for Tax Reform
(from Maine Townsman, March 1997)
By Jo Josephson, Staff Writer
Information. Its what drives the engine of democracy. Or as founding father James Madison once said, "A popular government without popular information, or the means of acquiring it, is but a prologue to a farce or a tragedy, or both."
This article is offered as resource for "getting the word out," information if you will, on the proposed Tax Reform Act of 1997, a.k.a., An Act to Comprehensively Realign the Tax Structure of the State.
The materials below can be used in a number of ways. Some, like the Questions and Answers, can be reproduced in your municipal newsletters or in your town reports, or be reproduced as "stand alones" to be distributed at meetings or to the press. Some of the materials, like the calculations, can serve as a template for producing your own informational materials.
SOME BASIC Q & A
Question: What is the purpose of this legislation?
Answer: To realign the balance among the three major sources of tax revenue collected by state and local governments in Maine. They are currently way out of balance, with the property tax bearing a disproportionate share of the burden, contributing about 45 percent of the mix, and with the sales and income tax each contributing about 28 percent of the mix. An ideal mix would have each tax contributing about 33 percent of the mix.
Question: How will this realignment be achieved?
Answer: By reducing the contribution made by residential property taxpayers through a tool known as a "homestead exemption." By increasing the services that are subject to the sales tax. By requiring institutions that currently pay no property tax to pay their fair share of essential municipal services such as fire protection and snow plowing. Federal property, exempt church property, municipal property, and exempt open land (property with no buildings) will not be required to pay for municipal services under the proposal.
Question: Who will benefit from the homestead exemption?
Answer: Every Maine owner of residential property - an estimated 300,000 owners - no matter what their income, as long as their home is their primary place of residence.
Question: Just how will Maine homeowners benefit?
Answer: As currently proposed they will have $20,000 exempted from the "just" (market) value of their home and the land it is on, up to ten acres, before their property taxes are calculated. So if their home is valued at $65,000 and the full value tax rate of their municipality is 16.09, they will save $321.80 in property taxes. Without the exemption they would have paid $1,045.85 in property taxes; with the exemption, they will only pay $724.80 in taxes.
Question: Doesnt the homestead exemption give a property tax break to people who dont need it?
Answer: Proportionately the homestead exemption provides a much higher percentage tax reduction to individuals in low to mid-range valued homes. A $20,000 homestead exemption would be a 50 percent property tax reduction for someone in a $40,000 valued home; the same $20,000 homestead exemption would be a 10 percent property tax reduction in a $200,000 valued home. A homestead exemption for property taxes is similar to the standard deduction available to everyone who pays income taxes (both state and federal), regardless of their income.
Question: How will the municipalities be reimbursed for the lost taxes?
Answer: It is estimated that municipalities will "lose" more than $100 million as a result of the homestead exemption. Under the proposed legislation, municipalities are to be reimbursed 45 days after filing their Municipal Valuation Return for 100 percent of the loss to their community. If the State fails to reimburse the municipalities at that level, the homestead exemption provision of the law is automatically repealed. Most of the monies to pay for the exemption will be generated by an expanded sales tax base that taxes certain services that are not currently subject to the sales tax.
Question: What kinds of services are going to be newly taxed?
Answer: Services that are bought with discretionary dollars, including amusement and recreation services like ski and movie tickets. Also being proposed are such personal, business and professional services as janitorial, lawn care, dry cleaning, accounting, lobbying and legal. Exempt health care and construction services will not be taxed.
Question: Isnt this just another tax increase?
Answer: No, but it is a tax shift. Under the proposed legislation there will be a shift from the overburdened property tax to the narrowly based sales tax. There will also be a shift to entities that are currently exempt from property taxes. The proposed law requires that any revenues collected from the sales tax expansion that exceed the cost of the homestead exemption must be placed in a special Tax Relief Fund.
Question: Whats in this for renters?
Answer: There is already a program on the books for renters. In 1989, the Legislature adopted what is popularly known as the circuit breaker program. Under it, low income and elderly residents of Maine are entitled to partial rebates on their property taxes and rents if the money they spend exceeds a certain percentage of their income: five percent of income for property taxes and 33 percent of income for rent. The average rebate for taxpayers and renters in 1995 was $351. If the homestead exemption is adopted, it will free up about 20 percent of the funds in the circuit breaker program that could be better targeted to renters. A homestead exemption and circuit breaker program are not mutually exclusive; in fact, they complement one another.
Question: What's in this for businesses?
Answer: Business and industrial properties and seasonal residences will not directly benefit from the homestead exemption, as that part of the tax reform proposal will not have the effect of lowering the mil rate. However, the service charge piece of the restructuring proposal will benefit the non-residential property taxpayers by immediately dropping the mil rate, especially in the service center communities. It should be noted that businesses and industries are already privy to substantial tax breaks. Over the past 10 years, 70 to 80 Maine businesses have tapped into a tool known as Tax Increment Financing (TIF), which enables them to plow all or a portion of the property tax dollars generated by new projects back into those projects. More recently, a state level TIF, Employment Tax Increment Financing, was made available to businesses that create good paying jobs with benefits. ETIF rebates businesses up to half of the income tax withholdings for the new jobs. Maine also has one of the lowest corporate income taxes in the country, and according to calculations developed by the Margaret Chase Smith Center for Public Policy, only 14 other states place less of a tax burden on corporations than Maine does.
SOME SAMPLE CALCULATIONS
Calculating Tax Savings
To calculate the savings in property taxes for a homeowner who makes their primary residence in your municipality,
First determine the tax obligation without the homestead exemption as you would normally do, multiplying the assessed value of the home by the municipal mil rate. To determine the taxable assessed value with the homestead exemption, apply your towns assessment ratio to the $20,000 exemption and substract that amount from the assessed value. Then, calculate your tax bill using the new assessed value.
EXAMPLE: A home is valued at $50,000, the towns assessment ratio is 80% (of full value), and the municipal tax rate is 15 mils. Without the homestead exemption, the property tax bill would be $750 ($50,000 x .015). With the homestead exemption, property taxes are $510: the homestead exemption is $20,000 which is multiplied by towns assessment ratio 80% which equals $16,000; the $16,000 is subtracted from the $50,000 assessed value; the taxable assessed value of the property is now $34,000, multiplied by the municipal tax rate of 15 mils, which equals $510. The amount saved by the homestead exemption is $240 ($750 minus $510).
While everyone in town will have the same deduction from their property tax and therefore the same dollar amount savings, the fact that not everyones homestead has the same value means that the homestead exemption will have greater value for some than others. Which is to say, those with lower valued homes will benefit more than those with higher valued homes.
EXAMPLE: A municipality with a 20 mil tax rate is assessing its property at full value (assessment ratio is 100%). There are two homes: one assessed at $100,000; the other assessed at $40,000. The $100,000 homeowner would get a $20% reduction in taxes (the $20,000 exemption is one-fifth of the assessed value); whereas, the $40,000 homeowner would get a 50% reduction in taxes (the $20,000 exemption is one-half of the assessed value). The dollar savings for both homeowners is $400 ($20,000 times the mil rate).
A PROPOSED RESOLUTION
Resolutions are formal expressions of sentiment, opinion or will. While they do not have the force of law, adoption of a resolution during the course of a town meeting or a meeting of the board of selectmen or the council is an effective way to draw attention to the legislation, provided background materials are also made available. Accompanying this article is a sample resolution expressing support of the tax reform legislation.
Key Points to Make With Your Legislators:
This is about tax reform, about changing a structural problem.
This is about realigning the balance among the three major sources of revenue that drive state and local governments, so that the state does not rely disproportionately upon the property tax.
The property tax currently makes up 45 percent of the aggregate, while the sales and income taxes together only make up 55 percent.
The current burden on the property tax is unacceptable.
The homestead exemption is the only significant tax break that is available to the average citizen; low income residents have the circuit breaker; businesses have their own tax exemptions.
This is about realigning the balance with more discretionary sales tax dollars.
This is about expanding the historically narrow sales tax base, to bring it into the 21st Century, where services make up a large part of our economy.
This is about tightening up the standards applied to tax-exempt charitable and benevolent institutions so that the taxpayers supporting them can be assured they are actually performing a charitable service.
IN THE WEEKS AHEAD
Municipal officials will want to get the word out in the next few weeks as An Act to Comprehensively Realign the Tax Structure of the State makes its way through the legislative process. As with all proposals, it will be amended and modified; municipal officials are urged to keep abreast of the changes by reading MMA's Legislative Bulletin.
But keeping abreast of the bill is just the tip of the iceberg. What follows is a short list of what else can/should be done in the coming month.
Contact your local legislators by phone at the State House. For state senators the number is 1-800-423-6900. For state representatives the number is 1-800-423-2900. Make use of the above "Key Points".
Contact members of your educational community (teachers, school board members) and get them to understand how education will benefit from this proposal. Then get them to contact their legislators.
Contact members of your elderly community and encourage them to make calls and write letters to their legislators in support of the bill.
Pass a resolution at your board or council meeting in support of the tax reform bill. See above "Sample Resolution". Be sure to give a copy to the local press.
Develop your own set of cost saving calculations under the $20,000 proposed homestead exemption, using the above samples as a template. Publish the calculation in your municipal newsletter. Share them with the local press. While you are at it, do the same with the above "Questions & Answers".
RESOLUTION SUPPORTING COMPREHENSIVE TAX REFORM TO
REDUCE RELIANCE ON PROPERTY TAX (sidebar)
Whereas, it is vital to our common interests that there be a proportionate, fair and stable balance among the three major sources (property, sales and income) of tax revenue necessary to support state and local government;
Whereas, we rely disproportionately (approximately 45 percent) on the property tax as a source of this revenue and only 28 percent each on the sales and income taxes;
Whereas, the sales tax base has historically been so narrow that a balance among the tax revenue sources can neither be achieved nor maintained due to instability and unpredictability;
Whereas, historically the standards for exempting charitable and benevolent institutions from property taxes have been too liberal, placing an unfair burden on our service center communities;
Resolved: That the Legislature enact "An Act to Comprehensively Realign the Tax Structure of the State" by expanding the sales tax base, imposing service charges on tax exempt institutions, and reducing the property tax by exempting the first $20,000 of "just" value of homesteads of Maine residents.