BETR funding change cuts tax burden

AUGUSTA – Supporters of Gov. John E. Baldacci’s proposed tax relief legislation maintained Wednesday that Maine’s overall tax burden would creep downward immediately by a modest two-tenths of a percent as a result of new accounting language built into the bill.

Martha Freeman, executive director of the Maine State Planning Office, said Maine’s Business Equipment Tax Reimbursement program is covered as an expenditure under the state’s General Fund. Under LD 1, the $80 million program would be funded from state income tax revenues received by Maine Revenue Services.

The switch would have the effect of turning the program into a tax reimbursement rather than a General Fund expenditure when viewed by agencies that rate Maine’s standing in overall tax burden as a percentage of personal income. Freeman said Maine now ranks second in the country at 12.6 percent.

Baldacci’s entire tax package, she said, will drop Maine down to 10.65 percent within 10 years to bring the state into the middle of the pack nationally.

While minute, the accounting change for the BETR program provides an immediate payoff for the state.

“Currently, the BETR program looks to people who do tax rankings nationally like an expenditure, just like the laptop program, when it’s actually a reimbursement,” Freeman said.

Adopted in 1995, the BETR program was advanced by Gov. Angus S. King as a way to provide incentives to large and small companies that are taxed by municipalities on a wide variety of business-related equipment ranging from refrigerators to multimillion dollar papermaking machines. The state program reimburses the businesses for the taxes collected by the municipalities.

“Under the bill, the state would be able to take what is needed to fund BETR off the top of revenues coming into the state instead of going directly to the General Fund,” Freeman said.

The action would have the added effect of removing the BETR issue from political debate each year when lawmakers take up programs paid for through the General Fund.

The BETR accounting conversion was one of three tax relief aspects discussed Tuesday by the Legislature’s 15-member Joint Select Committee on Property Tax Reform. Representing the administration, Jerome Girard, acting state tax assessor, also outlined how the Homestead Exemption Program and a beefed-up circuit breaker program would fare under the governor’s bill.

The governor’s legislation contains $250 million in new education funding for Maine cities and towns to comply with a June referendum vote dictating that the state’s share of local education costs should rise from 43 percent to 55 percent. Baldacci’s plan would achieve that goal over the next four years. The additional money would be available to municipalities to lower property taxes – an anticipated development that Girard claims will free up more money for the circuit breaker program.

The state now funds the circuit breaker program at $25.8 million annually. In effect since 1972, the program provides property tax relief to low- and middle-income Maine residents whose property tax on their home exceeds 4 percent of their household income. The program also provides relief to renters whose rent exceeds 18 percent of their household income.

Girard said the current circuit breaker benefit covers 50 percent of property taxes that are between 4 percent and 8 percent of an applicant’s income, and 100 percent of property taxes that exceed 8 percent of income. Maximum income eligibility limits as adjusted for inflation in 2004 were $30,300 for single-member households and $46,900 for households with two or more members.

Assuming municipalities will lower property taxes with the influx of additional education funds now raised by local property taxes, Girard said the decreased local tax should trigger a decrease in the number and amount of circuit breaker claims. In addition to the circuit breaker program, Girard said the lowered local taxes should decrease the demand on the $36 million Homestead Exemption Program.

Under Homestead, in effect since 1997, Mainers with homes assessed at less than $125,000 would have the first $7,000 of that value exempted. The figure drops to $5,000 for those with homes valued at more than $125,000 but less than $250,000 and again to $2,500 for those with homes valued in excess of $250,000.

Girard told the legislators that the lowered local property taxes should create a surplus in the Homestead account, which would be reallocated under the governor’s bill to expand the income eligibility thresholds for the circuit breaker program. The threshold would increase from $30,300 to $50,000 for single-member households and from $46,900 to $75,000 for multimember households.

The circuit breaker program currently limits its maximum payment amount to $1,000, but Girard said the governor’s bill directs the state tax assessor to review the program to determine how the maximum benefits may be increased to $2,000 by 2009 and $3,000 by 2011.

In response to questions raised by Sen. Richard Rosen, R-Bucksport, Girard said the circuit breaker program would be viewed as more successful than it has been if the program’s original $3,000 maximum refund hadn’t been dropped to $1,000 during the state budget crisis of 1993. Girard was less enamored of the Homestead program which he said was “too broad and not targeted.”

“The result is that many folks that don’t need property tax relief receive it,” he said. “Many folks that itemize tax deductions lose a chunk of it to the income tax system because they have to report it as income on their tax return. My view is that given the situation, the program would be best to be more targeted because there are so many folks who get relief who perhaps shouldn’t.”

Freeman quickly stepped in Tuesday to remind legislators that regardless of the opinions on the Homestead program, Baldacci remained committed to its future funding.

“The governor absolutely recognizes how popular in some quarters the Homestead program is and although he strongly believes we do need more targeted property tax relief, he chose in this bill to find a way to increase the targeted relief without changing the Homestead program at this time.”

Lawmakers are slated to hold a public hearing on LD 1 at 9 a.m. Tuesday in Room 228 of the State House.