Maine State Senator Peter Mills

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Articles By Peter Mills

A Dissent in Defense of Our Most Hated Tax

Of all the taxes that we pay, the tax on property is certainly the least popular, perhaps because it so literally hits "closest to home." It imposes a perpetual burden on our domiciles, creating a payment that seems always to increase each year, a mortgage debt never to be paid off, an annoying annual reminder that our rights in property are not absolute.

The tax descends like a hammer every summer and demands to be paid in cumbersome, sometimes brutal, installments. For many homeowners and businesses, it is the largest single bill to be paid each year. Our municipalities have no power to withhold it slowly from our pay or to collect it in dribbles at the point of sale or subtly to bury it within the price of beer or gasoline.

While payment of the property tax may be deferred, it can never be ignored. Punishments for non payment are only gradually inflicted, but they are inexorable. If you fail to pay, your neighbors at the town office have the power, and the duty, to stretch you slowly on the rack. They begin by charging interest. Next comes the shame of being listed in the town's annual report. Then comes the lien, 18 months later a loss of title to your home, still later a quit claim deed to a local speculator, and finally eviction followed by a suit to quiet title.

And yet this is pain that we impose upon ourselves each year to meet the tangible needs of each community in which we live. Before we too roundly condemn this contemptible tax, we should reflect on its virtues.

As Professor Josephine LaPlante has pointed out, the chief attribute of the property tax is its resistance to the "bungee cord" effect in contrast to other taxes. While the needs of government are much the same from year to year, our chief sources of state revenue, the sales and income taxes, fluctuate wildly with variations in the economy. When times are good, our citizens will more freely fork over the extra 6% in sales tax on a new snowmobile, a jet ski or a Lincoln Continental. When company profits are high, businesses pay the state 8.93% of each new dollar that is added to corporate revenues. Or they give bonuses to their employees whose personal state income taxes may rise by as much as 8.5% out of each new dollar earned.

State income taxes are easy to pay not only because they are collected primarily when times are good but also because they come sugar coated as deductions from federal taxable income. The feds, in effect, pay nearly two-fifths of the tax for us.

But when times are bad, these same freshets of revenue dry up like dirt roads under an August sun--leaving the state's Appropriations Committee to eat the dust.

The property tax, by contrast, is collected every year in good times and in bad. It is consistent revenue largely shielded from the "slings and arrows" of economic misfortune.

Although the property owners who pay it will encounter varying levels of capacity to meet the burden, the municipal services they receive remain much the same from year to year. Through reliance on the property tax, local governments are able to operate at consistent levels.

It is also the only tax that is adjusted each year by the voters to reflect exactly the anticipated needs of the community in which the taxes are collected. It is a "demand side" tax.

The state's budgeting process is just the opposite. The legislature's Appropriations Committee projects state tax revenues first before adjusting expenditures. They redefine our "needs" until the budget balances. State appropriations are driven by the supply--or by the shortage--of estimated revenue. When our supply of state revenues rose dramatically in the 1980's, we allowed our list of needs to expand to a point where now, in the 1990's, we can no longer afford to meet them.

It would be a revealing exercise to calculate the total of all property taxes in Maine that are paid from sources out of state. Approximately 65% of the taxes in Skowhegan are paid by paper company owners living in South Africa. 60% of Madison's taxes are paid by wealthy residents of Finland and the world-wide readership of the New York Times. Our coastal communities are blessed with taxpayers like the Rockefellers and the heirs of Thomas Watson. Our lakefront villages collect taxes from those who visit here in the summer but otherwise work for Boston banks and Hartford insurance companies.

These folks pay their taxes on time; they demand few services; they send no kids to our schools; they don't circulate tax cap petitions. And in truth, the taxes they pay here are much lower than those they pay at home--whether in Republican New Jersey or in socialist Finland.

While property taxes are certainly too high for many Maine communities, the worst property taxes in Maine are only half what they are in New Hampshire, a state much admired by those with conservative fiscal views.

The property tax is the easiest and least expensive method by which a small Maine community may tax a huge multi-national corporation whose intangibles elude our other tax systems. Yet some of these gargantuan companies get relief anyway. The recently passed law to rebate property taxes on business machinery and equipment is contributing significantly to our current revenue shortfall. It was the governor's theory that such refunds would encourage companies to expand in Maine, provide new job opportunities and ultimately enhance revenue from income taxes.

But too often, the new machinery simply replaces manpower in the workplace and eliminates jobs available to Maine residents. Such new investments reduce the costs for extracting our untaxed natural resources; they enhance the dividends paid to out of state investors but leave few residual benefits to those of us who live here.

Our tax code does not ensure that the machinery will be purchased to put more people to work. But investment tax credits and the depreciation allowances on such equipment make it certain that the owners' profits will be sheltered from our income taxes for many years to come. And to top it off, we are now paying back to these same owners, out of precious state revenues, the property taxes they have paid to our local communities for newly purchased machinery and equipment.

How many redundant inducements are necessary to attract investments of such dubious value?

And these tax avoidances are entirely secret. No ordinary citizen may discover what a company paid for income taxes last year, what the company avoided paying by taking credits, or how much income was hidden by shifting revenue and costs from one jurisdiction to another.

Yet everyone knows what each company pays for property taxes within its own community. If the company doesn't pay by January 1st, its name goes in the town report right along with everyone else who falls behind. This alone is enough to restore one's faith in democracy.

Maine is high among the states in per capita burden for property taxes. Although tables suggest that Maine citizens are paying property taxes that average nearly $1000 apiece, this is intuitively untrue. Very few four-member families in Maine are paying $4000 in property taxes. Yet we often hear of such households in New Hampshire, Massachusetts and New Jersey.

The apparent discrepancy is resolved once we acknowledge that Maine is one of the few states in the union that still includes most of its industrial infrastructure within the property tax base. Imagine, for a moment, a simple fraction. Place in the numerator all of the taxable property in Maine, including the assets of 17 paper mills, the shipyard at BIW, nine million acres of industrial forest and every seasonal home in Boothbay, Belgrade, Sugarloaf and Sunday River.

Now divide this enormous numerator by our comparatively small permanent population. It is no wonder that our per capita figure is so high. We have lots of valuable property to tax (most of it owned by out of staters) and comparatively few residents who personally contribute.

Among the choices for property tax reform, we should continue to focus on reallocation of educational funding, on circuit breaker refunds to residents, on capping local exemptions, and on restraining business tax credits to those that are laser-targeted for job creation. But we need to be careful about condemning the property tax out of hand. It has an important place in the mix of public revenues.

Peter Mills
November 1996