Best Practice Fiscal Policies for Maine

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Best Practice Fiscal Policies for Maine

• Iris J. Lav and Karen Lyons
• Center on Budget and Policy Priorities
• www.cbpp.org
• MECEP Annual Tax and Budget Conference
• Augusta, Maine
• January 8, 2007

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Strengths Natural Beauty

• Maine is 32nd in tourism employment as share of
  workforce
• Tourism supplies 2.7 percent of tax revenue
• Can Maine do better? Vermont is 16th in tourism
  employment and gets 4.3 percent of tax revenue
  from tourism
• Maine could invest in more tourism development
  and also modestly increase tourism-related taxes
  to finance some of that investment

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Strengths Fiscal Responsibility

• Good bond rating (not best because raters dont
  like TELs)
• 30th in level of tax-supported debt per capita
  or as percent of personal income

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Maine Debt Service Well Below 5 of General Fund
Revenues
Source Maine Office of the Treasurer
http//www.maine.gov/treasurer/debts_bonds/debt_su
mmary.html
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Less Regressive than Most States
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Overall Tax Levels Moderate

• Maine is in a higher-cost, higher-tax
  neighborhood
• Maine state and local taxes per person are 10th
  highest in country, BUT they are below
  Connecticut, Massachusetts, and Rhode Island and
  just 100 higher than Vermont
• Maine has 3rd highest tax level measured as share
  of income need to raise incomes
• Note These are 2004 rankings, before LD1 and
  higher circuit breaker. Maine rankings may have
  dropped

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Taxes Strong Services

• Ranks best in country
• Adults with health insurance
• Low-income adults under 65 with health insurance
• Parents with health insurance
• Ranks 5th best in children with health insurance
• Ranks 7th in access to prenatal care

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Taxes Strong Services

• Ranks 17th in 4th and 8th grade reading and math
  scores
• Has 6th lowest poverty gap in reading and math
  proficiency
• Ranks 21st in high school graduation rate
• Ranks less well on higher education measures-
  need to improve

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Challenges

• Property tax unrest perception that property
  tax is unfair and too high
• Relatively low incomes of residents

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Property Tax

• Property tax is relatively high
• 6th highest in the country
• Few other revenue sources for local governments
• Assessment practices exacerbate problem
• Maines assessment and valuation practices are
  among the worst in the nation!
• But Maine has better property tax relief than
  many states combination of homestead and
  generous circuit breaker

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Abysmal Assessment Practices
Best practices (IAAO) assessment at 100 market
value, annual valuation, and periodic reassessment

• Municipalities assess in Maine
• Required to maintain assessments at no less than
  70 of market, but many do not
• No enforceable requirement for periodic
  reassessment

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Abysmal Assessment Practices

• In many municipalities, no consistent valid
  method for updating valuation between assessments
• Many municipalities too small to meet
  professional assessment/valuation standards
• Residents can block reassessment by refusing to
  vote funds for it at town meetings

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Results of Assessment Practices

• Poor assessment and valuation practices lead to
  general perception that the property tax is
  unfair
• If property values arent regularly adjusted for
  increase in inflation and valuation, it becomes
  more necessary to raise rates further
  aggravating residents
• Putting an assessment cap on top of such poor
  assessment practices would lock in the inequities
  and further exacerbate property tax unhappiness

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Recommendations for Assessment Practices

• Assessment should be done at county or state
  level, not municipal
• Update valuations annually
• Conduct reassessments every 6 or 7 years
• State should provide some funding
• For example, New York gives local government 5
  for each parcel assessed at 100 market value
• State savings wouldnt need to re-do for aid
  allocation

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Advantages of Circuit Breaker

• Best type of property tax relief because relates
  property tax payment to income - it goes to those
  overburdened by property tax
• For those in eligibility range, protects against
  property tax increases in Maine pays half the
  increase if property tax is between 4 and 8 of
  income and all the increase if 8 or more of
  income

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Great Circuit Breaker in Maine, but.

• One of most generous circuit breakers in country
• Post LD1
• Rebate up to 2,000 of property tax
• Eligible if income up to 77,000 single, 102,000
  couple
• Relives property tax in excess of 4 of income
• Homeowners and renters

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Is it a Secret?

• 92,000 out of 225,000 eligible claimed it last
  year for 2004 property tax
• So more than 130,000 eligible Maine residents are
  failing to get property tax relief that is
  intended for them
• Are these the same senior citizens and others who
  are clamoring for more property tax relief?

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Outreach, Outreach!

• Advantage circuit breaker outside income tax
  system, because people more likely to perceive it
  as property tax relief
• Disadvantage requires separate filing that can
  result in low take-up rate unless there is
  energetic outreach campaign

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Recommendations for Outreach

• Create concentrated period for filing 3 to 4
  months
• Train people to help fill out forms
• Have assistance available at wide variety of
  institutions schools, churches, community
  centers, senior centers, etc - on well publicized
  filing days
• Public service announcements
• Involve local elected officials
• And more (think EITC outreach)

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More for Seniors?

• Argue both ways
• Fixed-income seniors can find property tax
  increases problematic
• Families with child-raising expenses and others
  may also have trouble paying
• If do more for seniors, important to relate to
  income
• For example, circuit breaker could cover all
  property tax over 4 of income for seniors (this
  is more common design among states)

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Local Option Tax Could Directly Relieve Property
Tax

• Maines sales tax (combined state local) is
  lower than every other state except Hawaii
• A low-rate sales tax option for cities could help
• Having two types of taxes gives perception that
  payment for public services more widely shared -
  people tend to prefer

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Balancing Local Option Tax

• Would additional sales tax make Maines overall
  tax system more regressive? Yes
• Could offset with a larger and/or refundable
  state EITC
• Also could provide additional relief to seniors
  via the circuit breaker

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A State EITC

• Maine has a very small (5 of federal)
  non-refundable EITC cannot help offset
  regressivity of other state/local taxes or
  provide wage supplement to working poor
• 16 states have refundable EITCs that piggyback on
  the federal EITC including Massachusetts (15),
  Vermont (32), and Rhode Island (25 and
  partially refundable)

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Moving Beyond the Property Tax- Raising Incomes

• Wage rates in Maine are low compared to national
  averages or to other Northeastern states
• Wage rates average for health occupations, higher
  for farming/fishing/forestry
• Requires right kind of economic development-
  Investment is Key

No State Can Cut Its Way To Greater Prosperity
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Tax Breaks for CompaniesOften are
Ineffective/Inefficient

• Of top 10 recipients of TIF financing in 2004
• 6 received 13.53 million and reduced employment
  by 852 jobs
• 2 received 3.18 million in TIFs and created zero
  jobs
• 1 received 1.02 million and did not report
• Katahdin Paper received 1.82 million and was the
  only one to create jobs (127)
• All recipients of TIF net loss of 769 jobs

Source Maine Department of Economic and
Community Development
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Evidence Other Tax Breaks Also Dont Work

• Hundreds of survey, econometric, and
  representative firm studies show that tax cuts
  are unlikely to stimulate economic activity and
  create jobs in a cost-effective manner
• Some studies show no improvement. Even with
  optimistic assumptions, governments may lose
  between 39,000 and 78,000 annually for each job
  created. Can force public sector layoffs that
  cancel any additional private sector jobs

Source Robert Lynch, Rethinking Growth
Strategies How Sate and Local Taxes and
Services Affect Economic Development, Economic
Policy Institute, 2004
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Investment Higher Education

• Quality higher education is often at the top of
  business leaders lists of what makes a good
  business climate
• Can be core for other types of investment

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Investment Brookings Ideas

• Capitalize more on quality of place
• Revitalize towns and cities
• Augment land and farm conservation
• Protect use and access to forests, farms, lakes
• Promote outdoor recreation and high-quality
  tourism
• Brookings suggests increasing lodging tax and
  issuing revenue bonds to support

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Investment Brookings Ideas

• Invest more in research and development efforts
  that currently are under-funded
• Maine Technology Institute is state supported
  nonprofit that makes grants
• Maine Economic Improvement Fund supports
  university-based research
• Encourage industry clusters
• Brookings suggests bond issue to enhance, but is
  this a better use of funds than TIF and ETIF?

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Investment Brookings Ideas

• Encourage smart growth in traditional regional
  centers through model building and zoning codes
• Maintain character of traditional communities
• Provide grants for infrastructure, downtown
  development

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State Revenue for Relief or Investment Taxing
Services

• Many states have antiquated sales taxes that
  focus on goods
• But personal consumption has shifted away from
  goods and toward services
• Federation of Tax Administrators catalogs 168
  services that states could include in sales tax

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State Revenue for Relief or Investment Taxing
Services

• Of the 168 services, Maine taxes only 24
• Connecticut taxes about half - 80
• If Maine included all services taxed by CT, would
  collect an additional 120 million a year

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Major Services Taxed by CT

• All leases or rentals
• Cable/satellite TV
• Computer/data processing services
• Employment agencies
• Private investigation and protection
• Painting and lettering
• Advertising, Graphic Design

• Telephone answering
• Management consulting, Public relations
• Repairs (appliances, auto, furniture, etc.)
• Landscaping
• Janitorial
• Photo studios
• Health clubs

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Summary

• Address property tax unrest
• Greatly improve property tax administration
• Consider relieving property tax through local
  option tax with state EITC offset to regressivity
  
• Make property tax relief more accessible and
  transparent
• Possibly increase senior circuit breaker

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Summary
Enhance incomes of residents invest in ways that
enforce states strengths for example

• Improve higher education
• Enhance attraction of state to tourists and
  promote tourism
• Invest in technology research and development and
  encourage industry clusters
• Invest in infrastructure and encourage smart
  growth

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Summary
Finance investment and additional property tax
relief

• Increase bonding
• Tax some additional services under sales tax
• Eliminate inefficient tax breaks such as TIF and
  ETIF
• Increase lodging tax