Penny hike in sales tax proposed Belfast manager’s bid draws attention, critics

BELFAST – City Manager Terry St. Peter believes adding a penny to the state sales tax to reduce property taxes is an idea whose time has come.

But a state economist is not so sure.

St. Peter has unveiled his proposal to the City Council and, though members took no action last week, they indicated the idea has merit.

The proposal calls for enacting a state law that would increase the sales tax by 1 cent for the reduction of property taxes. The community that generated the sales tax would receive three-fourths of the extra levy, and the town’s host county would get the remaining one-fourth.

Finding extra pennies has drawn attention around the state this year, especially a thwarted bid to enact a local-option sales tax to pay for such projects as a new civic center in Bangor. Despite support from Gov. Angus King, the measure was killed in a legislative committee after its sponsor decided it would not win House approval this year.

In May, state officials estimated that raising the state sales tax by 1 cent would generate an additional $70 million a year.

Maine communities are particularly interested in ways to reduce property taxes, and getting a share of the sales tax is one way to do that, the Belfast manager said. He said other states have “localized” sales taxes and that the time is right for Maine’s communities and legislators to endorse such a proposal.

“We think there is a groundswell out there for it waiting to be tapped,” St. Peter said Wednesday.

Galen Rose, an economist with the Maine State Planning Office, is skeptical of the proposal. In an interview, Rose said increasing the sales tax would not resolve property tax problems. Rose said communities would be better off if the sales tax were broadened to cover services as well as goods. An expanded sales tax would enable the state to boost its support to the towns by increasing revenue sharing, he said.

Under St. Peter’s plan, all of the state’s municipalities and communities would benefit from the extra revenues. He cited the state’s sales tax figures as an example of the revenue potential. According to those figures, more than $127 million in taxable merchandise was sold in Belfast last year.

Had there been a 1-cent local tax in place, the city would have received about $1 million, a figure equal to 3 mills on the local property tax rate. In addition, sales in Belfast would have earned Waldo County $300,000 in extra revenues compared with current figures. He said sales from the county’s other 25 municipalities would have boosted the county’s revenues further.

“That would reduce our tax rate considerably and would reduce the county’s bill to the municipalities as well,” said St. Peter.

But Rose is wary. “The state would be better served by changing the tax structure we have. The problems right now are more a matter of the design or structure of the tax base, rather than the rates.”

Rose said the sales tax is applied to goods and the bulk of its revenues are supplied by sales of automobiles and building products. Purchases of those items fluctuate with the economy, causing a roller-coaster effect, rising in good times and declining in slow periods.

Rose said expanding the tax to include the broad base of services that are exempt would be a fairer way to address the problem.

“There’s really no good reason to tax goods and not tax services except that we’ve always done it that way,” said Rose. “Why not broaden the base to include services? We are increasingly becoming a service-based economy.”

St. Peter said the change to 6 cents would simply be putting the sales tax where it was until recently.

“The 1-cent local sales tax proposal is not a tax increase. It is a tax change, from the overburdened property taxpayer to a consumption tax based on ability or willingness to consume,” St. Peter insisted. “It simply recognizes the 21st century economic conditions, rather than the 19th century economy.”

He noted that while demand for services continues to grow, revenues no longer keep pace with those demands.

The Belfast council is expected to discuss the issue in more depth when it meets next month.