Year Change and Multiple Collection Dates
(from Maine Townsman, March 1989)
By Michael L. Starn
Since 1980 the average price of a home selling in Maine has more than doubled and the amount of property taxes collected statewide has also doubled. So, it seems logical to assume that for many Maine residents, their property tax bill has also doubled.
In 1980 homeowners were probably paying, on average, between $500 and $700 annually in property taxes. Today, the average yearly property tax bill is likely to be $1,000 to $1,500, and probably more in the urban areas.
In 1989, as in 1980, most Maine communities continue to collect property taxes in a lump sum, once a year. For a variety of reasons, the time may have come to change this longstanding tradition of property tax collection.
Another longstanding Maine tradition is the springtime town meeting. With more and more communities moving to a July-June fiscal year, this tradition is also changing.
Fiscal Year Change
In 1975 the Maine Legislature enacted a law that required municipalities to conform to a uniform fiscal year for school budgets. Since June 30, 1977, the date upon which that new law was to be implemented, all Maine school budgets have been on the same fiscal year which begins July 1 and ends on June 30.
Traditionally, most municipal budgets have operated on a calendar year, January 1 to December 31. The mandated change to the uniform fiscal year for schools afforded municipalities the opportunity to also change their fiscal year for the non-school portion of the municipal budget as well. While several communities have switched to a July-June fiscal year for both the school and municipal budgets, the majority have not.
MMA's Director of Financial Management Services, Robert Reny estimates that 20% of Maine's municipalities, or about 100, have made the switch to a July-June fiscal year. Reny also believes that most of those communities have implemented a multiple tax payment plan.
A combined fiscal year for school and municipal budgets provides an excellent opportunity to implement a multiple property tax payment schedule, according to Reny.
The sheer size of the property tax bill, today, necessitates a closer look at how the taxes are collected. Regardless of how well an individual prepares for the inevitable once a year property tax bill, any bill over a thousand dollars, due in a lump sum payment, is bound to wreak havoc on the family budget.
Clearly, the method of payment of property taxes is one of the underlying causes of the increased public attention currently being focused on property taxes by way of tax and spending cap initiatives. Other sources of tax revenue while often taking a larger bite out of a person's income are nonetheless less painful in their method of collection.
Income taxes are withheld from our paycheck and if we get a refund at the end of the year, we actually are left feeling good even though many people pay substantially more in federal and state income taxes than property taxes. Sales and use taxes are taken out a little at a time and unless we are buying big ticket items like cars or appliances, most people don't realize the amount they pay each year. The other distinct advantage these taxes have over property taxes is that a robust economy means plenty of growth in revenues without the political difficulty of having to raise taxes.
The property tax, on the other hand, has no elasticity (growth actually costs more in services than it provides in taxes) and the method of collection certainly has its shortcomings. Moreover, most people just plain don't like property taxes, largely due to the regressive nature of the tax. That is to say, a person's income or wealth may not be reflected in the amount of property taxes he pays.
The fiscal year change also offers a much better budgeting process.
For the small town on a January-December fiscal year, by March town meeting time the town is three months into the budget year, spending tax money that has not been officially appropriated. In March municipal officials and townspeople do not know what the local valuation will be since April 1 is the date for fixing assessments. Additionally, at town meeting time, no one knows what school spending will be since the Legislature does not have to certify school costs until April 1.
Education comprises about 60 to 70 percent of most municipal budgets. This means that the major portion of the property tax commitment in most communities goes to fund education. From a financial and budgeting standpoint, residents have decided very little relative to their property taxes during or after a March town meeting.
A late May or early June town meeting and a unified school/municipal budget offer significant budgetary advantages to a town. There will be many more "knowns" than "unknowns" relative to revenues and expenditures, particularly school revenues and expenditures. Budget adoption prior to the beginning of a fiscal year allows for the purchasing decisions and contractual arrangements to be made early in the budget cycle with proper legislative authority. Municipal officers also have the benefit of knowing the total assessed valuation at the time of budget adoption thus providing for a more exact prediction of the property tax rate for the coming fiscal year. Lastly, the July-June fiscal year affords the opportunity for multiple tax collections with the good possibility that tax anticipation borrowing can be reduced or even discontinued.
In changing their fiscal year, communities have three basic options: adopt an 18 month and then a 12 month budget; or adopt a 6 mo. and then a 12 mo.; or adopt a 12 mo., a 6 mo. and then a 12 mo. budget. A TOWNSMAN article in December, 1975 outlined a calendar of events for the 12-6-12 option. Copies of that article are available from MMA.
Multiple Tax Collection Dates
The best reason for dividing up the property tax bill and having multiple collection dates is partly financial but mostly public relations. Take a $1200 property tax bill. Most people are probably better able, and perhaps more willing, to make four $300 payments during a 12-month period than one $1200 lump sum payment.
Michael Roy, Vassalboro's manager, says that the advantages of multiple collections far outweigh the disadvantages. Vassalboro has had multiple collection dates (4 times a year) since 1976. Former Vassalboro Town Manager Ken Kokernak (now city manager of Gardiner) outlined the process that the town went through in adopting a multiple-payment plan in the April, 1977 TOWNSMAN. Copies of the article are available from MMA.
Lauding the advantages to the taxpayer of spreading out the property tax payment and to the town of increased cash flow, Roy also has some words of caution for municipal officials contemplating a multiple tax payment schedule.
One problem that Vassalboro had when it first set up its payment plan was that the final tax payment was at the very end of the fiscal year. A fairly large number of people were delinquent in making that final payment and they had to be accounted for as unpaid taxes. This put the town's collection rate at about 85% which was looked upon unfavorably by some lending institutions. When the town moved its final collection date from the end of June to the first of May, the collection rate improved dramatically.
Another problem for Vassalboro was the use of the term quarterly tax payments. The Vassalboro payment schedule for 1988-89 (adopted every year at town meeting) was September 30, November 30, February 24, and May 5. The four payments were not equally distanced and some people complained, according to Roy, who now refers to their payment plan as 4 times a year.
Finally, Roy says that for communities with a manual accounting system, quarterly tax payments can be burdensome and administratively costly. But, he maintains, "still worth it."
Vassalboro operates on a July-June fiscal year and holds its town meeting the first week of June. Roy says the July-June fiscal year is "infinitely better" than a calendar year for a town meeting community. Acknowledging that the spring town meeting has been a strong tradition in Maine, Roy says the July-June fiscal year is so much more manageable because school and county government costs are known and the local valuation has been determined. "Some people thought we'd have fewer people attending a June town meeting," says Roy, "but we haven't seen a decline yet."
The major disadvantage of multiple collection periods for property taxes is the extra administrative paperwork. Particularly for communities with manual accounting systems the extra paperwork could be significant.
Multiple collection dates also mean multiple due dates and interest starting dates. For town meeting communities these due dates and the applicable interest rate for delinquent taxes and when interest starts have to be approved at town meeting. Town and city councils can accomplish this through the annual budget adoption process by setting due dates and interest starting dates (should be done for each fiscal year). The tax lien process may be affected but only if the final payment is more than 12 months from the commitment date. If the final payment were more than 12 months after commitment, a municipality would not be able to use the tax lien process to collect property taxes that were owed.
A fiscal year change and multiple payment plan go hand in hand. Municipal officers have the authority to set the fiscal year (30 M.R.S.A. § 5151(3)[30 M.R.S.A. § 5151(3) repealed and replaced by 30-A M.R.S.A. § 5771.] Another important statute is 30 M.R.S.A. § § 5110 [30 M.R.S.A. § 5110 repealed and replaced by 30-A M.R.S.A. § 5651.], 5151[30 M.R.S.A. § 5151 repealed and replaced by 30-A M.R.S.A. § 5771 .] which allow a town to raise two taxes using a single valuation and to repay Tax Anticipation Notes (TANs) within 18 months of the fiscal year during which they were borrowed in order to make a transition to a new year.
Mortgage escrow accounts for property taxes have become more popular in recent years and many property taxpayers are now paying their property taxes as part of their monthly mortgage payment. A few communities have Christmas Club accounts where the property tax bill is divided into 12 equal monthly payments.