AUGUSTA — A plan to restore $40 million in state funding for municipalities already smarting from years of cuts elicited scorn Wednesday from several business groups and the state’s top finance officer.

The proposal by leaders on the Appropriations Committee would pay for the municipal revenue sharing by ending several tax breaks for businesses and by raiding a state rainy-day fund and another fund meant to eventually decrease the state income tax.

Municipal officials praised the proposal as much-needed relief to local budgets squeezed by six years of declining state funding. Meanwhile, business groups said ending tax breaks that companies rely on amounted to playing “Russian roulette” with the state’s economic future.

The biennial budget that ends in June 2015 included a $40 million cut to revenue sharing and a directive to the Legislature to find the same amount of savings by ending tax breaks. If lawmakers are successful in that endeavor, the revenue sharing would be restored. If not, the cuts will go through.

Revenue sharing is the second-largest source of state cash for municipalities, after funding for education, and is a crucial part of local budgets, which cover everything from police and fire departments to parks and recreation. Further cuts will have to be made up for with increased property taxes, proponents say.

The current two-year budget already reduces revenue sharing by more than $30 million, from about $96 million in 2013 to about $65 million the first year; if the $40 million hole isn’t filled, that will fall to about $20 million in the second year.

Put another way, that would be a 79 percent decline in state funding for municipal services in just two years.

“Towns are telling us their budgets are as tight as can be. They depend on the state’s revenue sharing, and cannot tolerate placing any more unnecessary pressure on local taxpayers,” said Rep. Peggy Rotundo, D-Lewiston, the House chairwoman for Appropriations, who co-wrote the plan with her Senate counterpart, Dawn Hill, D-Cape Neddick.

“If the state doesn’t keep its promise, no town will escape the choice between cutting bare-to-the bones services or raising property taxes,” Rotundo said. “And, many will have to do both.”

Meanwhile, businesses and industry groups — as well as Maine Revenue Services — lobbied against the Hill’s and Rotundo’s plan with equal fervor, saying that ending the tax breaks would introduce unnecessary uncertainty and put Maine’s economic recovery in jeopardy.

Linda Caprara, a representative of the Maine State Chamber of Commerce, said the proposal may even push businesses out of the state.

“Companies don’t have to stay here in Maine; they can choose to leave,” she said. “Part of the decision not only to come to Maine, but to expand or remain here, is the certainty of the economic policies in any state. Companies invest where there is certainty.”

Rotundo’s and Hill’s plan would create additional revenue for the state by restoring a 12-year limit on a program that reimburses businesses for taxes paid on equipment, and exempting property used at retail sales locations from participating in that program at all.

Another provision would calculate, for tax purposes, the value of inventory of volatile-price goods — such as oil — at the current price, essentially recognizing the profit generated by sitting on stockpiles that will be sold to the public at a much higher price than they would have been when they were originally purchased by the business.

Lastly, the proposal would transfer $4 million from the Tax Relief Fund for Maine Residents — a fund established by the Republican-controlled 125th Legislature to slowly chip away at Maine’s income tax rate — to the general fund, and transfer an as-yet undetermined amount of money from a state rainy day account, known as the Budget Stabilization Fund, to the general fund. Both transfers would go straight to the revenue sharing program.

Peter Nielsen, Oakland’s town manager and president of the Maine Municipal Association, was one of many municipal officials who testified in favor of the proposal.

Mike Chasse, a member of the Presque Isle City Council, was flanked by policemen and firefighters from his city as he spoke to lawmakers. Cuts to revenue sharing since 2008 have represented 12.5 percent of the city’s annual budget, resulting in a nearly $12 increase on the city’s property tax rate, he said. If another $40 million is cut, it could add another 97 cents.

He said his city cannot absorb any more cuts.

“As a city councilor, I have seen one out of every five full-time [city] employees lose their employment,” he said. “We have cut police officers and firefighters. We have reduced hours at the library and City Hall. We have reduced spending on capital. We have virtually eliminated every discretionary spending we can.”

The decision of the Legislature in how to fill the $40 million budget hole could also have financial implications for the state on Wall Street, said Finance Commissioner Sawin Millett, who testified against the provision that would look to the state’s rainy day fund to close the gap.

The budget stabilization fund currently contains about $60 million. Millett said that’s only enough to pay for about five days of normal government operations. Raiding that fund — one Democratic estimate shows that about $15 million may have to be transferred — would affect how bond rating agencies view the state. That could result in lending practices less favorable to Maine’s balance sheet, Millett warned.

“As both Moody’s and S&P noted in their May 2013 reports, our minimal reserves and an overall weak balance sheet are highlighted as weaknesses in our ratings,” he said. “Moody’s further went on to state that actions that could cause the rating to go down include a lack of meaningful improvement in the state’s reserves.”

The Appropriations Committee will consider the proposal in a work session Thursday. If they approve Rotundo’s and Hill’s plan, it will be sent to the full Legislature for a vote.

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