Delivering Tax Relief

Gov. John Baldacci promised voters that if they turned away the Palesky tax cap referendum – which he termed a “meat ax” approach – he would come up with meaningful property tax relief. Voters rejected the tax cap in November and now the governor has delivered.

While many details of his package remain to be worked out, it has a unifying theme – lowering Maine’s tax burden to near the national average within 10 years – it is clear and it has partial support from lawmakers and the business community. The lack of any of these doomed the governor’s previous effort early this year.

This time around the package is markedly improved. The outcome should be, too. Rather than rushing to develop competing plans – last time each party and each legislative chamber had their own plan, thereby dooming the whole affair – lawmakers should work together to improve the governor’s offering.

Republicans have raised some fair criticisms of the plan; it doesn’t address income taxes, for example. However, in his last tax-reform package, the governor tried to do too much and ended up with a mish-mash proposal that was complex and unfocused. This plan, by focusing solely on property taxes, which is what the public has been focusing on thanks to the Palesky and school funding referendums, has the advantage of being straightforward. Further, the governor has said that he will first tackle property taxes before moving on to income and sales taxes for revision. This is a sensible approach.

It is encouraging that, while some Republicans may object to portions of Baldacci’s plan, their leaders have already named colleagues to serve on a 15-member select committee assembled to review the tax-relief proposal. The governor’s two tax-reform bills have already been referred to the panel, which consists of four senators and 11 state representatives. The committee expects to make its recommendations on the governor’s proposal by Jan. 14, lightning speed in Augusta.

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As for the plan itself, it includes a combination of increased state aid to schools, an expanded circuit-breaker program and state, local and county spending caps in an effort to lower Maine’s tax rate as a percentage of personal income from nearly 13 percent to less than 11 percent by 2015. For all the complaints about Maine’s high taxes, it is worth noting that the state’s tax burden has declined since it reached a peak of 14 percent in 1999. Still, the state’s tax burden is the second highest in the country.

To change that, the governor proposes to accelerate the state’s movement toward providing 55 percent of education funding. Although voters in June approved such a move, the state’s financial situation prompted the governor and others to propose a slower ramp up to the 55 percent funding level. Now, the governor says it should be done in four years with 90 percent of every new dollar from increased state education funding available for direct property tax relief for Maine citizens. In other words, since the state will be paying more, local communities will pay less and they should use 90 percent of that money to lower taxes, not to fund new programs.

To reach the 55 percent level by 2009, the governor has proposed an additional $250 million in school aid in the next biennium. Most of this money is already in the governor’s budget for the next biennium and the rest will come from increasing revenues.

Another component of the plan is to expand the circuit-breaker program by increasing the income limits. Refunds of up to $1,000 would be available for a single person with an income of $50,000 or a couple with an income of $75,000 in 2005. The refund would be increased to $2,000 in 2009 and $3,000 in 2011.

Aspects of the plan that require more debate include a deferred loan program – some have referred to it as a reverse mortgage – that would allow residents who expend more than 6 percent of their income to pay their property taxes to put off those payments until the property is sold. More debate is also needed about the governor’s proposal for a constitutional amendment that would permit municipalities to value homestead land at current use rates. This has been advocated by coastal communities but could push the tax burden onto local businesses.

In addition to lowering property taxes, the governor also plans to rein in government spending. Mirroring a plan spending cap advocates hope to put on the ballot next year, the governor’s bill would limit spending growth at the county, municipal, state and school district levels. Spending increases would be tied to growth in personal income and property values at the local level. Residents could vote by referendum to exceed spending caps.

Finally, the governor would create an independent commission to assess and report on the state’s progress on lowering its tax burden, a worthwhile oversight mechanism.

The plan is far from perfect, but lawmakers, along with municipal, education and business groups, should work to improve it rather than pushing competing measures. The common goal is to reduce taxes. This proposal, with reasonable changes from lawmakers, can move the state in that direction.