Tax exempts in spotlight if cap passes Untaxed property represents tempting target for cities, towns

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BANGOR – For municipalities facing deep cuts in property tax revenues under a proposed statewide tax cap, property now exempt from taxation could become a tempting means for making up the losses.

A recent University of Maine study set potential statewide losses of property tax income under the tax cap at $372 million to $530 million.

Statewide, the total value in tax exempt property for 2003, the most recent annual report available, was more than $13.5 billion dollars, or almost 15 percent of the state’s total valuation of $91.4 billion for that year, according to the Maine Revenue Service.

With nowhere else to turn for additional revenues, municipalities with high percentages of tax exempt properties could be looking at ways to collect payments in lieu of taxes.

“It’s not real clear-cut,” Maine Municipal Association spokesman Michael Starn said in a recent telephone interview. “It’s speculative at this point, but I think it would be, as they say, ‘low-hanging fruit.'”

Regardless of where municipalities stand on the issue, there’s little local leeway in the treatment of tax exempt property.

For starters, any change to the rules regarding exemptions would require approval from the Legislature, the only entity empowered to authorize taxation or grant exemptions.

Furthermore, Maine’s tax exempt organizations are very diverse as a group. Some, like hospitals and churches, have relatively strong lobbies in Augusta, while others operate on shoestring budgets and would be hard-pressed to assume any additional costs, including property taxes.

“The more powerful lobbies don’t like the idea of someone like us getting our foot in the door because it could open the door up to other changes down the road,” Starn said.

Other reasons lawmakers have been reluctant to make changes include the important services many tax exempt organizations provide and other benefits they bring to their host communities, such as jobs.

As some see it, the tax cap could change that.

Proposed by Topsham tax activist Carol Palesky, the plan aims to cap property taxes at $10 per $1,000 of valuation. It also would limit assessment increases to 2 percent a year while a property remains in a family.

“It’s clear that exempt property would be fair game because the Legislature would be scrambling to find ways to make communities more whole,” Starn said. That could include enabling municipalities to spread costs over a broader base of users, he said.

While state law gives municipalities the discretion to establish fees in lieu of taxes, those fees must be collected from every property owner, exempt or not, and not be assessed on the basis of valuation, Starn said.

That already occurs to some degree, he noted. Tax exempt institutions already pay fees for water and sewer services.

“We’ve asked legislators to introduce bills that would get at some of these exemptions and tighten them up, but we’ve had little success,” Starn said.

The last significant change to tax exempt rules was back in the late 1970s, when the Legislature adopted an amendment to the state constitution requiring the state to reimburse municipalities for at least half of the property tax revenue losses suffered under any exemptions added after April 1, 1978. Since then, the state’s list of exemptions has remained more or less stable.

In Maine, tax exempt property falls into two categories: institutional and individual, according to Bangor Assessor Benjamin Birch.

Institutional exemptions account for the lion’s share of exemptions in most communities, he said. Eligible institutions include churches, schools, city, state, county and federal properties, hospitals, fraternal organizations, literary and scientific organizations, and benevolent and charitable organizations.

Individual exemptions include those granted to the blind and veterans.

Tax cap supporters say taking another look at tax exemption might not be a bad idea.

“It seems to me that this discussion is a step in the direction of recognizing that the property tax is falling disproportionately on homeowners who are struggling to give their kids a college education, maintain their homes and put away something for retirement – let alone pay their property taxes,” said Phil Harriman, a spokesman for Tax Cap Yes!

“This is one of several [tax cap] issues I hope we could roll up our sleeves and talk about. For the amount of protection we provide to those immune from paying taxes, to not ask them to [contribute toward services they use] isn’t fair, is it?” he said.

Bangor City Manager Edward Barrett believes a tax cap could result in reform, pointing to Pennsylvania, which has tightened controls over eligibility for tax exemptions.

Pennsylvania’s Institutions of Purely Public Charity Act of 1997 created standards that nonprofits must meet to keep their tax exempt status.

To be exempt, nonprofits must: advance a charitable purpose; donate most of their services; benefit people who legitimately need charity; relieve government of some of its burden; and operate free from profit motive.

Starn agreed reform could occur: “There’s a vagueness to some of the tax exempt classifications and we have attempted to tighten that up to make sure that tax exempts not just meet the definition but also provide a certain level of service.”

The idea that the state might revisit exemptions is troubling to members of Maine’s tax exempt community.

“We are greatly concerned about the impact of any effort to revisit the tax exempt status of hospitals,” said Maine Hospital Association Vice President Mary Mayhew.

“While we are under the increasing pressures that exist at both the municipal and state levels to find [ways to contain health care costs], the answer is not to penalize the very organizations, such as hospitals, that are out there to provide critical health care services and programs to the communities we serve,” Mayhew said.

“Losing our tax exempt status will only exacerbate health care affordability,” she said. “We need to put those resources in place to make people healthier.”