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Sunday, December 29, 2002

Tax caps work, but curb local autonomy

Copyright 2002 Blethen Maine Newspapers Inc.

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After the tax revolt fever that swept the nation more than two decades ago, several states passed tax-limiting measures that performed exactly as advertised. But while they achieved the goal of curbing property tax increases, they also transformed the states' political structures in ways their proponents never intended.

Citizen initiatives, such as Proposition 2 1/2 in Massachusetts and Proposition 13 in California, caused towns to become more dependent on state financial help. Over time, as the tax burden shifted from property taxes to other taxes, so did political power. Towns found that the tax limits meant losing some control over their own destinies.

In Massachusetts, for example, cities and towns have lost an extraordinary amount of fiscal independence, said Geoffrey Beckwith, executive director of the Massachusetts Municipal Association. Since Proposition 2 1/2 became law in 1980, towns have come to rely heavily on the state to pay for public safety, education and even road maintenance, he said. While the law successfully limited property tax increases, towns and cities became more vulnerable to decisions made by the state officials.

In Maine, there is growing political consensus that property taxes are too high and that the burden should be shifted to other taxes, such as a broader sales tax. Maine this year had the second highest property taxes in the nation, ranked only behind New Hampshire, according to a survey by the Small Business Survival Committee, a nonpartisan lobby group based in Washington, D.C. Critics of the tax say it is regressive because it is based on the value of property rather than on income. The tax can fall especially hard on seniors, whose property values soar even as their incomes fall, and on moderate-income people who own waterfront property.

Recipe for sprawl

Moreover, some say Maine's reliance on property taxes creates sprawl because high tax rates in cities encourage people to move to rural areas, where taxes are typically lower and where educational services are more heavily subsidized by the state.

Revamping a state's tax system inevitably affects the political process, and reforms that sound appealing can lead to less political accountability, said Lynn Reed, research director for the Minnesota Taxpayers Association, a nonpartisan public interest research organization.

Minnesota, for example, would seem like a paradise for Maine's weary property taxpayers. The state of Minnesota now pays well over 80 percent of the cost of education. It gets the money from sales and income taxes and a statewide property tax on businesses and vacation homes - but not year-round homes. The sales tax is 6.5 percent.

Because the education system seems like a "super bargain" for Minnesota homeowners, Reed said, voters don't pay attention to how the money is being spent. He said the relationship between taxing and spending has now become so "hopelessly muddled" that there is little accountability and a lot of waste.

In Maine, where many cities and towns pay for the bulk of the cost of education, local officials or residents at town meetings decide how much they will tax property owners for education and also how to spend that money.

For Reed, the issue is not how much is spent on education, but whether the people making the decisions can be held accountable for their actions. In that sense, Reed said, Maine's system is "fantastic."

There is nothing wrong with spending a lot of money on education, if that's what voters want, he said.

Where does money go?

The granddaddy of tax limiting measures, Proposition 13, has also muddled the relationship between taxing and spending, said Lenny Goldberg, director of Sacramento-based California Tax Reform. Tax revenue collected by the state is poured into a "big central pot" and stirred, and taxpayers have little sense of where the money goes, he said.

Proposition 13 was born in the 1970s, when California's economy was booming and the state was flush with cash. Property values - and property taxes - were soaring. Paralysis in state government over the issue of property tax reform led to popular support for Howard Jarvis' and Paul Gann's Proposition 13, which capped property taxes at 1 percent of the property's value. Also, property was no longer assessed at market value - the price a seller and buyer would agree it was worth. Instead, property was taxed at its purchase price plus a maximum rise of 2 percent a year for inflation.

Because local governments' ability to raise revenues was hamstrung, the state began providing more and more money. Authority over local revenues shifted away from municipalities and is now centralized in Sacramento, the state capital. By confusing taxpayers about how their tax dollars are distributed, the system reduces taxpayers' ability to hold their government accountable, according to a report in 2000 by the Legislative Analyst's Office, a nonpartisan office that advises the California Legislature.

Although it limited property tax growth, the measure hasn't curbed government spending. Gov. Gray Davis announced two weeks ago that California's budget deficit for the next 18 months would be a stunning $34.8 billion, a shortfall bigger than the annual budgets of every other state except New York.

Proposition 13's influence spread beyond California. Half of the states have adopted additional tax and expenditure limits. In the 1980s, Massachusetts voters upended the state's tax system by approving a citizen initiative called Proposition 2 1/2. Nearly 10,000 teachers statewide lost their jobs during the law's early days, as property tax reductions reached nearly a half-billion dollars. The tax-limiting law today has become an accepted part of the state's political landscape.

'Taxachusetts' no more

At the time, the state's property taxes were among the highest in the nation. Today, although the overall Massachusetts tax burden is higher than average, the phrase "Taxachusetts" no longer applies.

To make up the difference in lost property tax revenue, the state gradually increased financial aid to towns. It raised the additional funds, even while cutting other state taxes, because the booming Massachusetts economy filled state coffers with revenues, said Michael Widmer, of the Massachusetts Taxpayers Foundation. The foundation is an independent, nonpartisan organization that provides research on state spending and tax policies.

In 1993, to counter the disparity in education spending between urban and suburban communities, the state drastically increased education aid to cities. While Maine cities like Portland and Lewiston have some of the highest property taxes in the state, Massachusetts' cities have some of the lowest. Some of the Bay State's poorest cities receive as much as 70 percent of their revenues from the state.

Compare, for example, the fates of Lawrence, Mass., and Lewiston. Both are struggling mill towns with high concentrations of poor people. Lawrence's tax rate, $13.99 per $1,000 of value, is half Lewiston's rate of $28.89.

Subsidized by the poor

South Portland City Manager Jeffrey Jordan said Maine's tax system rewards people - by taxing them less - if they move out of cities and into rural areas. That migration, in turn, raises taxes for everyone because additional schools are then built, even as the state's student population declines.

Maine cities do a good job of keeping costs down, he said. Taxes are high, he said, because residents' incomes are relatively low and the state's education, transportation and land use policies have spread out the population, making it expensive to provide services.

"The people who have to subsidize that are the poor people stuck in the urban centers, where the jobs and the industries are," Jordan said.

In Massachusetts, the current economic downturn will make it harder for the state to continue to be generous to its cities. This year, faced with a deficit of more than $2 billion, the Massachusetts Legislature is poised to slash local aid, and the fiscal constraints of Proposition 2 1/2 would leave municipalities with little choice but to lay off police officers, firefighters and teachers.

In suburban towns, there is growing resentment among residents that too much state tax money is sent to cities and suburban towns are not getting their fair share, said Andrew Maylor, town administrator in Swampscott, an affluent town of 13,000 people 13 miles north of Boston. The municipal budget was cut long ago to the minimum, he said, and there is no room left for further cuts.

At the very least, in the view of many municipal officials, Proposition 2 1/2 is a financial collar that can quickly turn into a noose at the first sign of trouble.

"They don't have any options," said Widmer of the Massachusetts Taxpayers Foundation. "They are not the masters of their own fate."

Staff Writer Tom Bell can be reached at 791-6369 or at:

tbell@pressherald.com


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