BEYOND BETR

Eliminating the tax on business equipment, as Gov. John Baldacci proposed to do during his State of the State speech last month, makes much sense. As the prior administration found out, however, this is hard to do. And with a proposal to reduce property taxes on the ballot either this spring or fall, doing away with the equipment tax is even less likely unless the administration can come up with a way to ensure that municipalities do not suffer the double whammy of losing both sources of revenue.

Former Gov. Angus King strongly believed that the business equipment tax, basically personal property tax assessed on machines and fixtures used by businesses, was a disincentive to companies that wanted to move to or expand in Maine. But, he found, the tax couldn’t simply be eliminated because many municipalities, especially those with one large major manufacturing plant or quickly expanding businesses, would be hurt by the loss of revenue. So a clumsy reimbursement system was put in place. Today, municipalities collect the tax, companies apply to the state to be reimbursed for the tax they have paid, then they get the money a year later.

Economic experts argue that the major expansions at Bath Iron Works and National Semiconductor in recent years would not have happened without the business equipment tax reimbursement, or BETR, program. Eliminating the tax might help even more, and would certainly be simpler than BETR, but what happens to municipal revenues, especially in service center communities, which get a significant portion of their revenue from the tax?

The favored solution is to boost state and municipal revenue sharing for these communities. The problem is that such a fix does not sufficiently help towns dependent on a single manufacturing facility, such as Jay or Bucksport, or a major power plant such as Veazie. Furthering the problem, these town typically have a much lower mill rate than do service sector communities like Bangor and Augusta so these towns feel little compunction to forgo some of their state money to help mill towns with lower tax rates.

Gov. Baldacci has yet to provide details on how to eliminate the tax and compensate municipalities.

All of this is quickly becoming an academic discussion, however. Faced with the prospect of a tax cap, lawmakers will have to come up with real tax reforms that can compete with the proposal from the Maine Taxpayer’s Action Network. Not only will competing measures have to address the imbalance between the state’s property, income and sales taxes, it must also not harm municipalities in the way that the MTAN proposal. It would cap property taxes at 1 percent of assessed value. That means the tax rate in Bangor would be cut in half and the city would lose $20 million in revenue annually.

Faced with such a prospect, cities across Maine can’t be expected to also bear the loss of business equipment tax revenue.