REFINING TAX REFORM

The legislative delay on potential tax reform is welcome. Lawmakers do not, as a group, have a clear sense of what they want to achieve and it is better to hold off reconvening until they do. Meanwhile, their leaders have an obligation to continue to look for areas of agreement so that they can present voters with a worthy proposal this fall.

There are a dozen good reasons to insist that tax reform in Maine is overdue. Maine’s system is archaic – relying too heavily on property wealth, too steep in its income taxes, to narrow in sales and, in the distribution of taxes, designed too often to appease the politically powerful than to make good policy so the state becomes more affordable. The popularity of a reform measure already on the fall ballot through citizen initiative, the School Finance and Comprehensive Tax Reform Act of 2003, focuses attention on property taxes. Partly because of inadequate state funding for schools and partly because many small towns, which characterizes Maine, are more expensive to operate than fewer large towns, property taxes in Maine are too high. The problem is exacerbated by a sales tax that grows more narrow by the year as an eager Legislature tries to give breaks to individual industries likely harmed by the state’s high tax rates.

But lawmakers largely do not like the citizen initiative, which was prompted by the Maine Municipal Association, because it requires the state to pay far more in school funding, no less than the 55 percent of the total as set in statute, shifting the responsibility for hundreds of millions of dollars from the towns to Augusta. The act expects the state to broaden the sales tax to items currently tax-free to pay for the expected drop in property taxes. Gov. Baldacci has said such a tax increase in unacceptable. But raising income taxes is out of the question, and there is no fee big enough in which to hide an increase of this magnitude. Voters, if the record number of signatures for the initiative is an indication, will likely support the property-tax relief unless something better is offered.

What’s better? The governor wants to trade increased efficiency among towns and offering them a local-option sales tax, which rural legislators do not like because their towns wouldn’t get much from the added tax. Senate President Beverly Daggett says reducing volatility – the unusually large swings in revenue that Maine state government experiences as the economy rises and falls – is a key to tax reform, but that suggests that becoming more dependent on sales taxes is problematic, unless taxes are raised on essentials. Some rural lawmakers assume that Maine cities, which property taxes are on average 39 percent higher, are just a bunch of spendthrifts and what’s needed is a dose of frugality.

Whatever they decide will go before voters, who could then choose between it and the MMA proposal. Lawmakers therefore should choose something significantly different from the measure currently on the ballot, yet like that measure broad enough to provide lawmakers room to legislate. The MMA measure is a revenue-neutral shift in school funding to the state; an opposing measure would direct much more of the reform to the local level, including the regionalization discussed by Gov. Baldacci and address a range of costs that service centers bear that are not carried by other municipalities. Several million dollars added to Revenue Sharing II, which targets communities with high property taxes, could find support among many lawmakers.

Legislative leaders have several weeks to figure this out. Their work has been impressive through the session and there is good reason to think they will be successful with tax reform. To do that they should focus on the issue so prominent in the MMA proposal, property-tax relief, and aid those communities that need relief most.