The Smart Money: Revisiting Circuit Breaker

Posted Monday, November 18, 2013 in Analysis

The Smart Money: Revisiting Circuit Breaker

A measure to increase the property tax credit for working Mainers will get further review by the Legislature in January. Legislative leaders today to allow the measure, LR 2258, An Act To Provide Property Tax Relief to Maine Residents, to move forward. The leaders must approve any new bills for the short second session of the legislature, which is typically reserved for emergency or time-sensitive measures.

“Across the state, middle and low income Maine families are struggling to afford rising property taxes. This bill will put the state on a path to ensure that this tax credit can grow for working Maine families,” said Speaker of the House Mark Eves, who is sponsoring the measure.

The bill uses year-end surplus revenue to increase the property tax credit for middle class families. Those funds would be put into a savings account for Maine residents. It also directs the Legislature to find additional ongoing funding to help this critical property tax credit.

Governor Paul LePage proposed cutting the program, formerly known as “Circuit Breaker,” for middle and low income families. Democrats pushed to fully preserve the tax credit program, but Republicans were unwilling to give up tax breaks for the wealthy. As a result of a compromise budget, the program was preserved at a lower funding level under a new name. Changes were also made to how the program is administered.

An estimated 200,000 households were eligible for the former Circuit Breaker property tax and rent relief program. In 2011, the average yearly refund was $479 and the maximum refund was $1,600, according to Maine Revenue Services. Under the new tax credit program, the Press Herald reported that 125,000 people will qualify for credits with a maximum of $300 a year, or $400 if they are 70 or older.

Eves said, “We’ve heard outcry from Mainers across the state about the changes to the program. Often, the credit helped many families help make ends meet. It’s critical that we push for increases in January.”

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by Gina Hamilton

The Circuit Breaker program, which was designed to rebate some rent and property tax for low-income Mainers, was repealed as part of the enacted state budget for claims beginning on August 1, 2013.  In 2012, about 89,000 Mainers received property tax and rent relief through the Circuit Breaker program, and the average rebate was $479, according to Maine Revenue Services data.

That's not the full story, however. Depending on where you live, and the property taxes in your community, the average rebate could have been much higher or lower.  For example, Brunswick's average rebate was $517, which was about average for the Mid-coast.  Some towns averaged higher than that, for instance, Scarborough's average was $667, while York Beach was $801.  Other towns averaged lower; Caribou's average was only $300, while Rumford's average was $335.

By contrast, the "replacement" for the Circuit Breaker program, the Property Tax Fairness Program, offered a flat tax break of $300 for most people, with $400 going to seniors 70 and older.  The Property Tax Fairness Credit represents a savings of between $20-25 million over the Circuit Breaker program, but to be fair, many more people would have been more likely to get the tax break, since the process was simplified and done with the normal tax returns.

However, those who had been getting Circuit Breaker checks greater than the average amount were counting on those dollars, often to offset property taxes in their communities or some other big ticket yearly expense, such as property insurance.  They wrote and called in large numbers, and the Legislature - both Republicans and Democrats - got the message.

Two bills were proposed to extend tax relief to the middle class, and to seniors.

Speaker of the House, Mark Eves, D-Berwick, has said that he wants to expand the tax credit in January.  He has proposed LR 2258, An Act To Provide Property Tax Relief to Maine Residents, which will be considered when the Legislature reconvenes in January.  The second session is usually reserved for emergency, or time-sensitive measures.

That bill uses year-end surplus revenue to increase the property tax credit for middle class families. The funds would be set aside in a separate account, and the bill further directs the Legislature to find additional funding for the tax credit.  However, the bill is hazy on that point.  It is also unclear that the surplus revenue funds would be available in any given year.

Meanwhile, Sen. David Dutremble, D-Biddeford, is appealing the exclusion of his bill to provide property tax relief specifically for seniors.

“We should be doing more to help seniors stay in their homes as long as they can,” said Sen. Dutremble in a written statement. “Ensuring they aren’t taxed out of their homes is a start.”

Dutremble pointed out that the Tax Fairness benefit for the oldest Mainers is less than the average Circuit Breaker award.

Dutremble’s bill, LR 2593, An Act to Provide Property Tax Relief to Seniors Residing in Maine, would freeze the property taxes of eligible seniors, and reimburse municipalities for up to fifty percent of the lost revenue.

Dutremble's plan, while it sounds reasonable, has been tried in other states, causing havoc as the population ages and younger or new residents end up with a larger and unsustainable tax bill. 

An example is California's Prop 13, which froze property taxes at the 1975 level for people who already owned a home.  Since no additional taxation would have been captured until the property was sold, people who owned property did not sell them, choosing to remain in homes with a Prop 13 tax cost, causing other properties' values to soar around them.  Schools, and other public functions, ground to a standstill as a smaller and smaller number of taxpayers financed greater and greater shares of public services.

Only now, as the Prop 13 homeowners are either passing on or are moving out of their homes into assisted living or nursing homes, are the tax dollars being recaptured.  Not surprisingly, California's economy, which had been on a downward spiral, is now beginning to rebound.

Dutremble's bill does not specify where the additional revenue sharing to the municipalities whose tax base has been capped would come from, nor how it would be paid for.  Municipalities would have no choice but to increase taxes on the remaining homeowners and businesses to exempt seniors from increased taxation, creating a two-tier system that other states' experiences have shown creates downward pressure on the overall economy.

The Legislative Council will meet on November 21 to review appeals.

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