1 Percent Tax cap proposal has rural Maine bracing for budget woes

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As the fourth-graders at the Dr. Carl E. Troutt School in Mattawamkeag scurry around the gymnasium this day, economics is surely the last thing on their minds.

Watching from the sidelines, however, Harry Michaud, their principal, can think of little else.

“Sometimes people save a dollar and lose something good,” said Michaud, contemplating what some believe to be the crippling financial effects of the 1 percent property tax cap proposed by Topsham accountant Carol Palesky’s Maine Taxpayers Action Network.

Even without the cap, Michaud’s small, northern Maine school of just 55 pupils is being considered for closure, as the district’s school committee, based in the nearby mill town of Lincoln, seeks to cut costs.

Michaud fears Palesky’s proposal, set to go before voters in either June or November, could seal the school’s fate by slashing the town’s revenues, thus making it impossible to pay its share of the district’s costs.

Just a short drive past the vacant buildings on the town’s once busy Main Street, John Whitehouse, the town’s first selectman, wished he could allay Michaud’s fears about the impact of the Palesky plan. But he couldn’t.

“[Closure] would be certain,” said Whitehouse from behind his desk at Town Hall, punching in numbers on his calculator. “It would be too bad because it seems anytime something has happened to that school, the town has died a little bit more.”

Based on numbers provided by the Maine Municipal Association, an advocacy group for Maine’s cities and towns, the town would collect only $262,500 in property taxes under the cap. That’s down from $565,000, leaving it about $130,000 short of paying its school costs and leaving no money for town expenses such as fire and trash collection services.

Palesky’s plan, modeled after California’s Proposition 13, would limit property taxes to 1 percent of a property’s value in 1997. For instance, the owner of a home valued at $120,000 that year would pay $1,200 in property taxes.

In Mattawamkeag, that homeowner – rare in the town where the median value of a home doesn’t even hit $50,000 – would pay about $2,700.

Not all towns would be hit equally by the tax cap, according to MMA estimates, which predict a statewide loss of more than $700 million.

For instance, towns such as Blue Hill, Brooklin and Sorrento, relatively affluent coastal towns in Hancock County, won’t feel much of a pinch because of their traditionally high property values and already low tax rates.

In addition to lowering property tax rates across the board, the Palesky plan would limit increases in a property’s value to 2 percent a year, a drastic reduction considering property values in Maine have increased, on average, 9 percent each year since 2000, based on Maine Revenue Service numbers.

Palesky, reached Thursday at her home, said it was such increases in her own hometown just north of Brunswick that prompted her efforts a decade ago to ease the tax burden on property owners.

Fears a cap would force the closure of schools, town libraries and police and fire stations were unfounded, she said, but continue to be perpetuated by the plan’s opponents, who have inflated town revenue losses to frighten voters.

“They don’t want to make any cuts,” Palesky said of the municipal leaders who oppose the plan. “They want to increase the size of government. They have no intention of decreasing it.”

California nightmare?

When 57 percent of California voters approved that state’s 1 percent tax cap in 1978, they did so under much the same circumstances.

State and local leaders derided the plan, advanced by the now deceased Howard Jarvis, a crass anti-tax crusader who effectively appealed to a frustrated electorate with a simple idea: Cap rising property taxes in an effort to force local governments to limit spending.

The cap, advocates at the time argued, would protect coastal residents in the growing state, where property taxes had doubled or tripled in the years leading up to the vote.

Twenty-six years later, there’s still little common ground between those who protect, and those who seek to change what has become perhaps California’s most sacred political cow.

“Take the warnings of doom and gloom with a huge grain of salt,” Joe Coupal, president of the Howard Jarvis Taxpayers Association, advised Maine voters. “They predicted everything would close under Prop. 13. Everything stayed open.”

Coupal, whose father coincidentally was the city manager of Bangor for many years, contended the lower property taxes actually accelerated California’s economic boom of the 1980s as companies located there, bringing jobs and more tax revenue.

Schools and fire stations might have stayed open, said Francis Medema, an analyst with the California League of Cities, but they did so at a cost.

“While there may seem to be some benefits on the surface, there are unintended consequences,” said Medema, adding that the cap forced cities and towns to impose a host of fees – on everything from streetlights to new home construction – to stay afloat.

Already in Mattawamkeag, Whitehouse pondered the possibility of imposing fees for sewer service or garbage pickup in an attempt to close their projected budget gap.

“If the reception’s not good, deorganization is a real possibility,” he said, “unless somehow the state steps in.”

The California cap did force the state government in Sacramento to bail out struggling cities at considerable financial cost. In turn, cities lobbied to impose their own local sales taxes as a means of closing their remaining budget shortfalls.

In Bangor, which stands to lose about $23 million in revenue should the Palesky tax cap pass, a 2 percent local sales tax could close most of the gap, according to City Manager Edward Barrett.

But even if Bangor – or any of the state’s other large retail centers – were given the needed authority by the Legislature to impose a local sales tax, the Palesky plan requires that two-thirds of local voters approve.

The two-thirds threshold also would apply to any borrowing the city might want to undertake. The Palesky plan would allow the city to impose an additional tax to pay any voter-approved debt.

Requiring such a popular vote would be a fundamental change in Bangor, and most other large cities, where the city council has authority to approve most borrowing.

The fact that, since 1980, only 21 of the 132 statewide bond issues have reached that level of support is not lost on Barrett.

“It’s hard to get two-thirds of anyone to agree on any issue,” he said. “Something controversial? Even harder.”

A taxing political fight

For former Bangor Mayor Tim Woodcock, the restrictions imposed by the Palesky proposal mark the “antithesis of local control.”

“It’s saying that you, the people, can’t be trusted to manage your own affairs,” said Woodcock, who successfully led the fight against a spending cap in Bangor in the early 1990s. “Why doesn’t Carol Palesky go to each town and ask them to vote on her tax cap?”

In 2002, Bangor collected about $40 million in property taxes. Its projected $23 million loss coincides with almost exactly what the city provides to the school department each year.

In what is destined to be a political fight of epic proportions, schools – and images of children with outdated textbooks and no art or music classes – undoubtedly will take center stage, political analysts say.

“They’ll paint a very negative, scary picture,” said Jim Melcher, a political science professor at the University of Maine at Farmington. “They’ll say we all want property tax relief, but do you want to do it like this?”

It’s an unfair tactic, Palesky said, noting that school enrollment is predicted to drop by 12 percent in the next decade.

“The class sizes are getting smaller, but the budgets are getting bigger,” said Palesky. “That has to stop, and [a tax cap] is the way to do it.”

Before the debate begins in earnest, however, the state supreme court is expected to offer its opinion on whether key aspects of Palesky’s plan – including a provision that would roll back property values to 1997 levels – are at odds with the state’s constitution.

Its potential constitutional problems aside, the Palesky plan has gained some mainstream backers, including former state Sen. Phil Harriman of Yarmouth.

“It sends a clear message that people are demanding change,” said Harriman, who dubbed himself a reluctant supporter of the plan, a necessity, he said, in a state that has refused to tackle comprehensive tax reform. “In Augusta right now, they’ve got a fire and they don’t know how to put it out.”

With the Palesky plan looming, the MMA and Gov. John Baldacci – two vehement opponents of the tax cap – are working to craft a compromise as an alternative to the citizen initiative.

Whether voters opt for Palesky’s seemingly uncomplicated plan – at least on the surface – or a less drastic alternative remains to be seen.

“[Palesky’s plan] has the virtue of simplicity,” Woodcock said. “But at this point, that cure is worse than the disease.”