Tax caps and budget cuts; state and local

The people of of Maine, in voting for Question 1 (increased state funding of local education) last June, and in considering the proposed property tax cap seem to be sending a signal to our political representatives that Maine must reduce both state and local expenditures. Such reductions do not seem unreasonable in light of the fact that even with the reductions spending would still exceed that which occurs in most other states.

Although most of the debate on the property tax cap has been related to the impact of that initiative by itself, to get a true picture of the budget impact, one must also consider the impact of the recent passage of Question 1. Taken together, the adverse impact of the tax cap on local spending would be significantly mitigated and the overall reduction in the tax burden in the state (including local taxes) moves us closer (albeit still higher) to the national average.

Consider the following exercise in arithmetic. The total expected local tax revenue (without the cap) is about $1.9 billion in 2006; the “most likely” impact of the tax cap is a reduction of about $600 million (both according to a recent analysis by the Maine Municipal Association). This would be about a 32 percent reduction in revenues, and require a commensurate significant reduction in local spending. However, the recent passage of Question 1 requires the state to fund about an estimated additional $215 million (projected 2006 impact) more in local educational costs.

The net reduction in local revenues is, thus, $385 million, a 20 percent reduction in local tax revenues. At the state level, the expected 2006 revenue is about $2.7 billion. Assuming no additional state taxes to fund Question 1, state level spending must be reduced $215 million, or an 8 percent reduction. Combining the local and state budgets, the total revenues (without the tax cap) for 2006 would be about $4.6 billion. The total state and local required spending reduction would be $600 million, or about a 13 percent reduction.

Currently, Maine ranks as the second highest state in terms of combined state and local tax burden, taxes as a per cent of personal income, with about a 12.3 percent burden. The national average is 10.1 percent. If the tax cap is passed and governmental expenditures are reduced by 13 percent as outlined above, Maine’s tax burden will be reduced to about 10.7 percent. While still higher than the national average, Maine would fall in the state rankings to about 10th highest, similar to Vermont.

If the required reduction in local services is too severe at 20 percent, citizens also have the right to ask state legislators to fund a greater proportion of local costs. An additional $135 million from the state would equalize the pain, requiring a reduction of 13 percent in both state and local spending.

The passage of Question 1 last June and the tax cap this November, together with tightening governmental spending budgets, would go a long way in improving Maine’s poor tax position and help boost future economic growth. Perhaps our

citizens are on to something with these referendums.

Carroll Lee is a resident of Brewer.