Tax relief plan may not deliver, analysts say

AUGUSTA – A leading state policy analyst said Thursday that while the Baldacci administration’s new tax plan eventually will provide some measure of relief for Mainers, it fails to deliver immediate and significant tax reductions.

“It’s fair to say that the implementation of this plan as written will provide over time somewhat modest and diluted reductions in the property tax burden,” said Geoff Herman, director of state and federal relations for the Maine Municipal Association. “The [increases in state funding for education] alone will result in reductions in the amounts that need to be raised locally.”

Baldacci’s plan, described by the governor as “historic and unprecedented,” promises to reduce the state’s property tax burden through:

. A four-year phase-in of additional state revenues to bring the state’s share of educational funding from 43 percent to 50 percent by the end of the next two-year budget cycle, which begins July 1, 2005, and to 55 percent by the close of the budget cycle that begins July 1, 2007.

. Policies ensuring that no Maine residents will pay more than 6 percent of their income in property taxes through a new circuit-breaker and loan program.

. Statutory caps for state, local, county and school budgets based on average personal income growth.

Herman’s organization and the Maine State Education Association were instrumental in passing the June referendum requiring the Legislature to increase the state’s share of education costs from 43 percent to 55 percent. But the state can’t afford to fund the 55 percent all at once, said Baldacci, pointing out a $733 million gap between projected revenues and the anticipated cost of state programs in the next two-year budget cycle. Instead, his plan calls for boosting school funding by $250 million over the next two years to raise the state’s share to 50 percent by June 30, 2007.

That won’t be enough for many of MMA’s members who supported the June referendum question, according to Herman. He said some Mainers expected the Legislature to provide the 55 percent in the first year of the two-year budget cycle and others certainly didn’t plan to wait two years for significant relief, much less four.

“This is being phased in in such a way that relief is not going to be as substantial as voters wanted it to be,” he said.

In an effort to influence the legislation, Herman plans to participate in hearings and present his own implementation plan to a 15-member select committee of legislators reviewing the governor’s proposal. In addition to reviewing the timetable for reaching the 55 percent target, Herman said the committee is apt to take a close look at the governor’s goal of limiting property taxes to 6 percent of personal income.

One component of the administration’s plan allows Maine residents with property taxes exceeding 6 percent of their income to defer payments in the form of a loan from the state that would have to be paid back with interest when the property changes ownership. Critics claim that if homeowners wanted a reverse mortgage to pay taxes, they would be able to obtain better interest rates from a bank than those likely to be offered by the state.

Additionally, participants in the program would essentially be making the state a lien holder on their property, an arrangement that could complicate the owner’s ability to obtain a home equity loan for property repairs or other purposes.

Herman said the state had a similar option in effect from 1989 to 1991, but the Elderly Tax Deferral Program was not overly used.

“I don’t think [the deferred loan] will be a widely utilized tool,” he said. “It encumbers the estate with a lien and people for a variety of reasons are not interested in doing that – although I suppose some people would not find it objectionable.”

The MMA official expects that most of what the governor defined as the plan’s “caps” on state, local, county, municipal and school budgets will turn out to be “governance” mechanisms that will offer the entities some flexibility to exceed the limits. As he interprets the plan, Herman said the caps would be applied differently, with state government spending tied to the year-to-year growth in Maine’s personal income, plus inflation. Counties would be free to exceed the cap through a majority vote of their governing bodies in response to “extraordinary, catastrophic” events. Counties could also hold referendums to raise assessment limits set under the plan.

Herman said the school budget caps as defined under the state’s Essential Programs and Services model could be exceeded at the local level through the referendum process.

EPS initially was designed to identify programs and services that all schools in Maine should provide and to determine how much providing those essential programs and services should cost.

But under the governor’s plan, Herman said the EPS process that replaced the school funding formula will become closer to what school administrators and educators always feared: a cost containment program instead of a cost analysis program.

Herman said the total aggregate state and local projection of reasonable and necessary educational costs under EPS for Maine in the next year is $1.77 billion. The governor’s plan maintains the aggregate amount cannot grow from one year to the next at a level greater than “the average annual real total personal income gain,” excluding inflation, a figure Herman placed at 2.58 percent.

“That is obviously a cost containment system,” Herman said. “To me that really rubs against the integrity or authenticity of the EPS model because its very conceivable, particularly with the imposition of any federal mandates in the future, that the 2.58 percent” increase would not be enough to pay for those essential programs and service.