Growth Primer: Imposing Uniformity
(from Maine Townsman, February 1997)
by Jo Josephson
While eligibility requirements under the Tree Growth Tax Law have been evolving over the past 25 years, the uniform, statewide method used in assessing the lands under tree growth has pretty much stayed the course. Despite that, there still appears to be a lot of confusion regarding it, especially when it comes to the reimbursement formula and the concept of "full funding".
Nowhere in the law is "full funding" required, so it is not surprising, given the less than "full funding" by the state of recent years that there are at least two bills before the Legislature calling for full funding. But as this article attempts to point out, "full funding" is not what the term implies, even if it were achieved, it would not reimburse towns for all the taxes "lost".
Computing Current Use
Under the Tree Growth Tax Law (36 MRSA §576), local assessors are relieved of the burden of calculating the so-called "current use" or "productivity" value of the land in the program. Under the law it is the responsibility of the State Tax Assessor to furnish local assessors with the 100 percent valuation for an acre of forest land, according to forest type (soft, mixed and hardwood) and region (county), every year.
In computing the current use or productivity for each forest type and county, the state takes into consideration four factors:
the prevailing stumpage price being paid for the various types of trees harvested in each region;
the average rate of growth of the three forest types in each region;
the amount of that growth that can realistically be harvested and sold; and
the future earnings of the land.
As can be expected, the productivity or current use values that the state arrives at, vary from forest type to forest type and from county to county. It goes without saying that softwood commands a higher price than hardwood by a factor of about two to one. But it depends on where it is growing.
For example, under the Tree Growth Tax Law Valuation Schedule for 1997, Piscataquis County had the highest rate for softwood at $228.80 an acre while Washington County had the lowest at $84.20 an acre. For example, Cumberland County had the highest rate for hardwood at $116.70 an acre, while Hancock County had the lowest at $40.60 an acre.
It also goes without saying that the calculations, as designed by law, produce in most municipalities, but not all, a value far less than the fair market value of the land.
And it goes without saying that land enrolled in the Tree Growth Program has the immediate effect of eroding a municipalitys tax base. To make up for what the state calls a "calculated tax loss" or "theoretical revenue difference" between the two values, the state provides municipalities with what it calls a "subsidy" and others call a "reimbursement".
Before looking at how the state arrives at the amount of the subsidy/reimbursement, it should be stressed that the state views the loss to the town as "theoretical" because they see it as a tax shift. State officials contend that as a result of using the lower tree growth values there is a rise in the tax rate and a corresponding shift to non-tree growth property.
That said, one begins by calculating the difference between the fair market value and the tree growth or current use value of the land (s) in tree growth. But not just any fair market value is used. Just as the current use value is decided on a county-wide basis so is the fair market value. Figured annually, it is based on sales in each county within the past three years of parcels 40 acres or more.
"Generally we are in the ballpark with undeveloped acreage, " says David Ledew of the Bureau Taxations Division of Property Tax. But he acknowledges that there are a number of towns whose undeveloped acreage values are far higher than their county averages, as in the case of coastal towns.
"But by state law( 36 MRSA §578) we must go with the lower figure," says Ledew.
That is not to say there have been no attempts to change the law. Ledew recalls that a few years ago there was an attempt to remove high valued shore land from the Tree Growth Program. "It never went anywhere," recalls Ledew; "What did emerge was the removal of land in personal use." He also recalls there was an attempt to break out the higher valued coastal tier towns from their counties, but there was insufficient data to justify the different numbers.
Tree growth valuations and the states fair market valuations on a county-wide basis aside, there is a third major factor in computing reimbursement and that is the so-called "education cap".
36 MRSA §578 states, "No municipality may receive a reimbursement payment under this subsection that would exceed an amount determined by calculating the tree growth tax loss less the municipal savings in educational costs attributable to reduced state valuation."
All of which is to say, the reimbursement formula makes sure there is no "double dipping" into increased state subsidies due to the loss of valuation from tree growth.
One cannot address the issue of "full funding" without noting that the current law anticipates less than "full funding".
36 MRSA §578 states, "If the sum of all approved claims exceeds funds appropriated for reimbursement under this subchapter, payments must be prorated so that each eligible municipality receives the same percentage of its approved reimbursement."
That said, as noted above, tree growth has not been "fully funded" since 1992 and the gap between what has been the amount claimed by the towns under the formula and what the legislature has appropriated has been growing wider ever since.
In 1995, municipalities were entitled to $5.1 million in reimbursements but since only $2.1 had been appropriated by the Legislature, only $2.1 was reimbursed.
Using a small Franklin County town by example, Temple was out $18,441 under the formula. According to figures generated by Taxations Ledew had the legislature fully funded the program in 1995, and if Temple had applied its fully funded reimbursement of $31,343 toward reducing its tax commitment, its tax rate would have dropped from 17 mils to 15.8 mils. And had that happened, the taxes on a home in Temple assessed at $75,000 would have dropped about $90.
Impact Is On Rural Towns
Ledews figures show similar reductions in similar small towns with large parcels in tree growth. For example, Bancroft with 88 percent of its land in tree growth would have been able to reduce its tax rate from 22.5 mils to 20.4 mils and a similarly valued home would have had its taxes reduced by $152. For example, Carthage with 71 percent of its land in tree growth , the tax rate would have dropped from 20 mils to 18 mils and taxes on a $75,000 home would have dropped $144
Ledews figures are clear in that when full funding is absent, small towns with large acreage in tree growth are hit hardest. It does not make much of a difference in the larger coastal communities with high valuations and small amounts of land in tree growth.
For example, had there been full funding in 1995 in Freeport, which has about 16 percent of its land in tree growth, the tax rate would have gone from 17.15 mils to 17.13 mils, for a savings of $1.28 in property taxes on a house assessed at $75,000; while in Rockland with about 8 percent of its land in tree growth, the tax rate would have dropped from 25.60 to 25.59 mils for a savings of 51 cents in property taxes on a house valued at $75,000.
As Taxations Ledew sees it, the current reimbursement formula is not about full funding; rather it is about fairness. As he sees it, the formula was designed solely to distribute the monies available to those in greatest need. As he sees it, the formula was not designed to provide for a true reflection of loss.
As Taxations Ledew explains it, before 1989 all towns with land enrolled in the Tree Growth Program received reimbursements from the state on a per acre basis whether or not their valuations were reduced under the program to the tune of about $500,000 a year.
All that changed in 1989, when the Legislature, faced with a surplus, decided to increase the amount to between $2 and $3 million. The formula that was devised was merely a means for distributing that money fairly, merely a means to make sure that towns that were not losing money were not gaining money, says Ledew, who notes that as a result of the new formula there are about six towns in Maine that receive no reimbursement, as their acreage values are below that of tree growth values.
Some Proposed Changes
As noted above, going into the First Session of the 118th Legislature there were some 18 tree growth related bills being proposed. As noted above, at least one (LD 631) seeks to repeal the Tree Growth Tax Credit over a period of five years; another (LD 655) seeks $185,950 to reimburse 48 municipalities who filed their municipal tax returns late last year; while yet another (LD 357) calls for a grace period of 30 days in the future for filing those returns to make sure they remain eligible for reimbursement.
There are two bills (LD 645 and LD 796) that address the issue of "full funding". The former seeks to raise the reimbursement factor of 90 percent to 100 percent; the latter seeks to require that the 90 percent factor be mandatory . As noted above, neither bill will return all the taxes "lost" due to the education cap.
Perhaps the most innovative of all the tree growth bills proposed for consideration by this Legislature is one being sponsored by Senator Jill Goldthwait of Bar Harbor.
Goldthwaits bill, LD 972, would get the Tree Growth Tax Law off the backs of the municipalities. The bill proposes two things: first it would change the reimbursee from the municipality to the beneficiary (the landowner) and second; it would enable the municipality to assess the property at the local rate (the states or the municpalitys, whichever is the lower) for undeveloped acreage, rather than at the reduced tree growth acreage rate. All of which is to say, the taxpayer would be reimbursed the differential formerly provided the municipality.
In support of her bill, Goldthwait argues that Tree Growth Tax Law is a state devised and created program which the state has fluctuated in its ability and willingness to implement fully. She says her bill takes the municipality, which she portrays as the "innocent bystander", out of the picture. She says there are already models in which taxpayers seek tax credits from the state for tax relief, such as the Circuit Breaker program and the Business Equipment Tax Reimbursement program.
Computing Reimbursement: An Example (sidebar)
Temple is located in the western part of the state in Franklin County. Sixty-nine percent of its land is in tree growth. In 1995, the state set $124.10 an acre for the county value of land in softwood; $86.80 an acre for mixed wood and $81.60 for the value of hardwood. Temple has 1,038 acres in softwood; 4,043 acres in mixed wood; and 9,244 in hardwood.
In 1995, the state set $370 per acre as the average value of undeveloped land for the county; Temples rate was $325 per acre. Because Temples rate was the lower of the two, it was used in calculating the fair market value of the land. Temples tax rate was 17 mils.
To calculate the reimbursement to the Town of Temple in 1995 for the 14,326 acres that are enrolled in the Tree Gowth Program, one must first subtract $1,234,058 (tree growth valuation) from $4,655,950 (fair market valuation) and then multiply $3,421,892 (the difference) by .017 (the towns mil rate) to arrive at an initial figure of $58,172.
One must then multiply $58,172 (what the state calls "calculated tax loss" or theoretical revenue difference between the two values) by 90 percent to come up with the figure $52,354.. This is where most municipalities cease calculating and start scratching their head. For in 1995, Temple only received $12,904 back from the state.
The difference between $52,354 and $12,904 is not all due to the lack of full funding. For if there had been full funding of the program by the Legislature that year, Temple would only have received $31,345 from the state.
The difference ($21,009) between $52,354 and $31,345 is due to the so-called "education cap" that reflects the states indirect subsidy/reimbursement to Temple through increased state aid to education. State aid to education is "increased" in the sense that Temple gets more GPA than it would if it none of its land was in tree growth. In other words, tree growth valuation keeps the towns valuation lower, which means that GPA is higher than it would be without tree growth.