Tax Burden Studies
(from Maine Townsman, December 1996)
By Geoff Herman
If the burden of our reliance on the property tax in the overall tax mix could be lifted by studies alone, we would all be walking with a considerably sprightlier step. Fifteen major studies with a focus on the property tax burden have been published since 1960, six of which were commissioned by the Maine Legislature or performed by the State Planning Office, three were commissioned by governors, two were issued by the University of Maine, and one preliminary foray in to the issue was privately sponsored. They all can be found in the Maine Law and Legislative Reference Library on a low shelf adjacent to other shelves just as loaded with a like number of similar looking reports and studies on such matters as sales tax exemptions, income tax bracket creeping, structural progressivity, horizontal and vertical equity, and other tax policy issues.
Most of the studies regarding the property tax make specific recommendations for reform. Others are more politic and merely identify "issues for further study".
History reveals that some task force suggestions have leapt almost immediately from the recommendation stage into the law books. The personal and corporate income tax was recommended in a 1968 study and enacted by the Legislature in 1969. The Uniform Property Tax was recommended in a 1972 study, enacted into law the next year and then repealed in 1978.
Recommendations promptly enacted into law, however, are exceptions to the rule. Most task force suggestions, it seems, take a rockier path. The creation of a generally applicable circuit breaker to partially relieve some low income taxpayers of the property tax burden was first recommended in 1968 and partially addressed in 1969 with the enactment of the Elderly Householders Tax and Rent Refund program. A paltry attempt at property tax reform was made in 1978 with passage of the Homestead Tax Relief Act (a $64 income tax credit for homeowners), which was repealed in 1982. The generally applicable circuit breaker was not enacted until 1987, two decades after being first recommended, and following no less than five additional formal recommendations for targeted homeowner property tax relief made in 1975, 1976 (from two separate commissions), 1978, and 1986. The call to eliminate the personal property tax on machinery and equipment and reimburse the municipalities for the lost revenue first appeared in the tax reform studies in 1972, along with the more specific recommendation to immediately exempt stock-in-trade and business inventories. Repeal of the Inventory Tax occurred in 1973; the recommendation to exempt machinery and equipment, often repeated over the years, made its way into law over two decades later with the personal property tax rebate program enacted in 1995.
Finally, there are the recommendations that seem to gather dust rather than force. This article tracks three recommendations that have been made many times over 35 years by study commission after study commission, but have yet to be implemented:
(1) Reducing the base of tax exempt property;
(2) redesigning the overall tax mix to reduce the reliance on the property tax; and
(3) local option taxation.
Property Tax Exemptions
In 1960, Dr. John F. Sly of Princeton University recommended in his authoritative Maines Tax Structure: "That the legislature reconsider exemption policies as applied to literary, scientific, benevolent and charitable institutions with a view to defining more closely their position under the property tax." Thus began a seemingly perennial call for systematic reform of the property tax exemption policy in this state.
The initial task force recommendations regarding property tax exemption took one of two tracks. As Dr. Sly recommended 36 years ago, the first type of recommendation suggests that the several underlying definitions of eligibility should be amended to reduce the number of exempt properties throughout the state or their degree of exemption. This approach appeared again in 1972, when a study sponsored by the State Planning Office (SPO) stated that: "Legislation enacted during the past 153 years has exempted many categories of real estate from Property Taxation. Most of the legislation appears to have been justified at the time of enactment, but circumstances have changed, making some of these exemptions no longer advisable." The 1972 SPO study recommended . . . yet another special study.
The other recommendation track regarding exempt property addresses the municipal revenue loss and leaves the base of exempt property unchanged. The report of a 1968 Citizens Task Force, for example, calls for 100% state reimbursement for the municipalities revenue loss.
Since the early 70s the recommendations have borrowed something from both approaches by calling for municipal authority to levy service charges. This was the recommendation of a 1975 gubernatorial task force and another in 1978. It was the recommendation of a legislative task force convened in 1990 and another in 1996.
The most exhaustive study of institutional tax exemptions, however, came out of the University of Maine in 1975. In his Institutional Property Tax Exemptions in Maine, UMOs David Wihry makes the following observations and outlines a broad range of options.
Local tax rates are higher when property (by category) is exempt than if the same property were taxed.
Exemptions are a relatively inefficient way of subsidizing desirable activities.
Exemptions, since they are not now subject to annual legislative scrutiny and since their cost is imposed haphazardly among municipal budgets rather than on the State budget, may tend to overexpand through time.
Exemptions may cause capital losses to property owners in the short run or in the long run, depending on the magnitude of the initial revenue loss, the service needs of the exempt organizations, and the long-term effects of any local growth that might be stimulated by the presence of the exempt organization.
- Removal of exempt status.
- Replacement of exemptions with direct subsidies.
- Revenue replacement (replacement of foregone tax revenue).
- Service-related reimbursement.
Although there has been some tinkering with the tax exempt statute to limit rental housing from fully exempt status when it is converted from profit to non-profit ownership, it is generally fair to say that none of the task force recommendations made over a 40 year period regarding exempt property have been implemented.
Restructuring the tax mix
All of the 15 property tax reform studies were commissioned for a reason, so it is hardly surprising that most of the studies decry the states heavy reliance on the property tax and dutifully record its proportion alongside the other two major tax sources - the income (personal and corporate) and the sales and use taxes. By stringing this information from all the studies together, the property tax weighs in during the pre-income tax years at over 70% of the two-tax mix, was driven down into the 50% range during the 1970s as the income tax came into its own, fell all the way to 39% following the economic boom of the 1980s, and has now worked its way back up to its present 43%.
If there is near-consensus among the studies regarding our over-reliance on the property tax, a solution to that problem takes a close second in terms of popularity. At least nine tax reform studies, from 1960 through 1996, claim that the tax base of commodities and services against which the sales tax is levied is too narrow. In what direction to expand the base, however, is a matter upon which not all the tax commissions agreed.
The most recent commission, with the principal charge of studying the growth of tax exempt property, established the simple goal of a level of reliance on the property tax approaching the national average of 30%. The 1995 Preliminary Outlook on Maine Tax Policy, commissioned by the Maine Business Alliance Foundation, was similarly unfocused as to detail with the statement: "The rate of Maines sales tax has edged up over the years and the tax base has eroded. This causes several problems . . . (A) sales tax base consisting largely of consumer durables makes for unstable tax revenues."
If the most recent study commissions have been short on detail, the earlier groups were more than accommodating. The 1990 report from a legislative "select commission" found that special purpose sales tax exemptions should be eliminated and the sales tax base be extended to cover entertainment and recreation, but no additional services. The same commission also recommended that the sales tax exemption for food be eliminated if certain "inconsistencies" in the administration of that exemption could not be fixed, and provided an income tax credit for food purchases could be conveniently implemented. The same recommendation was previously made in 1972.
In 1979, 1976, 1975 and 1972, the suggestion was to include "services" in the sales tax base. In 1976, 1975, and 1960, amusements or "luxuries" were the way to go. The 1972 report, sponsored by the State Planning Office, was the only commission specifically charged with finding new revenue sources to meet the projected needs of Maines state and local governments, so its recommendation to expand in the areas of services or food was specifically intended to generate new revenues. In contrast, the other studies were focused on redistribution of the tax burden rather than revenue generation, and recommendations of tax base expansion were designed either to provide revenues to release some pressure from the property tax burden or improve the overall progressivity of the tax structure, or both. As a result, recommendations from most of the tax study commissions were designed to be revenue-neutral, and if the property tax was not going to be relieved with the revenues generated by the tax base expansion, it was recommended that the sales tax rate be lowered accordingly.
In 1960, Dr. Sly reported that: "The (sales tax) base had not been greatly extended since the tax was enacted in 1951, and there are doubtless opportunities in this direction which could increase the yield." Today, even though nearly half a century has passed since the enactment of the sales tax and the Maine economy is radically different in structure from the post-World War II economy, Dr. Slys comment is still true.
Local Option Taxation
The call for municipal or regional authority to obtain revenues from other sources in addition to the property tax has not been as constant and forceful as the calls for an expanded sales tax base or relief from the proliferation of tax exempt properties. Local option taxation -- a sales or income tax, for example, authorized by the municipal or regional general electorate and collected on the local or regional level -- is a divisive issue for some reason. In his comprehensive report of 1960, Dr. Sly said: "Maine has not yet taken seriously to local non-property taxes. The usual pressure for revenue, may, however, bring the issue before the larger cities."
Fifteen years later, the Governors Tax Policy Committee recommended that a local, optional income tax be made available to the municipalities. Fifteen years after that, in 1990, the Select Commission on Comprehensive Tax Reform recommended: "Municipalities within a county should have the power to levy local sales taxes if approved by a majority of citizens in a county-wide referendum vote." This commissions recommendation, however, was divided. Finally, a 1996 study commission recommended full-scale local option taxation to fund municipal services; an option that could potentially include sales, income, excise, and meals and lodging.
A saying came out of the Soviet Union before its demise, as its economy was coming apart and inflation was out of control. A worker, speaking about the centrally organized industrial authority, said: "In the U.S.S.R., they pretend to pay us, and we pretend to work." Sometimes it seems that the same sense of cynicism can be applied here with respect to study commissions. "They pretend to study the issue, and we pretend to respond." Sometimes the response is nothing; nothing, that is, until the matter is studied again.
The Property Tax Subcommittee of the 1990 Select Commission reported the following: "With the property tax representing 39% of Maine tax revenues (as compared to 35% from the income tax and 26% from the sales tax) there must be a reduction in the burden of that tax . . . Relieving the burden of the property tax on these Maine residents and businesses is the principal position of this subcommittee."
Six years later, the property tax burden, at 43% of the tax mix, has become more burdensome, not less. Perhaps we need to study why weve gone in the wrong direction.