Shades of Tax Reform

Maine towns have grumbled for years about unfunded mandates from the state. Education requirements, pollution control, safety standards – nothing wrong with the rules, locals say, but where’s the money to go with them? In local taxpayers’ pockets, is the usual answer. Think of the contentious property-tax referendum question initiated by the Maine Municipal Association as a reverse unfunded mandate, from the towns to the state. Hey, Augusta, how does that feel?

Legislators, predictably, started yelling immediately about how irresponsible the MMA proposal is. It would lower property taxes by demanding the state pay for more of education starting next year, at least 55 percent, which would shift $264 million in costs from local to state government. State lawmakers have called such an abrupt shift unaffordable, ignoring the fact that property taxpayers are forced to afford it, uncomfortably, every year. The MMA proposal, like all citizen referenda, is a blunt tool for making policy changes. But it arrives after more than a decade of inaction over tax reform by the Legislature, and it makes no more sense to blame the referendum question for not being accurate enough than it does to blame a sledgehammer for not being a surgeon’s knife.

Gov. John Baldacci was so worried the referendums would send too much money back to the towns too quickly that he offered a more gradual proposal. It is in some respects a better plan, but it is being sold as the more affordable option. Theoretically, it is. But it will, in fact, be the more difficult to fund for two reasons. First, it defines what counts for funding specifically under the new Essential Programs and Services (EPS) model, while the MMA proposal also anticipates EPS but refers to it only as “an alternative school funding model.” If the MMA proposal passes and lawmakers decide they can’t afford it, they could pass 80 percent of EPS as the new model and leave towns with the problems they have now.

Second, the governor’s plan requires increased school funding at an average of 8 percent per year for the final four years of his plan. Care to guess the last time the state made that level of effort? Going back to 1986, the first year of the current funding system, the answer is never. It has never achieved sustained increases for schools anything like what the governor’s competing measure proposes, though it has tried a couple of times. It hasn’t, in part, because state revenues fluctuate too wildly, which is why adding stability to the state tax system is so important and why no tax reform is finished without it. The MMA proposal assumed that would happen; state lawmakers ran away from it.

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Maine is faced with two well-intentioned tax-relief plans, each with their own flaws. Gov. Baldacci, who has been excellent in bringing discipline to the budget process, could help again here. He could take a couple of steps between now and the November vote to help minimize the flaws in the proposals and push Maine toward needed tax reform, no matter the outcome of the vote. Assuming his plan succeeded, for instance, he could find significantly more money for General Purpose Aid to Education in the next two years, before his 8 percent increases would begin, lowering the need to hit those higher levels later.

And he could emphasize the need for stability in state revenue by carefully expanding Maine’s narrow sales tax incrementally while at the same time lowering other taxes or lowering the sales tax rate itself. The first half of that sentence doesn’t make sense without the second half. When Maine had a debt problem several decades ago, it devised a 90 percent rule – it would bond no more than 90 percent of the amount of debt it was retiring until the total debt was substantially reduced. It is important to note that it did not stop borrowing; politicians sensibly didn’t take a “No new bonds” pledge. They cut back the amount bonded and looked long-term. It worked; Maine’s debt dropped to among the lowest in the country. It may even have gone too far with that rule.

For tax reduction, the key is to provide sustainable reductions that result in a fairer, more stable system. To do that the governor might propose to shift taxes but allow new taxes to equal no more than 90 percent of the taxes being eliminated. So, for instance, he might flatten the steep grade in income tax and offer more property tax relief worth a total of, say, $300 million, but allow new taxes to equal no more than $270 million. This is politically perilous because some lawmakers would conclude this was a tax increase, though it would reduce overall taxes by $30 million and force the state to become more efficient by that much.

State lawmakers will be tempted this fall to make all kinds of gloomy claims about the MMA proposal. These will be largely unfair: The proposal leaves a lot to legislative discretion. More important than either question is what else the state does to advance tax reform. Maine has been waiting more than a decade for legislative action – the MMA sledgehammer was a hint that communities are getting impatient.