Articles By Peter Mills
Maine's Dubious Odyssey into the Funding of
Local Government
One hundred years ago, Maine and its subdivisions depended almost entirely on the property tax to fund government at all levels. Towns as collecting agents were directed to add several mills to local tax bills and remit the proceeds to Augusta to support functions of the state.
Today, the flow is reversed. In 1952, the Legislature passed a sales tax, and in 1969 an income tax. Although initially adopted for the state's self-support, about half of these revenues are now remitted to local governments to relieve the property tax. In many local budgets, state supplied revenue overshadows the significance of the property tax itself.
Money from the state is delivered to towns and school districts or given back directly to property taxpayers under a variety of different schemes. The dominant system is General Purpose Aid to Education (GPA), a matrix of funding relationships defined by a formula that sometimes breaks down under pressure to solve municipal issues unrelated to teaching children.
When all of the state's revenue sharing and rebate systems are identified, quantified and held up to light, it is difficult to conclude that there is any general or unifying theme that can pass muster as consistent policy. In reviewing and critiquing these systems, this article makes the case that raw necessity and simple equity ought to be the guiding principles for justifying state expenditures on local government. To go beyond merely squanders revenue and elevates state taxes in a way that threatens the competitiveness of Maine's economy in the national marketplace.
School Funding, Revenue Sharing and Rebates
State relief for the property tax is delivered in four primary ways: General Purpose Aid to Education, municipal revenue sharing, road assistance, and an assortment of rebate payments to taxpayers.
School subsidies consume every third dollar of state taxes. In fiscal year 2000 the state will spend for the benefit of K-12 schools a total of $778 million out of a state budget of $2.4 billion. No other department of state government claims a greater share of the general fund.
It requires $1.6 billion a year to run Maine's 726 public schools through 286 local governing units. Five percent is from federal funds; the remainder comes about equally from state and local sources. The state share is largely from sales and income taxes, the local share from property taxes. School funding is, by far, the state's largest property tax relief program for municipalities.
The second largest is general revenue sharing which distributes to towns $92 million per year, about 1/8 of what is provided through school funding. The state treasurer is directed by law to siphon off 5.1% from all sales and income taxes directly into a municipal revenue sharing pool and remit only the remaining 94.9% to the general fund. The municipal pool is then distributed each month to all 494 Maine communities and the Unorganized Territories under a formula with two variables, population and local property tax rate, adjusted to state equalized valuations.
If two communities have the same population but the adjusted local tax rate is 20 mills in one town and only 10 mills in the other, then the town with 20 mills receives twice as much money from the pool. While this is a gesture toward equity, it needs to be emphasized that every town receives a substantial subsidy, even those whose property wealth justifies no need for assistance.
The third largest program is state road assistance which supplies $22 million to local government in FY 2000. The DOT distributes money based on the number of winter and summer roads in need of maintenance. In recent years the DOT has directed that some of the money be devoted to capital improvement programs rather than routine upkeep.
Other programs distribute money as direct relief for property owners while permitting the towns to collect all or most of the tax. These include a rapidly growing Business Equipment Tax Reimbursement program (costing $42M this year and more than $50M next), a circuit breaker refund for low income homeowners and renters (costing $26M), a new state-funded homestead exemption for the first $7000 of value in a residence (costing $43M), and a tree growth program to shelter woodlands from development (costing $5.5M).
Local Dependence on the Property Tax
In total revenue, towns collect or receive
roughly $1.5 billion (not including school
funding). Their major sources are $1.2
billion from property taxes, $130 million
from vehicle excise taxes, $92 million
from revenue sharing, and $22 million from
DOT road assistance. Towns provide $775
million to local schools, contribute $60
million to county government, and spend
about $700 million on their own municipal
services.
So long as education is controlled locally,
the first layer of support for public
schools will come from the property tax
because that is how towns raise money.
Although they have other small sources of
revenue, the property tax is the only one
which local governments control. Maine
does not permit its towns to tax sales or
income.
Maine
has 70 billion dollars worth of taxable
property. Tax rates in populated regions
range from 7 or 8 mills in rich coastal
towns and some rural plantations to 27.3
mills in Lewiston. The state average is
17.34 mills (1.734% of value) yielding 1.2
billion dollars annually from property
taxes.1
For
other sources of revenue the towns have no
power to set rates and thus to control
what they earn. The vehicle excise tax,
for instance, is the second largest supply
of money for municipal government. It
produces $130 million, or about ten
percent of locally raised funds. The rate
for this tax is set by law (at 24 mills
for new cars) so that the amount paid on
any vehicle is the same wherever the tax
is collected. The effect of the tax varies
widely. In rural Jackman, 21% of local tax
receipts are based on trucks and cars;
whereas in Jay, which has a paper mill to
tax but fewer logging trucks, only 4%
comes from vehicles.
The
Distribution of Property
Wealth
The
most important thing to know about the
value of real estate is the unevenness of
its distribution. Only 40% of the state's
taxable property is residential. The
remaining 60% is industrial, commercial
and recreational property that is
distributed randomly from town to town.
Some towns have so much of it that 90% of
their taxes are paid by people and
companies who don't live
there.
By
contrast, many other towns collect nearly
all of their revenue from local homes
because there is nothing else to tax--no
paper mill, no lakefronts, and no
impressive coast lines. When it comes to
supporting children in school, the
difference in capacity from the top of the
scale to the low end is staggering. Many
towns have 10 times as much property per
pupil as others do. These differences
occur through accidents of geography with
no one to blame.
One
of the most revealing documents regularly
produced by state government is a listing
by the Department of Education of all 286
school units ranked in sequence to show
the amount of property valuation behind
each pupil. The differences are dramatic.
While it demonstrates in part the
existence of "two Maines," not all poor
districts are in the north, nor all rich
in the south. Among the poorest are
Berwick and Sanford. Among the wealthiest
are Carrabasset Valley and
Rangeley.
Many
wealthy towns, notably those on the coast,
have more than a million dollars in
property value to support each child in
school. To raise $5000 for a child's
education in Southport (valuation $2.4
million per child) would require a tax
rate of just over 2 mills. (In fact, they
raise 3.73 mills.) In the less fortunate
Aroostook town of Woodland, it would take
60 mills to raise $5000 and over 91 mills
to raise the $7821 that is actually spent
by Southport.
Wealth
is not confined to the coast. The entire
northern forest, consisting of 10.5
million acres in the Unorganized
Territory, supports only 1300 children in
school. The tax for education is 5
mills.2
Thus, 50% of the land mass of the state is
taxed at only 5 mills for education while
the other half averages 11.07. The
education tax in the Unorganized Territory
is about 50 cents per acre for raw land.
Although the Territory is administered by
the state as though it were a gigantic
municipality, it is not treated as one of
Maine's 286 school units and therefore
does not participate in General Purpose
Aid.
Attractive
tax rates in the Unorganized Territory
have tempted small towns like Madrid to
deorganize and turn themselves over to the
state and the county for further
governance, giving up local control for
favorable taxes.
If
it were not for state school subsidies,
our poorer towns would be bankrupted by
the burden of education. Woodland, near
Caribou, with 305 children to educate has
only $83 thousand in property value behind
each child. It receives about $1.1 million
in state aid to supplement the $325
thousand it is able to raise locally by
taxing itself at nearly 13 mills. Even
with high taxes and a large subsidy, it is
able to spend only $4070 per child, $1100
less than the state
average.
If
Woodland were on its own without subsidy
and if it elected to tax itself at 62
mills in order to raise the state's
average expenditure of $5150 per child, it
would, in theory, take only 16 years to
confiscate all the property in town to
educate children.
There
are many children living in towns with
less than $150 thousand in valuation per
child:
Glenburn - 739 students | Van Buren - 532 students |
Greenbush - 338 students | Mars Hill - 463 students |
Mechanic FAlls - 556 students | Medway - 352 students |
Princeton - 199 students | |
If
there were no state subsidy, each of these
towns would require a tax of 34 mills just
to raise the state average expenditure of
$5150 per student. While property tax
rates in Maine peak out at 27 mills (in
state equalized rates), in New Hampshire
there are towns whose rates rise to 40 or
50 mills precisely because the state
provides no school funding subsidy. The
New Hampshire Supreme Court has declared
such excessive reliance on local funding
to be unconstitutional, as have other
states.
In
Maine many school districts link rich
towns with poor. These combinations are
encouraged by the school funding subsidy
which is calculated on the basis of what
the district is entitled to as a whole. A
wealthy town standing alone might receive
very little subsidy; but when it joins
with a poorer neighbor, the new district
benefits not only from economies of scale
but also from a subsidy based on blended
wealth.
Unfortunately,
when the valuation differences are
extreme, it is advantageous for the
wealthy neighbor to remain aloof rather
than to subject its tax base to the
district's burden. Carrabassett Valley,
Rangeley Plantation and West Forks, for
instance, find it preferable to pay
tuition on the order of $6000 per student
rather than to tax themselves at three
times that rate by joining a neighboring
district. To join the district would cost
an additional $12,000 per child; but in
such wealthy towns this would require only
3 or 4 mills of added
tax.
The
Service Center
Problem
While
there are great differences among towns in
their capacities to raise revenue, there
are equally significant variations in
demands for municipal
services.
In
some rural towns with dirt roads, no
police force and a volunteer fire
department, it is possible to pay for
nearly all services entirely from
miscellaneous revenue (vehicle excise
taxes, state revenue sharing and road
assistance), without relying on the
property tax at all. In such towns it is
primarily for schools that a tax bill is
issued.
By
contrast, in more centralized towns and
cities, often called "service center
communities," the tax for municipal
services may equal or exceed the bill for
schools. These are towns where people
visit shopping centers, receive medical
care, borrow from banks, take college
courses, shop for cars and appliances, go
to court, buy insurance, file deeds, and
seek legal advice. Many of these towns are
county seats. They have full-time fire
fighters, a round-the-clock police force,
a public library, professional street
crews and a management staff at city
hall.
Service
center communities are not necessarily
large and metropolitan; many are small but
functionally set apart. Most have other
towns around them with populations
dependent on services from the center.
Property tax rates in the central
communities are often more than double
what they are in the surrounding towns.
Smaller centers like Houlton, Mars Hill,
Eastport and Mexico, for example, all have
property tax rates in excess of 24 mills,
just as do the larger centers of Portland,
Lewiston, and Auburn.
In
such communities we find concentrations of
tax exempt property for which services are
provided without compensating taxes to pay
for them. In the aggregate, about 15% of
Maine property is tax exempt ($11 billion
out of $81 billion). While over half of
the exemptions are for government (U.S.,
state and municipal), exempt properties
also include colleges, churches, fraternal
halls, hospitals and medical facilities.
27% of Lewiston is tax exempt, 40% of
Brunswick, 49% of Orono, 21% of both
Portland and Waterville, 24% of Presque
Isle, 25% of Machias, and 22% of
Calais.
In
stark contrast are the satellite towns
where exempt property is negligible, often
just a small church, a town office and a
few graveyards. The tax base for many
small and peripheral Maine towns includes
99% of all the property within their
borders.
While
it is true that residents of service
center communities benefit directly from
the value of the added services provided
to them (trash pick up, concerts at city
hall, prompt response for heart attacks,
etc.), the doubling of their tax burden
undoubtedly exceeds the value of whatever
they receive in return. Why else would so
many of their residents be escaping to the
suburbs?
To
support schools, towns throughout the
state impose an average property tax of
11.07 mills. Under the influence of the
school funding formula, the rate of tax
for schools does not vary greatly from
this norm except in the wealthiest
communities that can pay for education at
rates of only a few mills. Among the large
majority of towns closer to the median, a
school unit is regarded as making a poor
effort if it assesses only 9 mills;
whereas, at 13 mills, its residents are
said to be making a large sacrifice for
education.
On
the municipal side, by contrast, rates
vary from zero mills to 14, depending on
many variables: the cost of services
required to run the town; the amount of
exempt property; the presence of
industrial or recreational property to
inflate the tax base; and the revenue
available from other sources, notably the
vehicle excise tax, road assistance and
revenue sharing.
As
the above description highlights, there
are property tax inequities of all sorts
that come to bear on school funding. Many
of them, such as service center issues,
are not solvable through the formula; but
service center towns, with their
demographic power, think nothing of making
demands on the school funding formula to
solve their unrelated
problems.
While
the Legislature's Taxation Committee
reviews property tax issues year after
year, it remains politically stymied to
address them competently. This failure
increases pressure on the Education
Committee where the school funding formula
becomes the focus of perpetual adjustment
amid futile and misguided efforts to fill
tax policy voids.
The
K-12 Formula in
Overview
The
education funding formula is the state's
most significant effort to bring equity to
the funding of local
government.
At
its core the formula is driven by two
variables among school units (1) the
number of students and (2) property
valuation. If the formula were left at
that--if the state's money were
distributed simply in proportion to
valuation per pupil--we might then be
spared the annual spreadsheet battles and
the agony of benighted debate that pass
for public service on the Education
Committee. While such a formula might not
be entirely fair, it would at least be
comprehensible--and that, in the long run,
is just as important.
Unfortunately,
the formula is not simple. It has dozens
of refinements, wrinkles and modifications
that make it difficult to grasp and that
often hinder equity even though justified
in equity's name.
To
begin with, General Purpose Aid is really
four sub-formulas which blend into one
another using algorithms that are
fathomable by very few human beings and
that are calculable only by computers
operated by management information
specialists. It is no wonder that so many
legislators confine their analysis to a
quick glance at spreadsheets defining
their hometown
entitlements.
To
understand public school aid, it is
important to put the four formula
components into scale and then complete
the picture by including teacher
retirement costs that the state pays
directly and outside the formula.
Appropriations for fiscal year 2000 are as
follows:
Category
|
Amount
|
Percentage
|
1. Operating costs
|
$325.89 Million
|
52.5%
|
2. Program costs
|
208.55 M
|
33.6%
|
3. Debt service subsidy
|
56.15 M
|
9.0%
|
4. Adjustments (direct costs)
|
30.10 M
|
4.9%
|
|
|
|
Total GPA under the formula
|
620.69 Million
|
100.0%
|
Add a hold harmless provision
|
3.78 M
|
|
Total General Purpose Aid
|
$624.47 Million
|
|
|
|
|
Add: Teacher pension costs
|
150.00 M
|
|
Retired teacher health ins
|
3.46 M
|
|
Total support for
|
|
|
K-12 from state funds
|
$777.93 Million
|
|
Components
of K-12 Funding
The
four components of the formula and the
teacher retirement appropriation may be
outlined as follows.
1. Operating costs
Operating
costs are the normal and generic expenses
encountered by every school district,
including the salaries for regular
teachers, the cost of maintaining
buildings and paying utilities. This is
the category regarded as the essence of
General Purpose Aid; yet it accounts for
only 52% of GPA and is the last of the
four elements to receive an increment when
money is added to the formula. The other
three components are funded first while
operating costs are adjusted last to
absorb what remains of the total
appropriation.
This
category is based on the premise that
every district should spend at least $4020
per child, this year's "per pupil
guarantee", on normal operating costs. The
per pupil guarantee is raised through a
combination of state and local funds with
every school unit required to generate a
local share. To the extent that a school
unit's required share falls short of
$4020, the state pays the difference as
the operating cost
subsidy.
Amounts
raised by the district in excess of its
local share are optional and do not
diminish the state's contribution.
However, if the district fails to raise
its local share, it loses $1 of subsidy
for each dollar of
shortfall.
The
local share for each district is based on
two weighted factors: 85% on its property
tax capacity and 15% on its median
household income. The taxing capacity of
each school unit is measured by property
valuation per student. Municipal property
assessments are adjusted to 100% of market
value for uniformity throughout the
state.
Each
district's local share is determined by
reference to a mill rate known as the
"statewide local share." Set this year at
6.67 mills, this figure is used to
calculate what all districts must raise on
a statewide basis to arrive at the
aggregate local share of operating costs.
Because of formula intricacies having to
do with minimum subsidy calculations, 6.67
is not equivalent to the mill rate
required to produce the local share of any
single district. The actual mill rate for
most districts is above
7.
The
statewide local share and the per pupil
guarantee are the two major determinants
of equity under the current formula. When
appropriated funds are held constant,
raising either of these variables shifts
money from rich districts to poor. Under
provisions passed in 1999, a schedule was
set for raising both variables for fiscal
year 2000 and for each of the three years
that follow, not with the intent of
reducing what any wealthy district
presently receives, but with the hope of
distributing newly appropriated money in a
way that will increase equity to poor
districts as time goes
on.
If a
district has sufficient property wealth
(approximately $700 thousand in valuation
per child) so that its local share
calculation raises more than the per pupil
guarantee, then the district is given a
minimum subsidy, roughly equivalent to 5%
of average costs. 45 of the 286 districts
are wealthy enough to receive only the
minimum. The aggregate cost of minimum
subsidies is just under $1 million which
is regarded by most observers as a
suitable price for requiring these
districts to supply the data necessary to
manage the system. One might ask, however,
why the state must also pay their
teachers' pensions.
The
formula is further modified by injecting a
15% weighted factor for relative household
income that adjusts the amount calculated
under the tax capacity analysis. In the
end, this controversial modifier
significantly dilutes equity in the
formula.3
An
extreme example makes the point. If a
hypothetical school unit had zero taxing
capacity (a total absence of taxable
property), then it would need a state
subsidy for the full $4020 of the per
pupil guarantee because it would have no
other source of revenue. However, if the
district has an average household income
rating, then its subsidy is reduced by 15%
to only $3417, even though the town can
raise no money of its own. It can only tax
property and not income and has no
property to tax in this simple
example.
2. Program costs
Program
costs are special expenses that vary
significantly from one district to another
and for that reason are subsidized
separately on the basis of each unit's
actual costs as reported from two years
before. Representing about 1/3 of GPA,
they include:
a. Early childhood programs
|
d. Transport operations
|
b. Special education (local)
|
e. Vocational education
|
c. Special education (tuition & board)
|
f. Approved bus purchases
|
The
state subsidizes program costs in two
modes depending on whether the costs fall
above or below a threshold that is
calculated by applying a circuit breaker
mill rate to the district's taxable real
estate. The mill rate is 1.21 for FY 2000.
The bottom layer of costs, those below the
threshold, are subsidized based on a
percentage calculated by analyzing
historical operating costs. The
calculation of this percentage (which is
zero for wealthy districts) preserves a
portion of a former foundation cost system
that was otherwise repealed in
1995.
The
state subsidizes 100% of program costs
above the circuit breaker threshold,
without any limit on the subsidy, even if
the district is wealthy. Because program
costs are "expenditure driven," most
districts have an incentive to allocate
costs into this category whenever
discretion or accounting flexibility
permits.
When
there is not enough money appropriated to
pay for 100% of the state's program
subsidy, the state reduces the total
amount payable to each district by a fixed
percentage. This "percentage reduction"
method of balancing the program account is
significantly detrimental to poor
districts because they lack the taxing
capacity to recover the lost
revenue.
As
new funds were added to the formula for FY
2000, the percentage reduction factor was
dropped from 21% to 15.88% which is a
significant step toward equity for poor
districts; but it also benefited some
wealthier districts with high program
costs because they, too, will receive
larger subsidies. Districts favored by the
change include both metropolitan centers
with high special education costs and
rural schools with high transportation
expenses.
3. Debt service
Debt
service includes costs for approved
capital projects and certain leases. They
represent about 9% of GPA. The state
subsidizes debt service in a way that is
parallel to program costs except that debt
service subsidies are given only for
projects that are approved by the state
under a weighted priority
system.
As
with program costs a qualifying district
receives a more substantial subsidy for
debt service costs above a circuit breaker
threshold (.5 mills for FY 2000). With new
regional high schools costing upward of
$25 million, it is becoming increasingly
common for wealthier school units to
penetrate the threshold when they qualify
for new construction
projects.
4. Adjustments
"Adjustments"
are direct costs paid by the state to the
extent of the available appropriation.
This category, representing about five
percent of general purpose aid, includes
the cost of educating state wards, state
agency clients and pupils in
out-of-district placements. Some of these
costs are passed through from other
departments, such as Human Services or
Corrections.
Among
the adjustments, the expense for out-of
district placements is perenially
controversial. For each out-of-district
placement of a special education student,
the state distributes to the district each
spring funds to pay for a portion of that
year's costs which exceeds three times the
normal cost for educating the pupil.
Because the appropriation is always less
than what is needed, the district must
account for the shortfall under its
program costs, a portion of which is
subsidized two years later under the
program section of the
formula.
5. Teacher Retirement Costs
Completely
outside the general purpose aid formula,
the state pays 100% of the employer's
share for teacher pensions plus 30% of
health insurance costs for retired
teachers. These retirement payments are
significantly more beneficial to wealthy
districts than to poor because pension
contributions are directly proportional to
teacher pay which is much higher in
wealthy districts.
When
this subsidy is added to the funds
appropriated for General Purpose Aid,
teacher retirement costs comprise more
than 1/5 of the total amount provided by
the state for K-12 education. In effect,
20% of the state's K-12 subsidy system
counteracts the tax equity purposes which
underlie the remaining
80%.
To
Fix the Education Funding
Formula
Everyone
familiar with the school funding formula
keeps a list of things to change. I
recommend the
following:
1.
If the four categories of general purpose aid are preserved, as probably
they should be, then detach them from each other and appropriate funds to
each separately under simple formulas that are kept as parallel as possible
so that policy makers can see clearly how funds are being spent.
2. For program and debt service costs, allow the circuit breaker thresholds to
float upward so that only those districts that have the greatest need
will qualify for full reimbursement. Subsidies below the threshold levels should be based on the same percentages as for operating costs.
3. Reduce, but do not eliminate, the percentage reduction factor for program and debt service costs. While the current 15.88% discount is too high, a continuing contribution from local funds is appropriate in order to discourage districts from dumping costs into these favored categories. Such costs will be better controlled if the district must put some of its own money toward them at every level of the reimbursement scale.
4. Substitute a straight "local share mill rate" for the very complex "statewide local share" calculation. Continue to elevate this minimum mill rate as may be necessary to ensure that locally raised funds are suitably matched to the state's own contribution.
5. Follow through on commitments to raise the per pupil guarantee to suitable levels as appropriations are raised in future years.
6. Resist the temptation to hold all districts harmless at every turn in theroad. If a school unit is losing pupilsand gaining valuation, then it must sacrifice subsidy. While losses may be dampened or cushioned, they should not be indefinitely postponed.
7. Strike the income factor from the operating cost formula to eliminate its dilution of property tax equity.
8. Put the normal cost component of the teacher retirement contribution (6% of salary) onto district payrolls so that this cost will be accounted for under the formula. The unfunded liability component (about 12% of payroll) should be paid by the state.
9. Require that property in wealthy districts be taxed at a minimum mill rate for education. While we must respect that Maine's attempt at a uniform property tax for education was repealed by popular vote in 1976, we can still recognize as absurd that so many major property holdings in Maine are being taxed at 5 mills or less while the average is 11.07.
Above
all else, the formula must be made simple.
Equity and simplicity are not at cross
purposes. It is entirely feasible to
produce a formula which preserves the
beneficial essence of the present system
while excoriating the coral layers of
calcified algorithms we have allowed to
accumulate under layers of change,
superimposed one on
another.
Complexity
works to the advantage of insiders by
destroying the capacity of citizens and
legislators to comprehend policy. What
people cannot understand they are
compelled to ignore. We have enough
experts on night hunting and lobster trap
vents. We need more who understand how 1/3
of the budget is spent. We will have such
people as soon as the formula is rewritten
in plain terms with its principles
suitably distilled.
Toward
a "Grand Unified
Theory"
We
must recognize that the school funding
formula is only a limited measure for
property tax relief. Even though the state
provides half the funding for public
education, the management of schools
remains a fiercely protected local
prerogative. The Department of Education
does not manage school systems. Thus, even
though it seems strange to say so, state
school funding is more about taxes than
education.
However,
the formula is a limited instrument of tax
policy. It cannot resolve, nor even
competently address, the municipal side of
property tax inequities. If the state
continues with its "eyes wide shut" to the
burdens of our service center communities,
then we can hardly blame them for flexing
their considerable power to distort the
formula in ways that will benefit them to
the detriment of more needy districts.
Maine needs a "Grand Unified Theory" to
pull together its disparate policies
toward funding local
government.
Service
center communities do have genuine and
significant problems that the state has
not addressed. They also have demographic
strength and political power. However,
when these districts must choose between
tackling tax exempt institutions, for
example, or teasing out concessions from
the school funding formula, their
political energy is channeled to the
formula. We must address the problems of
service center communities, not only
because they deserve it, but also because
we must prevent them from dipping into
school funds at the expense of children in
poor districts.
There
is no easy way out of this. We have to
approach municipal tax problems like
adults and tell people some bad news.
There will be losers. Someone new may have
to be taxed. Some subsidies will be
reduced. We cannot solve property tax
inequities by indiscriminately
broadcasting state revenue to all
communities at once.
There
are some difficult changes we can
embrace:
- We
can repeal some of the exemptions that
exclude a quarter of all property from
taxation in our service center
communities. Perhaps we should deny
exemptions for some and impose fees on
others, at least for the value of the
services they receive--as represented
by the non-educational component of the
community tax bill.
- We
can permit service centers to adopt
local option taxes to relieve their
property tax dependency. We can free
these communities to exploit their own
commercial strengths by giving them
flexibility to design tax systems for
themselves.
- The
state can inject its limited revenue
sharing funds into just those
municipalities with intolerable tax
burdens that remain unmanageable
through local resources. Perhaps
revenue sharing should be distributed
only in proportion to the non-education
mill rate since the education side is
already subsidized. In any case, we
should stop squandering state funds on
wealthy towns with total mill rates
under 12.
In
recent years we have adopted a number of
expensive, broad and unfocused measures.
They share the single virtue of being
politically inoffensive. We seem unable to
bear the thought of taxing anyone new. It
is easier simply to sprinkle money in all
directions at once as though we were
blessed with an inexhaustible
supply.
Consider
the following examples:
- As
mentioned above, municipal revenue
sharing, although proportional to local
tax rates, is nevertheless delivered to
all Maine communities, rich and poor
alike.
- Under
the Business Equipment Tax
Reimbursement program, state refunds
are sent to all eligible businesses in
all communities without addressing the
issue of need or return on investment.
Much of the money is simply doled out
to shareholders of the world's largest
corporations.
- Maine's
homestead exemption passed in 1998 is
delivered annually to all Maine
homeowners without regard to whether
relief is needed. Large portions of the
refund are lost to the federal
government through reduction of
itemized deductions on the homeowner's
tax return. Thousands of well-off
people receive insubstantial benefits
at great aggregate cost to the
state.
- Road
assistance money from the DOT is
distributed to towns on the basis of
certain highway categories. Much of the
money is received by towns with very
low mill rates. The program has little
to do with need and nothing to do with
adjusting relative tax
burdens.
We
cannot relieve inequity by trying to
carpet bomb the property tax. The state's
revenue arsenal is not up to the task. The
state is already recycling half its tax
receipts back to local governments; and
the percentage of recycled revenue is
growing every year under pleas from
educators to expand school funding, under
pressure from municipalities to relieve
the property tax and under lobbying from
business to sustain the expanding BETR
program.
We
have superior laser guided ordnance
available. Our best example is the circuit
breaker program for low income renters and
homeowners which distributes annually a
small fund of state money in direct
proportion to each recipient's tax burden
and need. It is the lowest cost of all our
programs and the one that provides the
greatest good on the
ground.
With
Maine's sales tax soon to be reduced to a
moderate five percent, we are becoming
more reliant than ever on the income tax
to sustain state government. While many
states have dropped income tax rates in
response to recent upswings in the
economy, our rates remain among the
highest in the nation. States do not enjoy
the same freedom to tax income as the U.
S. government has. Few people abandon
American citizenship when the federal
income tax is raised by a few percentage
points.
Among
the states, by contrast, citizens may flow
at will. The problem of rate competition
is acute. An elevated income tax drives
out highly paid management personnel,
entrepreneurs, and wealthy retirees and
dries up venture capital from all sources,
including
non-residents.
When
we lose managers and investors, we lose
the wages, the spending and the taxes that
their money can leverage. When we lose
retirees, we lose not only their income
taxes while they live but also their
estate taxes when they die. High income
tax rates produce a brutally compound
impact on the state's economy and on
general revenues to the state
itself.
Some
will point out that high property taxes
can have a similar impact; but who can
seriously argue against equity in
taxation? If the owner of a ski condo or a
salt water cottage is taxed at only 7
mills, will an increase to 12 mills make
such a difference? Will the Elks close
down if the assessor sends a tax bill to
the lodge?
It
is not my purpose to argue that aggregate
state subsidies to local government are
too high. It is merely to point out that
our systems of distribution are defective.
With the state spending over a billion
dollars a year to achieve property tax
equity, we have a right to expect better
results. A town should not be required to
tax itself in excess of 12 mills to
achieve only a substandard school system.
A service center community should not have
to collect 12 mills and more just to
provide required services to its
residents. These communities and their
taxpayers deserve better
treatment.
Property
owners in our service center communities
are consistently taxed at 24 mills or more
while owners of coastal and forested
property are taxed at only 7 or 8; yet a
large portion of state subsidy money
continues to flow into towns with low to
moderate mill rates or directly to
taxpayers in such
communities.
For
far too long, Maine has been a prodigal
partner to its local governments. The
state has been inexcusably careless in
defining its relationships with
municipalities, school units and those who
pay property taxes. Maine's revenue
sharing programs squander the state's own
limited resources to poor effect. Much of
the money for local schools is distributed
without sufficient regard for meeting
needs or relieving the highest burdens.
And all the while, we avoid politically
difficult reforms that would build
capacity for service center communities to
stand on their own.
The
state cannot continue to raise revenue for
local government without tailoring our
programs to do exactly what is needed to
achieve equity--and precious little
more.
1 1998 Municipal
Valuation Return Statistical Summary,
produced by the Property Tax Division of
Maine's Bureau of Revenue Services.
2 Unorganized Territory
Municipal Cost Components FY 1999-2000,
published by the Bureau of Revenue
Services.
3 See the analysis by
Townsend and Dow in the December 1998
issue of Maine Policy Review.
Peter
Mills--1999
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