. There is no rational explanation why the Legislature chooses to provide reimbursement for one current use program and not the others. The impact of not reimbursing municipalities for the lost tax revenue is the same regardless of the nature of the current use program; that is, the cost of providing municipal services and education is shifted from some property owners to others within that particular town.
From the municipal perspective, the state's current use tax programs represent a state policy which has adverse consequences when the state, with its broad-based tax revenues, does not financially participate.
Accordingly, the municipalities will be seeking some level of financial participation on the part of the state for all current use programs, including the farmland program and the "open space" program.
The municipalities are not seeking 100% reimbursement. MMA will, however, be seeking a coherent reimbursement system. Under the Tree Growth program, the statute purports to reimburse municipalities for 90% of the lost tax revenue. The way the law works in its fine print, however, the municipalities do not receive 90% of their lost revenue. The reimbursement shortcoming is particularly acute when high-value lands are enrolled in Tree Growth. According to MMA's preliminary analysis, the 90% reimbursement statute is actually delivering significantly less than 90% reimbursement. In fact, some communities receive from the state less than 20% of the lost tax revenue to soften the property tax shift caused by the Tree Growth program.
The coherent and responsible reimbursement formula that MMA is recommending is designed as a common reimbursement system to be applied should any new or expanded "current use" category be created by the voters or enacted by the Legislature in the years to come.
Subdividing "current use" land
Under current tax law, property that is enrolled in the Tree Growth, farmland or open land "current use" tax programs can be subdivided into lots for residential development and still remain eligible for the "current use" property tax reduction.
Municipal officials believe that the act of subdividing a parcel of land for development should automatically disqualify that property from the preferential property tax treatment that is provided for the purpose of keeping the land undeveloped.
To see if the Legislature agrees, an initiative will be submitted that would disqualify subdivided parcels from the "current use" property tax break.
Enact standards of eligibility for the charitable exemption
For well over a decade the municipalities have been seeking some reasonable standards of eligibility for the property tax exemption governing charitable institutions. The laws governing the exemption, enacted in the 19th Century, are entirely insufficient in light of the complex reorganization of medical care facilities that is occurring in the 21st Century.
The Town of Falmouth recently challenged the exempt status of a number of condominium units owned by the Maine Medical Center, and the ensuing trial conducted by the State Board of Property Tax Review revealed the remarkable shortcomings of the state's archaic policy regarding the property tax exemption enjoyed by the "charitable" corporations.
In response, MMA will once again be supporting a legislative initiative that would provide reasonable standards to govern the property tax exemption. The proposal will be modeled on one of the five statutory standards that have been working successfully in Pennsylvania since 1997. In addition to the legislative initiative, MMA is positioning itself to invest some resources over this biennium and the next to provide some judicial advocacy for communities that wish to challenge an application for the charitable exemption and collect better data on the true impact of the charitable exemption on the tax burden of those property owners who, unlike the multi-million dollar non-profit corporations, do not happen to enjoy a forgiveness of their tax obligation.
Put some accountability in the property tax exemption for pollution control equipment
The fastest growing and second-most poorly governed property tax exemption on the books is the exemption for "pollution control equipment." In 1990, there was just $175 million worth of exempt pollution control equipment in Maine. By 1998, that number had jumped to $363 million - a 108% increase. By comparison, total taxable property increased just 73% over that same period.
The statute governing this exemption is hopelessly out of touch with pollution control technology. When originally created in the 1960's, water and air pollution was reduced or controlled by discrete, end-of-the-pipeline (or top-of-the-chimney) equipment. The pollution control equipment was functionally very different from production equipment and it possessed a relatively low value compared with the mass of production equipment to which it was attached.
Today we are presented with an entirely different environment. Compliance with state and federal pollution laws requires the fundamental redesign of industrial production equipment. Industrial property owners are seeking-and receiving from the Department of Environmental Protection-significant property tax exemptions for what used to be considered normal production property. To add to the municipal frustration with this exemption, the determination of eligibility is accomplished by the DEP without even so much as a consultation with the affected municipality.
And ironically, virtually all of the property potentially eligible for the pollution control equipment exemption is automatically eligible for the Business Equipment Tax Reimbursement program (BETR).
For all of these reasons, the municipalities will be seeking to redesign this property tax exemption according to its original intention, which was to provide incentives for the installation of pollution reduction equipment that delivers beneficial environmental results that go beyond the minimal requirements of environmental law.
Simplify motor vehicle excise tax administration
Still in the general field of taxation, MMA's agenda includes a housekeeping measure to improve the uniformity and efficiency of motor vehicle excise tax collection. This initiative would require the Manufacturer's Suggested Retail Price (MSRP) to be recorded on the motor vehicle title documents.
As it stands now, the assessment of the excise tax for re-registering a motor vehicle in a new location is something less than an efficient or highly dependable process. In attempting to establish the MSRP, the excise tax collector must ask a series of questions to the owner of the automobile regarding the type of auxiliary equipment that came with the vehicle. For fully equipped vehicles, the more honest the taxpayer is, the higher his or her excise tax bill will be.
In order to simply tax administration and improve excise tax accountability, the MSRP should be included on the title document so ultimate verification of the excise tax obligation would be immediately available in any municipal tax jurisdiction.
Repeal Growth Management 'Drop Dead' deadline
A very important plank in the Association's legislative platform is focused on Maine's Growth Management Act. At first glance, the Growth Management Act and the issue of "sprawling" land use development may seem to fall outside the tax policy issues that characterize the rest of the platform, but municipal officials will insist otherwise. As the related article in this issue of the Maine Townsman suggests, tax policy is at the center of the sprawl phenomena as much or more than the Growth Management Act will ever be.
In summary, a legislatively-created Task Force was charged with making recommendations to improve the effectiveness of Maine's Growth Management law in combating the phenomenon of sprawl, but a solid recommendation by the Task Force is not yet forthcoming. As we wait for the Task Force's work product, there is an element of the existing law that is completely unacceptable to the municipalities. On January 1, 2003, state law declares every municipal land use ordinance in this state to be void and unenforceable unless that land use ordinance is "consistent" with a comprehensive plan that is, itself, "consistent" with the Growth Management Act. The term "land use ordinance" is defined by law to include virtually any sort of land use regulation that a Town Meeting might enact.
If the state ever wants to enter into a working partnership with the municipalities to achieve a common growth management goal, eviscerating municipal regulatory authority is certainly not the way to reach that end. The 2003 deadline is an ugly piece of public policy that is abhorrent to municipalities. On top of that, it is completely counterproductive to any constructive growth management result.
A central plank of MMA's legislative platform will be to repeal the "drop-dead" deadline in the Growth Management law.