Legislative Overview: Money … busy… confusing
(from Maine Townsman, December 1999)
by Geoffrey Herman, Director of State & Federal Relations, MMA

Money! That’s one word that might aptly describe the second legislative session that will begin on January 5, 2000. Busy is another and confusing a third.

By all accounts, the second session is shaping up to be something other than the simple, low-key wrap-up to the first legislative session that is implied by Maine’s Constitution which actually limits the second session both in duration and scope.

Money

With the enactment of the two-year state budget last March and June, the Legislature decided how to spend or redistribute the $4.4 billion of state tax revenue that was expected at that time to be available over the next two years, ending on June 30, 2001.

On November 29, 1999 the Revenue Forecasting Committee formally "reprojected" state revenues for the biennium to include an additional $250 million. The Revenue Forecasting Committee is the group of state and legislative department tax analysts who are in charge of establishing the revenue projections within which the Legislature must work.

And that’s not all! In addition to its November, 1999 reprojection, the Revenue Forecasting Group could possibly lay down at least $70 million more in additional reprojected revenue next March, midway through the second session. To explain, the Committee initially projected income tax receipts using a prediction that assumed the inordinately high level of capital gains realized in Maine in recent years would not sustain throughout tax year 1999. If the year concludes and that conservative prediction proves to have been unfounded, over $70 million more in capital gains tax revenue will be released.

When the reprojections are over, the Legislature will have something over a quarter of a billion dollars worth of decisions to make in the areas of promises to keep, new programs to fund, or tax relief to deliver. For a second session, the presence of such a large sum of money is an unusual phenomenon, at least in recent history.

As tough as the decisions are to make when there is not enough money to go around, they are almost tougher to make when there is too much. When financial deficits are the rule, expectations are down and demands are muted. It is almost easier to say ‘no’ evenhandedly than it is to say ‘yes’.

Extra state tax revenue also serves to kindle the always-smoldering debate on Maine’s overall tax burden, with some legislators arguing that now is the time to cut the income tax or sales tax rate (or both) on the theory that those taxes are now "overcollecting revenue".

From the municipal perspective, there is the concern that the legislative debate on the disposition of the new-found revenue will focus too quickly on the propriety of income or sales tax cuts versus the benefits of new or expanded programs, without giving sufficient attention to a review of the state’s existing programs that have not been properly funded during the 1990’s.

The municipal laundry list – based on the theme of honoring legislative commitments – would include:

• A substantial boost to General Purpose Aid to Education to keep the state on track in a multi-year effort to achieve majority funding for K-12 education and fulfill a phantom 1985 promise, now buried in the law, to pay 55% of the K-12 "allocation". To achieve the 6% increase that would keep the state on track toward majority funding, the $638 million already appropriated for FY 2001 would have to be boosted by $20 million.

• An $5 million appropriation to cover the state’s share of sand-salt facility construction. That program has been chronically underfunded since it was created in 1986. During the last legislative session a bill was enacted that appropriately narrowed the scope of the program and targeted the mandatory construction to the most environmentally sensitive locations. Now is the time to fund the program so that the towns that build these mandated facilities don’t have to carry the state’s share of the cost for years, as has often happened in the past.

• Additional financial support for the recently created School Renovation and Revolving Loan Fund. That fund, which provides both grants and loans to school systems for deeply-needed renovation construction, is scheduled to be capitalized with $100 million of state money, matching an equivalent property tax contribution, to address the $200 million of identified high-priority renovation needs. The state’s contribution front-loads the fund, with the municipal contribution coming in the form of local appropriations and the debt service that returns to the revolving fund. Thus far, the state has appropriated $43 million for this fund which has been already earmarked for approved projects. The School Renovation fund would readily benefit from a $40 million appropriation, which would move the state to an 80% completion of its funding schedule.

• A final fix to the 1991 legislative shift-and-shaft gimmick which slashed state reimbursement for the time municipal police officers spend in District Court to prosecute traffic violations. Currently the state pays far less than half of the municipality’s actual and direct costs of providing the police officer to court. At the same time, all the traffic fine revenue accrues to the state. Bills have been before the Legislature over the entire decade to fix that gimmick, but the Legislature has alleged up to now that it simply can’t afford to reimburse at the actual-cost levels it used to, prior to the 1991 recession. The funding to end this gimmick would cost the state $300,000 a year and come out of the traffic fine revenues collected by the state.

• The $2.5 million dollars necessary to close out the landfill closure program. The state’s participation in the landfill closure and capping program ends on January 1, 2000. The costs of construction after that date will not be eligible for state cost-share funds. Last June, the Legislature scaled back the bond issue proposal that was originally designed to fulfill the state’s financial obligation. Now is the time to finally pay that bill.

As for the various proposals to cut taxes, the current strategy among some legislators seems to be to disparage existing tax relief programs in order to garner support for new tax cuts. House Republican leader Representative Tom Murphy (Kennebunk) wrote in a recent article in the Northeast Business Journal that the homestead tax exemption, initially hailed as the best tax relief, "was a bust…(r)oughly one-third to one-half of the eligible Mainers saw none of the promised property tax relief.". Representative Murphy’s article builds on these allegations to promote an income tax cut that would be achieved by raising the income levels that trigger the highest income tax rates. For a myths-versus-facts analysis of the homestead exemption and how it actually works, please refer to the side-bar article on that subject.

Busy

Even without the squabbles that will inevitably ensue over the disposition of a quarter billion dollars, this would be a very busy second legislative session.

315 separate pieces of legislation were carried over from the first to second session, 204 new pieces of legislation "of an emergency nature" were admitted into the second session by the Legislative Council, 64 agency bills (as of this writing) will be introduced under the Governor’s call; and there are dozens of task forces at work, created more or less formally during the first legislative session, that are prepared to report back comprehensive legislative proposals to the second legislative session. None of this takes into account the two citizen initiatives that are already in the hopper for legislative review, and the several additional initiatives that could still come in within the January 31st deadline.

Carryovers. Of the 315 carryover bills, 74 have been identified as having a significant municipal interest. Three of those carryover issues — property tax exemptions, municipal-school relations, and a cluster of land use issues, including sprawl and subdivision law – are discussed in greater detail in separate articles in this issue of the TOWNSMAN. Beyond those issues, the municipalities will also be closely tracking from the carryover list:

• the cops-in-court reimbursement bill that has been discussed above;

• a bill that would mandate extensive changes to the way contractors and subcontractors are paid for school construction projects ("retainage");

• a bill that could significantly change the training requirements of part-time police personnel;

• a bill that would establish certain county government reforms;

• several bills that address the issue of regulatory "takings" by requiring the government to pay for losses in property value attributable to regulations;

• a cluster of local option taxation bills; and

• a bill that would repeal the personal property tax.

New Legislation. Judging by their titles, it would appear that 40 of the 204 new pieces of legislation that will be introduced this session will be of direct municipal interest. Until the bills are actually printed, the devilish details that lie underneath the mere title of the bill will not be known, but a short list of the new issues that could crop up this second session includes legislation that would:

• adopt a "current use" assessing methodology for all agricultural land, presumably without enrollment in the farmland open space program;

• adopt a "current use" assessing methodology for the real estate and personal property used in commercial fishing;

• adopt a supplementary revenue sharing formula that would distribute revenue based on the local mill rate related to municipal services, excluding the education-related millage;

• create a financial assistance program for the Plymouth waste oil site, presumably along the lines of the system created in 1999 for the Wells waste oil site;

• extend the deadline for towns to make their recommendations regarding "jet ski" limitations; and

• add a standard to restrict the issuance of concealed weapon permits to persons sanctioned by a court for potentially violent behavior.

Task Force Legislation. It is too early to know the specific recommendations of many of the task forces or working groups that are dealing with municipal issues. A separate article in this issue of the TOWNSMAN details the work of the School Governance Committee. What we do know is that the Legislature will be receiving dozens of reports, with recommended legislation attached, from working groups dealing with subjects of municipal interest that range from public water supply protection to the maintenance of veterans’ graves to the state’s solid waste management plan to the legal issues surrounding public easements. Not to mention a sprawling network of working groups – legislative, gubernatorial, and academic – all dealing with the issue of sprawl.

State Agency Legislation. Getting a handle on the state agency legislation is especially difficult because the agency bills are listed only by title (e.g., "An Act to Amend the Motor Vehicle Laws") and there is no descriptive summary of their content. One legislative initiative that is expected to come out of the Governor’s Office is the "smart growth" bill. John Melrose, the Commissioner of the Department of Transportation, was asked by the Governor to head-up a Cabinet-level task force on the issue of land use sprawl. According to Commissioner Melrose, the package of his Committee’s recommendations will likely take several years to implement and will include both legislative and non-legislative approaches, including educational initiatives designed to raise the general public’s level of consciousness about the long-term impact of sprawling land use patterns. Some elements of the package of recommendations are expected to include:

• A component dealing with the state’s capital investment policies to ensure that the state doesn’t make siting decisions that exacerbate the sprawl phenomenon;

• A "rural places" element that would relax the so-called "20%" penalty for withdrawing land from the farmland current use taxation program within the first five years of enrollment and create a municipal reimbursement for the tax revenue losses associated with enrollments of property in the farmland tax program;

• A "service center community" element that would include: downtown revitalization incentives; financial support to the municipal infrastructure trust fund that was delivered still-born in 1989 and never funded throughout the 90’s decade; income tax credits for the development of environmentally damaged, "brownfield" properties; and financial support to service centers which host high levels of exempt property.

A more thorough review of the greater universe of sprawl initiatives is found in a companion article in this issue of the TOWNSMAN.

Citizen Initiatives. Two citizen initiatives, with the requisite number of signatures, have already been filed with the Secretary of State’s Office. As required by Maine’s Constitution, these measures will be presented to the voters in the November, 2000 election unless adopted by the Legislature exactly as presented.

One of the submitted citizen petitions asks if the voters want to allow video lottery machines at certain horse racing tracks if 40% of the profits are used for property tax relief.

The other petition that has been submitted asks if a terminally ill adult who is of sound mind should be allowed to ask for and receive a doctor’s help to die.

There are dozens of other citizen petitions that could be in circulation, according to the list that is posted on the Secretary of State’s web page, and any of those petitions with the requisite number of signatures that is filed with the Secretary’s Office on or before January 31, 2000 will also be reviewed by the Legislature and, assuming no legislative action, presented to the voters on November 7, 2000. Among the dozens of bills on the Secretary of State’s list, only a hand-full are in active circulation according to the municipal election clerks that become involved in verifying the petitioner’s signatures. The short list of petitions in active circulation include a proposal to repeal the snack tax, a measure that would limit property taxes to 1% of the property’s assessed value, and the proposal to require permits for all forest land "clear cuts" and define the maximum harvesting levels for land enrolled in the Tree Growth program.

Confusion

Even in a normal year and under normal circumstances, the 4-month saga of a second legislative session takes an enormous amount of planning to choreograph the dozens upon dozens of daily meetings, workshops, forums, hearings, and formal conventions of the Legislature, and otherwise accommodate the many thousands of people who congregate to the Capitol Building and State Office Building to participate in the legislative process.

The confusing element of this second legislative session relates to the logistics of pulling off that four 4-month event with a State Office Building that will be completely closed for construction, a Capital Building that will not be fully operational for part of the session, a shortage of parking space, legislative employees off-site in temporary mobile homes, and all the other inconveniences that will occur because of the multi-year renovation of the Capitol properties.

Throughout the second session, some legislative committees will be meeting three miles away from the Capitol Building in the Augusta Civic Center and perhaps at other off-site locations. Some joint standing committees will be asked to share their committee rooms with other legislative panels on alternating days. The full Legislature will be called in sparingly during January, in part because the south wing of the Capitol Building, which includes the Senate Chamber, is not scheduled to be completely renovated until mid-February. Easy access parking anywhere near the Capitol Building is expected to be very difficult to secure, and shuttle transportation between the off-site locations is scheduled to convey the far-flung legislators, lobbyists, and participating public among the various Route 27 locations that will be home to the second-session Legislature.

SIDEBAR:

Myths About Homestead Exemption Program

1) Maine homeowners received little tax relief from the Homestead Exemption Program.

Not true. In the two years that the Homestead Exemption Program has been in existence, over 300,000 Maine homeowners received on average $125 of property tax relief each year. The tax relief provided by the homestead exemption was prominently displayed on each homeowner’s property tax bill. Property taxpayers were able to see what they would have paid without the homestead exemption versus what they actually paid.

2) In most communities, property taxes increased beyond the amount of homestead exemption reimbursement; therefore, homeowners received no property tax relief.

Not true. This myth is drawn from a State Planning Office analysis done last March. According to the SPO report, 53% of communities increased their property tax collection by greater than 3.8% (what SPO termed "normal" growth) and therefore "kept" some or all of their homestead reimbursement. This conclusion is misleading. Even if a community increased its property tax collection by more than 3.8%, it would not mean that homeowners paid more property taxes than the year before. The homestead exemption only applied to a certain class of property taxpayers (resident homeowners). A municipality’s tax base is also made up of commercial, industrial and non-resident property owners, all of whom did not qualify for the homestead exemption program. For example, if half of a municipality’s tax base did not qualify for the homestead exemption, that municipality would have had to raise its tax collection by greater than 7.6% before a homeowner would not have had a lower property tax bill. Additionally, a municipality’s valuation would have had to remain the same (i.e., no new value) for the above scenario to hold true (in other words, property tax collections could be greater than 7.6% and homeowners’ tax bills would still be less than the prior year).

3) A municipality that increases its property tax commitment by an amount that is more than the homestead reimbursement provides "no tax relief" to its citizens.

The whole SPO analysis is faulty. Statistics from the report were misused and the spreadsheet data (which does a town by town analysis) is misleading. A conclusion drawn from the report was that if your community raised property taxes by an amount that was greater than your homestead reimbursement then you "squandered" or "gobbled up" property tax relief. The conclusion is "apples to oranges". What if your homestead reimbursement is low because you have a lot of seasonal or commercial property? For example, Ogunquit was cited in the data as one of the worst offenders. Ogunquit, according to the data, increased its property tax collection by 1155% of its homestead reimbursement (which was $28,728). Actually, Ogunquit raised its property tax collection by a respectable 6.2% - that’s only 2.4% over the "normal" growth figure (3.8%). Rangeley was also cited as doubling its homestead reimbursement, which was $31,091. Rangeley increased its tax collection by 2.3%. To conclude that a municipality which raised property taxes by an amount that was greater than its homestead reimbursement "kept it" is illogical and misleading. What if the homestead exemption had be $3500 instead of $7000? Over 70% of the communities would have been accused of "keeping" some or all of their homestead reimbursement.

4) The Homestead Exemption Program has failed to provide meaningful property tax relief because some communities exceeded the "normal growth" rate in the first year?

When did we start deciding the failure/success of a tax relief program based on one year’s experience? Should we penalize all those communities that stayed below the "normal" rate because some communities exceeded it? Aggregate data over a reasonable time period is the only appropriate way of analyzing this program.

According to the SPO report, the increased property tax collection for all communities in 1998 was 4.2%. That’s 4/10th of a percent over the 3.8% which was the average increase between 1991 and 1997. The increases during those six years ranged from 2.6% to 4.3%. Had SPO taken property tax collection data during the past five years (1992-97) instead of six, the "normal growth" would have been 4.1%.

Obviously, to single out one year and draw conclusions based on that year’s data is unfair as is the arbitrary decision on the number of years to survey. Looking at individual town data can also be misleading. Municipalities have varying needs and from year-to-year, a town’s financial situation and needs change. A town may have a 5% increase one year followed by a 2% increase the next.

5) If the legislature reduces sales or income tax rates, Mainers will pay less taxes, equating to "real tax relief" or "money in their pocket".

This statement is also illogical. It assumes that taxes are inelastic (the amount you pay doesn’t change from year to year). The truth is that receipts from all taxes change each year (look at how much more money the State is expecting to bring in from sales and income taxes this year) and even a tax rate reduction doesn’t guarantee that you will pay less taxes. If I buy a new car after July 1, 2000 when the sales tax rate will be cut to 5%, I will, most likely, pay more in sales taxes in 2000 than I did in 1999 when the sales tax was 5 %. If you get a 5% increase in wages, and the income tax rate is cut by 4%, you pay more income taxes than you did the year before. Property taxes are no different. Only if the municipality’s value doesn’t change and the amount raised in property taxes is exactly what it was in the prior year will the municipality collect the same amount of property taxes.

6) A rebate program for the homestead exemption – where the State cuts a check to homeowners – ensures property tax relief.

A rebate program ensures less property tax relief! The Homestead Exemption Program has the lowest administrative costs, by far, of any property tax relief program (e.g., circuit breaker or BETR). In 1999, the administrative costs are estimated at about $20,000 with over 300,000 homeowners qualifying for the tax relief program (after the first year, communities are paid $2 per new application). Estimates for a state rebate program varied when the program was first considered but by most accounts it was going to be very expensive. Maine Revenue Services estimated administrative costs as high as $1 million per year to have a state rebate program. Additionally, the current program is front-end property tax relief – the homeowner doesn’t pay the tax to begin with – and there’s minimal paperwork involved.