Tax Relief: Property taxes should be the top priority
(from Maine Townsman, December 1997)
By Geoffrey Herman, MMA Director of State & Federal Relations
According to the Chinese calendar, 1998 is the year of the Tiger. For the Maine Legislature, 1998 will be the year of Tax Relief.
Laws were enacted during the first session of the 118th Legislature that virtually guarantee some type of tax relief in 1998. With the help of surplus state General Fund revenue from FY 1997, some additional surplus income tax revenues that will accrue over fiscal years 1998 and 1999, and the recently imposed additional cigarette tax revenues that have been earmarked for this purpose, no less than $185 million will be available to the Legislature to provide tax relief (see Figure 1). Which taxes and which taxpayers are going to feel the relief are details that have to be worked out.
Relief can be temporary. Yet to be determined is whether the Legislature is going to undertake any meaningful tax reform in 1998. Although there is no bright line between tax reform and tax relief, a reform package would involve structural changes to the tax system that have the effect of assessing the tax burden more evenly among the three major taxes (property, sales, and income) and otherwise realigning the tax code for the purposes of achieving greater equity and stability.
To put it another way, reform would result in a better initial assessment of the tax burden, rather than patching up an outmoded or misaligned tax system by rebating overcollected taxes.
After reeling for half a decade from the interaction between a volatile tax structure and a negative economy, the state treasury is now taking in much more revenue than projected. Maines economy is currently growing at a rate of nearly 6%, but the states collection of tax revenues from the various tax lines (sales, individual income, corporate income, cigarette tax, estate tax, lottery revenues, etc.) is 10% over projections, yielding more than $58 million in unexpected state revenues during the first four months of the fiscal year.
An elastic or volatile tax code is responsible for these dramatic swings in state revenues. When Maines economy grows, the state tax revenues grow at a faster rate. When the states economy goes into a recession, state tax revenues drop more deeply into the negative than the economy as a whole.
Despite the fact that there are very good reasons to make adjustments to the states tax system so that a more stable and predictable stream of revenue is generated, structural changes to the states tax code are very difficult to achieve politically. Among some legislators, the solution to a volatile tax structure does not involve making any changes to the tax code. Their solution is to capture the excess tax revenues when economic times are good and hold that revenue in the state treasury for when the economy sours.
From a political perspective, one would think this roller coaster revenue ride would be fairly easy to correct. Having too much money is always easier to deal with than not having enough. Right? Not necessarily.
State legislators are now being pulled from two directions. On one side, people who rely on government services want funding restored for programs that suffered during the recession. On the other side, a contingent of people, who are less reliant on government services, are concerned that more taxes are being collected than are required to operate state government they want less taxes.
THE 1998 OUTLOOK
For municipal government, the tax relief debate underscores how important property tax relief should be to state legislators and the Governor. During the early 1990s, municipalities were hit from both sides. Not only were municipal assistance programs cut or flat funded, but to make up for the lost revenue, property taxes increased significantly.
Nearly $1.2 billion was collected in 1997 by the property tax, which is 44% of the $2.7 billion collected by the three major taxes. The income tax and the sales tax contributed 30% and 26% to the total, respectively. As the graph in Figure 2 illustrates, the recession of the early 1990s ushered in a new era of increased dependency on the property tax as the state government withdrew from previous levels of funding support for a variety of programs that assist municipalities.
The sales tax is now the weakest contributor to the states intergovernmental revenue stream. Ironically, a popular idea circulating the State House is to reduce the sales tax rate one penny, from the temporary rate of 6% to the pre-1991 rate of 5%. This change would further reduce the sales tax contribution to the total by $120 million per year, pushing off any serious relief to the property tax burden for years to come.
No single tax should be put in the position of pulling as large a share of the total revenue burden as is presently the case with the property tax. When a tax is compelled to out-perform, the weaknesses of the tax become exaggerated. In the case of the property tax, those weaknesses are: (1) it is not assessed according to ability-to-pay and can be extremely regressive in certain individual circumstances; (2) its burden is unevenly distributed among the 492 municipalities with their varied local tax bases and demands for governmental services; and (3) it is paid in large and absolutely unavoidable increments, exacerbating the not-uncommon perception that it is levied in poor relation to the services actually received by the taxpayer.
WHAT TO DO WITH TAX RELIEF FUNDS
The Taxation Committee has been given the charge of making the first recommendations regarding the disposition of the tax relief funds. The Committee has by no means finished its task, but it has been meeting since August and on a weekly basis since early October in an effort to accomplish parts of the task before the second legislative session convenes in January. Fortunately, the Committee appears to be very interested in using a chunk of the tax relief funds for property tax relief purposes.
One Time Surplus Funds
One piece of the Committees charge was to make a recommendation about the distribution of $28.4 million in surplus General Fund revenues that were collected during FY 97. The Committee segregated this pot of "one-time" revenue from the rest because it is already in the bank and not merely projected surplus. Dozens of uses were proposed for this money, which as a matter of law is to be used to "provide tax relief to the citizens of the state. Some of the ideas included in that long list were:
Put the money into the states Rainy Day fund as a hedge against the effects of the next economic downturn on the states budget.
Allocate some amount of the money to reduce the unfunded liability in the states workers compensation fund.
Use about $12 million to expand from 3% to 5% the increase to General Purpose Aid to Education slated for FY 1999.
Pay for some capital improvements to state buildings or the states schools.
Set aside $9 million of the money to pay back the counties for those several years when the state did not completely fund the Community Corrections Act.
Property Tax Relief
The Taxation Committee isnt ignoring property tax relief. The day before Halloween, the full Taxation Committee accepted a recommendation from its Subcommittee on Tax Reform which begins with the statement that "We believe that the committees primary structural tax reform objective should be to reduce the burden on the municipal property tax." The Subcommittees memorandum goes on to identify six proposals that would achieve that goal, with the recommendation that public hearings be conducted to obtain citizen reaction. The six property tax reform proposals on the table are:
Expanded Circuit Breaker program.
Additional, targeted Revenue Sharing.
A homestead exemption.
Grants to municipalities with significant proportion of exempt properties.
Enhanced General Purpose Aid to Education or other form of financial assistance to K-12 education.
The Task Force on Intergovernmental Restructuring proposal on county reform.
Although all these proposals are well understood conceptually, the details of each proposal have yet to be worked out. Certain characteristics of these varied property tax reform proposals are more fully described in Figure 3. Because true property tax reform would have to utilize state revenues in an ongoing way, the Taxation Committee appears to be targeting the cigarette tax revenues, which yield sustained revenues year after year, for property tax reform purposes.
The proposal that has been developed to the highest level of detail comes from the Task Force on Intergovernmental Restructuring. As municipal officials are well aware, the county reform recommendation was developed over the last year by a 21-member Task Force appointed by the Governor, with equal representation among state, county, and local governments.
The Task Force proposal has now been finalized and is being distributed to the various interested parties. In November, the board of directors of the Maine County Commissioners Association and the Maine Chamber and Business Alliance formally endorsed the Task Force proposal. At its centerpiece, the Task Force proposal would restructure the way county government is financed so that state revenues, rather than the property tax, would pay most of the cost of county government.
The goal of the Task Force proposal is to remove obstacles in the current state-county-local intergovernmental relationship that impair the ability of governments at different levels to work together cooperatively to make sure that the governmental services the citizens need will be provided with optimum efficiency and effectiveness. One of the major obstacles identified by the Task Force is the degree to which county government, which mostly provides state services, is almost completely funded by the property tax.
The Task Forces final proposal would change the funding system and otherwise accomplish its goal by:
Establishing a county revenue sharing program that would provide counties with a majority share of their funding from state tax revenues rather than the property tax. In 1997 dollars, if the Task Force proposal was entirely implemented, county revenue sharing would provide the counties with $38 million of the $60 million that is currently provided through the property tax.
Freezing by mill rate the level of county assessments that can be levied on the municipalities. With the state funding a majority share of county government, the counties assessment to the municipalities would drop significantly, 62% on average. Under the Task Force proposal, those reduced mill rates would become the maximum mill rate for county assessment purposes except in emergency circumstances.
Adjusting the apportionment of county government assessments to reflect the level of sheriffs patrol received by municipalities without police departments.
Invigorating the county charter process.
Moving counties towards more formalized management and establishing minimum qualifications for County Treasurer.
Amending the laws governing the authority of county government to position it to offer regional services on an entrepreneurial basis.
TAX REVENUE TARGETING
Tax burden neutrality is a key element in the county reform proposal. The way the final Task Force report has been worded, there is a link between the county reform" proposal and another tax reform proposal, Tax Revenue Targeting. Tax Revenue Targeting is a bill introduced by the Governor (LD 1824) that has been carried over into the second session.
In the context of the county reform proposal, the goal of Tax Revenue Targeting would be to create a mechanism to ensure that the $38 million freed up by the state paying for state services provided by the counties would translate into property tax relief on the local level. The Task Force proposal states that any property tax savings realized with the county reforms must not result in any increase to the overall tax burden in Maine. By implication, this language in the final Task Force proposal creates links between it and the concept of Tax Revenue Targeting.
The Governor feels very strongly about Tax Revenue Targeting. The Governors Office is promoting Tax Revenue Targeting as a mechanism to begin reducing the states overall tax burden in a deliberate and gradual way, rather than the absolute revenue-limiting property and income tax caps that have been proposed. Tax Revenue Targeting is also perceived by the Governor as the anchor that should be in place before the Legislature undertakes comprehensive tax reform.
The philosophy behind Tax Revenue Targeting is so important to the Governor that he feels his particular legislative proposal (LD 1824), or a similar mechanism, should be in place before any property tax reform measure is enacted in 1998, such as additional revenue sharing, a homestead exemption, grants to municipalities with large amounts of tax exempt property, or the county reform proposal. Presumably, expansion of the Circuit Breaker program would not require Tax Revenue Targeting because the Circuit Breaker provides direct property tax relief to the taxpayers.
Tax Revenue Targeting would establish a new system whereby the Legislature would establish tax revenue collection "targets" at the beginning of each biennium for both the state and local governments. At the end of the biennium, if the overall (state and local) revenue target is exceeded, certain enforcement mechanisms come into play.
Fifty percent of excess state government revenue would be diverted into the Rainy Day Fund. The remainder would be used to make good on any unfulfilled obligations to local government, and otherwise returned to the taxpayers.
For local government, if all the 492 municipalities together impose property taxes that (along with municipal excise taxes) exceed the established targets, State-Municipal Revenue Sharing for the subsequent biennium could be reduced by the amount the target was exceeded, provided the excess spending was attributable to the municipal side of the local budget. If local government exceeds its targets for reasons attributable to school budgets, no real penalty will be applied, because the schools receive funding as a result of a legislative appropriation rather than through a revenue sharing system.
Previous Support for Targeting
Last session, MMAs position on Tax Revenue Targeting was that we could support the measure only if it was attached to comprehensive tax reform that would significantly reduce the states current over-reliance on the property tax.
This time around the Governor is asking municipalities to support Tax Revenue Targeting in the context of incremental property tax reform, such as that represented by the Task Force proposal on county reform, or the other property tax reform measures that are being considered by the Taxation Committee.
In order to be as well informed as possible about Tax Revenue Targeting, MMA staff took the proposal around the state to a series of educational forums. This was done not as an attempt to promote the proposal, but only to make sure that municipal officials clearly understand how it would work in all its details. At the dozen regional meetings, the municipal officials generally understood the importance of making budgetary decisions in the context of tax burden. That being said, the municipal reaction to the details of Tax Revenue Targeting was decidedly cool, particularly towards the penalty aspects of the proposal.
MMA TAKES POSITIONS
MMAs Legislative Policy Committee met on December 11, deliberated on the issues of county reform, property tax relief and revenue targeting, and adopted the following positions.
The Policy Committee gave its support to a homestead exemption (for Maine residents) as MMAs top priority for property tax relief.
MMA will support Tax Revenue Targeting as long as its is tied to significant property tax relief and only if the penalty provisions for municipalities that could potentially affect the distribution of State-Municipal Revenue Sharing funds are deleted from the proposal.