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Sunday, December 29, 2002

Tax reform: Not whether, but how

Copyright 2002 Blethen Maine Newspapers Inc.

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AUGUSTA — The hottest political topic in and outside the Legislature is how to reform what many see as Maine's onerous property tax system. When state lawmakers convene next month, the debate will pit supporters of tax caps against supporters of tax shifts.

Some reformers would simply cap property taxes without making up the lost revenues, even if that forces municipalities and school districts to cut spending.

Others would raise more money from state taxes, such as the sales tax, to reduce reliance on property taxes without risking cutbacks in local services. At least one plan combines both ideas.

Voters actually may have the final say through a statewide ballot, even if lawmakers try to take decisive action.

Tax cappers argue the best and simplest solution is to let voters put the brakes on property taxes because the Legislature will not do so.

"They may pretend to do some tax reform, but it will not be meaningful tax reform," Carol Palesky, the leader of a tax-cap referendum campaign, said of the Legislature.

The tax shifters argue the Legislature should expand state taxes to ease the property tax, either through more state aid to local communities or through heftier tax breaks for property owners.

They note, for example, that local property taxes represent 32 percent of state and local revenues while the state sales tax represents 19 percent of that total.

"A tax cap would devastate the communities," said House Majority Whip Robert Duplessie, D-Westbrook.

The call for reform is understandable.

Since 1980, property tax revenues have jumped more than 300 percent in Maine, according to research by former Senate President Richard Bennett, R-Norway. His research also shows that Maine has the second highest property taxes in the nation, based on ability to pay.

"For me, inaction's not an option," said House Speaker Patrick Colwell, D-Gard- iner.

As former House Speaker Michael Saxl, D-Portland, put it, "The people are leading the policy leaders" in demanding action.

"Property taxes are a crushing burden on people," said Gov.-elect John Baldacci, and the problem "needs to be addressed - there's no question about that."

Despite broad support for reform, no one is willing to predict what may happen in the Legislature.

There are so many proposals on the table that lawmakers may find it difficult to sort through them. In addition to initiated referendums, at least four plans are expected to surface in the Legislature. There may be more.

"There are going to be a lot of different approaches to property tax relief in the next (legislative) session," said Rep. Bernard McGowan, D-Pittsfield, the sponsor of one reform plan.

Complicating the issue is the looming deficit in the state budget, which will take priority. The budget gap over the next two years is pegged at about $1 billion.

Baldacci says the budget, the economy and health care are his priorities, in that order. Tax reform places fourth on his list.

"It's not going to be dealt with in the beginning," Baldacci said recently. "I have a sense that we're going to want to address that down the line."

"I think (the budget deficit) is going to occupy center stage to the exclusion of everything else," said Chris Hall of the Maine State Chamber of Commerce, who lobbies the Legislature. "I see the fiscal crisis as being overwhelming. It will take up all your time, all your energy, all your focus" in the Legislature.

Experts disagree on how the prospect of one, two or even three tax reform referendums next November will affect the Legislature.

Referendum organizers have until Jan. 23 to submit 50,519 valid signatures to the Secretary of State's Office if they hope to put their plans before the voters in November.

Some argue that the initiated referendums will propel the Legislature to submit a plan of its own to the voters, to compete with the other referendum proposals.

Others say the threat of initiated referendums may prompt budget-obsessed lawmakers to sidestep major tax reforms in the upcoming session and let voters call the shots, at least for now.

"We will have tax reform," predicted House Minority Leader Joe Bruno, R-Raymond. "The question is how comprehensive it will be."

Reformers are moving on several fronts in the Legislature.

One group, created by Saxl, would broaden the sales tax by eliminating some exemptions, creating about $160 million in additional state revenue. The plan also would raise other state taxes and scale back the property tax on business equipment.

The Saxl plan would use the extra state money to increase state aid to municipalities and expand the state's so-called circuit-breaker program, which currently helps poor Mainers pay their property taxes.

The proposal would broaden eligibility for the circuit breaker to include middle-class and even upper-middle-class homeowners.

It also would increase the maximum circuit-breaker payout to homeowners eligible for such help and give people in the circuit-breaker program a choice between getting a reimbursement check from the state or claiming a property tax credit on their income taxes.

"Everybody seems to be invested in (making) a substantive change," Saxl said. "The challenge is, how do you find a moderate, centrist answer?"

A competing plan would broaden the sales tax and expand the circuit-breaker program as well. But it also would cap property tax rates for education. That plan would fix the school share of property taxes at no more than $4 per $1,000 valuation for all classes of property except vacation homes, which would be capped at $12 per $1,000 valuation.

The plan, which is being pushed by McGowan, would eliminate the state's homestead exemption, which protects from taxation the first $7,000 in valuation on every Mainer's home.

McGowan argues that capping the school share of property taxes would save taxpayers a lot more money than the homestead exemption does now.

McGowan's bill also would phase out the tax on business equipment and create a special savings account to set money aside for education. The plan "gives property tax relief to everybody in the state of Maine," McGowan said.

A third group also is pushing legislation that calls on the state to raise more money so that state government can help relieve the burden of property taxes.

Under that plan, the state would raise the 5 percent sales tax, apply the tax to some services that are now exempt or take both steps for a year or so. After that, the state would largely or entirely scrap the sales tax and replace it with a low-rate gross receipts tax of less than 3 percent.

This plan, backed by Democratic Rep. Theodore Koffman of Bar Harbor and others, would eliminate the homestead exemption, raise the state meals and lodging tax, triple state taxes on beer and wine and repeal the property tax on business equipment.

The state would reimburse cities and towns for half of the revenue lost from the demise of the business equipment tax.

The state would use some of the extra money it took in from higher or broader state taxes to increase state aid to municipalities and schools. Like Saxl's proposal, this one would put more money into the circuit-breaker program so the state could do more to help Mainers pay their property taxes.

Then there is a proposal dubbed the Chebeague plan because many of the people who crafted it own property on Chebeague Island. It may well be the most unusual of the legislative proposals. Supporters say it would not cost the state anything.

The Chebeague plan would cap land assessments, but not building assessments, for owners who plan to hold onto their property for a long time. Assessments would be scaled back to a five-year-old base, plus about 2 percent a year over and above that.

If owners get the tax break and then sell their land, stiff penalties would be imposed.

Initially, the plan would hike property taxes by 2 percent to 3 percent as landowners sign up for the tax breaks, said David Hill, an organizer of the campaign. But later, as participants sell out and penalties are imposed, "the tax rate actually goes down," Hill said.

The Chebeague proposal is designed to help people "who are being forced out of their homes by taxes," Hill said. "The idea originated on the coast because that's where property problems have been most severe," Hill said. "But we know the problem exists across the state and we believe our plan will benefit all areas."

Staff Writer Paul Carrier can be contacted at 622-7511 or at:

pcarrier@pressherald.com


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