To the editor:
With the town of Houlton, SADC and NMDC working in partnership, Geoff Herman of the Maine Municipal Association was invited to come to Houlton on Feb. 4 to speak about Governor LePage’s proposed biennium budget for 2016-17. Mr. Herman is currently MMA’s director of government and has been employed by them for approximately 25 years. Approximately 25 people were in attendance. Present were local elected officials, school board members, department heads and town managers. Participants were allowed to ask questions during the presentation. Courtesy of the Higher Education Center, ACAP and NMDC, a live feed was provided to sites in Caribou and Madawaska.
Municipal leaders have long been a proponents for the implementation of a comprehensive tax reform plan that balances the disproportion that exists among the three major sources of tax revenue; sales tax, income tax and local property tax. Presently, out of the $5 billion that is generated by the three taxes, sales tax accounts for 24 percent of the total, income tax 32% and property tax 45%. Ideally, a balanced tax code would place the same burden on each source of tax revenue rather than an over reliance on local property taxes.
The governor’s proposal to reduce income tax rates sounds like a great concept but, if the bill is approved as written, it comes at the expense of the property taxpayer. To balance the $106 million deficit between what the state is projected to collect in additional sales tax revenue versus the loss of income tax revenue, the governor plans to reduce and then eliminate municipal revenue sharing.
My primary concern with the governor’s budget is three-fold: eliminating municipal revenue sharing, eliminating the Homestead Exemption for homeowners under the age of 65, and taxing exempt property to make up for the loss of revenue sharing.
Revenue Sharing
Houlton received approximately $371,000 in revenue sharing from the state in 2014. According to the Treasurer’s Office, the town is to receive $364,584 in 2015. To put this in perspective, the town received $615,167 in 2011, $579,143 in 2012, and $472,598 in 2013. It is only over the last eight years of the program’s existence that the legislature has taken revenue sharing funds to pay for state spending priorities. Taking revenue sharing funds has increased with ferocity over the past four years.
Enacted in 1972, municipal revenue sharing was developed to (a) recognize and counter against the deep erosion to the municipal tax base caused by exemptions granted by the legislature, (b) recognize and counter the state’s over reliance on regressive property taxes to pay for governmental services, (c) recognize in good faith the contributions municipal governments make to nurture, support and grow the state’s economy, and (d) recognize in good faith all of the programs and service the municipalities are required by state government to provide for the general good.
Title 30-A, Subpart 9, Chapter 223, Subchapter 2, Section 5681 reads: Revenue sharing is distributed by the 20th of each month to each municipality based on a formula whose variables include municipal populations, state valuations and tax assessments. The monthly revenue sharing pool is funded by setting aside a percentage of the State Government’s sales, service provider, personal and corporate income tax receipts for the month.
With just a small share of broad based tax revenue, revenue sharing demonstrates the collaboration that can occur between state and local government. For the first 34 years of the program’s history, there was only one significant legislative raid on the program and that occurred in 1992-93. Over the biennium (2016-17), the phase out and elimination of municipal revenue sharing will provide the legislature with $250 million for other state funding priorities.
Homestead Exemption
The current Homestead property tax exemption is $10,000. The state reimburses the town 50% of the lost tax revenue. There are 1,412 homeowners receiving the exemption in Houlton. Approximately one-third of those homeowners are 65 or older. What is difficult on the local level is determining the age of the person receiving the Homestead Exemption. Fortunately the assessor was able to get me some preliminary information by comparing the list of residents receiving the exemption to the voter registration list which includes dates of birth. Preliminarily, the changes proposed to the Homestead Exemption would result in a net tax revenue increase of $150,000 for Houlton. The downside to all of this is that homeowners under the age of 65 will see their property taxes increase by $217.50 (10,000 x 0.02175) if this passes. This doesn’t factor in any other adjustments to the tax base that may occur as a result in the loss of revenue sharing. The Homestead Exemption changes are due to take effect April 1, 2015.
Taxing Non-Profits
According to information in a spreadsheet provided by Mr. Herman, the 2013 municipal valuation of current tax exempt charitable and benevolent structures in Houlton is $23,148,000. The municipal valuation of current tax exempt real property that falls under the literary and scientific category is $14,072,900. The municipal valuation of real property belonging to exempted veterans’ organizations is $150,000. Because these properties are currently tax exempt, they may be undervalued for tax purposes and some adjustments may take place should the governor’s budget pass as presented. Churches and government buildings are still exempt and will remain so under the governor’s proposal.
Under the governor’s plan, the first $500,000 of tax exempted property is exempt from taxation. The municipalities may tax 50% of the remaining valuation of the property. Municipalities can consider the aggregate value of the tax exempt property for taxation purposes. Taxing non-profits in Houlton will raise approximately $249,240 in revenue. This figure does not take into consideration the value of any personal property, owned or leased, by each organization/group that is subject to taxation. That amount will take some time to sort out and compile.
BETR to BETE Conversion
Of additional concern is the governor’s proposal to convert all personal property enrolled in the Business Equipment Tax Reimbursement program (BETR) into the Business Equipment Tax Exemption program (BETE). Eligible business equipment placed in service from 1995 to 2007 is currently considered BETR property. Taxes on BETR property are paid in full to the town. Any reimbursement of taxes paid comes directly from the state and is sent directly to the business owner. Eligible business equipment first taxable in 2008 is considered BETE property. BETE property is exempt from taxation. The state reimburses the town 50% of the lost tax revenue.
Under the governor’s proposal of converting BETR personal property to BETE over a four-year span, the estimated tax impact to Houlton would be as follows:
2016 – 25% conversion would result in tax revenue loss of $37,000
2017 – 50% conversion would result in tax revenue loss of $74,000
2018 – 75% conversion would result in tax revenue loss of $111,000
2019 – 100% conversion would result in tax revenue loss of $148,000
These numbers are based on the current mil rate of 21.75 and the current existing valuation of BETR personal property. Each year would result in an additional $37,000 revenue loss until we reached 2019 with the maximum revenue loss of $148,000 (and every year thereafter).
Telecommunications Property Tax
Beginning April 1, 2016, the governor is proposing that the state repeal the excise tax on two-way or interactive communications such as cellular phones and broadband services. By doing this, the property then becomes subject to municipal taxation. The governor’s bill suggests that the state will lose $8.25 million each year of the biennium under this proposal. Collectively, municipalities are in a position to share $8 million in taxation. Unfortunately no one knows which communities will be the beneficiary of the proposal and it will take another two weeks before the Maine Revenue Service is ready to release the information.
The owners of this property annually file a return with the Maine Revenue Services. In this report the owners describe the property, its value and the municipality where it is located. Once the report is received and filed, the state assesses a tax based on the municipality’s mill rate. Rather than compiling the information on a municipality by municipality basis, the data is maintained on an owner by owner basis.
General Assistance
Under the governor’s bill, the General Assistance (GA) reimbursement formula is significantly restructured. Under the current funding model, municipalities are reimbursed 50% of the direct benefits provided until the total amount of the benefits exceeds .0003 of the community’s valuation. So for every dollar Houlton spends on General Assistance, we are reimbursed 50 cents. For every dollar spent over the threshold amount, the town is reimbursed 90%.
As proposed, the state would reimburse the town 90% of direct costs until the town distributed an equal amount of aid equal to 40% of our six-year average ($4,800). As soon as GA spending reached the suggested threshold, the state’s share would be reduced to 10% of the remaining GA benefits issued during that fiscal year.
For example, if Houlton expended an average of $12,000 on its GA program each year, we would receive $0.90 for every dollar spent until the municipality expended $4,800. For every dollar spent on GA after $4,800, the state’s share would drop to $0.10. Under the Governor’s funding mechanism, the town of Houlton would receive $5,088 whereas under the current funding mechanism the town would receive $6,000 (12,000 x 50%= $6,000).
Education
Finally, Part C of the Governor’s proposed budget appropriates $964 million as the state’s share of the total amount the Essential Programs and Services (EPS) calculates as necessary for FY 2016. This appropriation represents a 2% increase over the current year’s contribution of $944 million.
The total amount of money (both state and local) the EPS model identifies as necessary is $2.085 billion, which puts the state’s share at 46.25%. This figure is a decrease from the current year’s share of 46.8%. As a result, the required local share for FY 2016 is set higher than the current required share.
Thirty years ago the legislature adopted the 55% standard as the state’s share of school funding. This standard was reaffirmed by voters 10 years ago. The governor’s proposal moves the state further away, rather than towards, meeting their funding obligation.
Overall, state taxpayers will be required to fund an additional $47.8 million for education in FY 2016. Part of that increase is due, in part, to the requirement that municipalities fund the normal cost of teacher retirement which was moved from the state to local responsibility in 2013. The school district’s current share of retirement costs is 2.65%. That figure will increase to 3.36% effective July 1, 2015.
Conclusion
As your town manager I will be contacting our local legislators regarding our concerns in the hope that the final budget bill is fair and balanced with the ultimate goal of placing less reliance on local property taxes to fund government services. Officials on the municipal level have a far better understanding as to what their citizens want for services and how to provide it in the most financially feasible way possible.
Butch Asselin
Town Manager
