While there are many proposals, solving Maine’s tax problem is ‘never as simple as people think it is.’
AUGUSTA – Two citizen initiatives and nearly a dozen more tax relief proposals have captured the attention of elected representatives, tax activists and economic analysts.
But hidden beneath this year’s property tax revolt lies an even greater and equally important task, they say: the need to stabilize Maine’s volatile tax structure.
Officials throughout the state, from the Governor’s Office to the Maine Municipal Association, agree efforts to lower residential property taxes should be a first step toward more comprehensive tax reform.
A referendum question spearheaded by MMA, appearing on ballots in June, would boost the state’s portion of K-12 public education funding.
Chris Lockwood, who heads MMA, says he realizes his organization’s proposal to make the state pay a greater share of school costs will not solve the state’s tax problems.
“It certainly isn’t the totality of tax reform but a very key element of it,” he says. “We believe that there are a number of things that are going to need to be done to deal with the whole tax structure issue.”
Another referendum question going to voters this year, based on a California initiative, would limit property taxes in Maine to 1 percent of assessed value.
Mary Black Andrews, R-York, said she and her fellow legislators are in crisis mode, responding to constituents whose property taxes have, in some cases, doubled or even tripled.
Yet she too acknowledges that most of the proposals floating around the State House these days are “just band-aids.” But they are necessary, she says.
No magic bullet
Lawmakers this session have proposed plenty of plans that would relieve the financial burden on taxpayers, from property tax relief measures, to budget-cutting and spending reforms, to reducing specific taxes.
But none of the plans addresses Maine’s underlying tax structure, which relies heavily on three revenue sources. Two of them – income and sales taxes – can fluctuate widely, especially during bad economic times.
In Maine, individual income taxes account for just under one-third of all tax revenues and the top 2 percent of taxpayers pay roughly one-third of the total income taxes collected. Income from investments make up a significant share of their income.
When a recession hits, as it did in the late 1990s, the state takes a big hit. Capital gains dropped 65 percent in a single year. That left the state facing a projected $1.2 billion deficit, about one-fifth of the total budget.
“That’s extremely volatile,” says State Economist Laurie Lachance.
Had interest rates not been so low, helping keep automobile and building material sales brisk, the recessionary effects on the state would have been even more devastating.
“We were extremely fortunate,” she says.
Experts who have studied the problem say tinkering with income and sales taxes would go a long way toward shoring up Maine’s tax structure.
Lowering the income tax rate charged those in Maine’s highest tax bracket would reduce the state’s dependence on a sometimes volatile stock market for a sizable portion of its revenue stream, Lachance says. The current top rate, 8.5 percent, is seventh highest in the nation.
To offset the loss in tax revenue and help reduce the state’s reliance on sales taxes from big-ticket items such as cars and building materials, the state could broaden the sales tax base, she says, sacrificing progressive taxation for stability.
Those are just two ingredients that go into the mix. There is no secret formula for tax reform, Lachance says, no magic bullet.
“It’s never quite as simple as some people would like to believe it is.”
The third rail
Resident tax historian, Rep. Peter Mills, D-Cornville, is a longtime proponent of expanding Maine’s sales tax base.
But, he cautions: Don’t hold your breath.
Past legislation has proposed taxing everything from haircuts to ski tickets. The result: lobbyists converge on the State House to oppose any expansion. The last time it happened, in 1997, the bill survived only eight days before it was dropped.
Meanwhile, the Legislature continues to carve out new exemptions for products and services. Every year, about $2.3 billion in total potential tax revenue goes untapped for that reason.
Some lawmakers representing coastal communities met recently in an effort to craft a tax relief measure. They were seeking ways to raise new revenues. The old concept of expanding the tax base resurfaced.
Mills asked them: “Are you ready to go back to your constituents on the coast and say we’re going to tax whale watches or windjammer cruises?” Discussion soon moved to other forms of taxation.
Mills says the push for true tax reform must come from the top. It is only likely to happen on an odd-numbered year in a governor’s second term, he says.
Because lawmakers would score no immediate political points by such action, it would never occur in an election year by anyone considering re-election.
Lee Umphrey, Gov. John Baldacci’s spokesman, says his boss does not see his current fiscal reform and tax-relief package now working its way through the Legislature as total tax reform. Instead, he sees it as an incremental step that would lead to other changes in the state’s overall tax structure.
“All indications are there is a widespread need (and) call for tax reform,” Umphrey says.
Once spending – at the state, county and local levels – is under control and Maine’s economy is competitive once more, lawmakers can and will tackle the issue of tax reform, he says.
And Baldacci will not wait until his second term to do it, Umphrey adds.
The ‘obvious answer’
Not everyone believes we need to wait for tax reform.
Upon his exit from public service two years ago, Michael Saxl, a Portland lawyer who served a term as speaker of the House, led a tax reform committee. That committee issued its recommendations a year ago. He feels those recommendations should be part of the current discussions.
In its plan, the group sought to shift much of the tax burden to out-of-staters, Saxl says.
The committee, composed of representatives from industry, business, advocacy groups, political leaders and academics, concluded that, in addition to greater property tax relief efforts:
• income tax rates should be lowered;
• the sales tax base should be expanded to include more products and services;
• personal equipment and business tax should be phased out, along with the Business Equipment Tax Reimbursement Program;
• meals and lodging taxes should be hiked; and
• items sold to non-profits ought to be subject to taxation.
“There are lots of good and committed ideas out there,” Saxl says of the current spate of proposals. “There is room to address all those concerns in more ambitious, comprehensive tax reform.”
That level of reform “is still the obvious answer,” he adds.
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