The Smart Money: The proposed state budget

Posted Wednesday, January 14, 2015 in Analysis

The Smart Money: The proposed state budget

by Gina Hamilton

Governor Paul LePage unveiled his budget proposal last Friday afternoon, and it’s a massive document. It’s also not likely to pass in its current iteration.

LePage’s proposal involves more than the budget — it involves major changes to Maine’s tax codes, including broadening of the sales tax base to cover just about everything, including goods and services, with the exception of food, some fuels, and some medicines. It would also begin the process of eliminating Maine’s income tax. For now, it would cut the top individual income tax rate from 7.95 percent to 5.75 percent. Until it is eliminated altogether, it would do away with itemized deductions and certain credits, but would add a credit for medical expenses.

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The plan would cut taxes on pensions and eliminate tax on military pensions.

And it would “modernize” Maine’s sales tax by increasing sales taxes to 6.5 percent for sales and use and prepared foods, institute a service provider tax of 6 percent, and cap lodging and shortterm auto rental at 8 percent.

This is quite similar to the sales tax proposal put together by Democrats under the Baldacci administration, which was effectively killed with a people’s veto in 2010, and sources say that the Republican leadership in the Senate is vowing that it won’t even get past the Legislature this time. The people vetoed the law, 60-39 percent. The law would have gone into effect just as Paul LePage was taking office in January 2011.

If it were to pass, the governor’s plan would have the effect of putting more emphasis on property taxes, sales taxes, and other less progressive taxes. It would eliminate the estate tax, which affects mostly very wealthy people, but in certain circumstances, may affect working families who have held family businesses on the coast for years, or large family farms.

Some of the property tax relief in place, such as the Homestead Exemption, would be restricted to seniors and veterans, leaving low-income younger working people and families with a major hit to their pocketbooks, not something the state might want to do as Maine is becoming a much grayer place generally. To help communities broaden their own income streams, the governor’s budget would transfer the state’s telecommunication excise tax to municipalities, which would be essential if LePage is able to do another thing he plans to do.

The budget itself cuts revenue sharing to zero, and repeals the Business Equipment Tax Reimbursement program by transferring property to the Business Equipment Tax Exemption program. Many communities use BETE and BETR as part of their tax increment financing as part of their capital improvement plans for their towns. Under BETE, the municipalities are reimbursed for the cost of the property tax subsidy to businesses or other entities. BETR was typically used for large employers, rebating them property tax directly. Recipients included Bath Iron Works, but was replaced in 2007 with BETE. Still, many of the TIFs have BETR funding written into their 25-year plans, and the communities that utilize them are dependent upon them. Bath City Assessor Brenda Cummings says that the Maine Municipal Association has estimated that the hit to the value of the personal property portion of TIFs generally would be about 50 percent. But Bath’s TIFs with the shipyard and the Wing Farm Parkway business park have a much larger portion than average tied up in personal property.

Although Bath has a long way to go to completely analyze the governor’s proposal, City Manager Bill Giroux said “We are concerned about this, because it seems like it would negatively affect the city.”

The towns across Maine would lose $60 million in revenue sharing, and although they would gain about $8 million in the telecommunications excise taxes, it would be a major loss. The towns and cities would have to raise more property taxes to pay for city functions and schools.

Some cities, however, would gain if a controversial nonprofit tax is enacted, including Brunswick, which has several large nonprofits, including two hospitals and Bowdoin College. Bath’s major nonprofits are Hyde School, the Maine Maritime Museum, the Chocolate Church, and Winter Street Center, and significantly, the Kennebec Estuary Land Trust, which owns three parcels in Bath alone, and several other properties in other nearby communities.

LePage’s budget proposes that larger communities could compensate for lost state aid by collecting property taxes from nonprofit organizations with valuations greater than $500,000. The organizations would be taxed at 50 percent of the property tax rate for assessed value above $500,000, according to Michael Allen, Maine’s deputy commissioner of finance. Hospitals, colleges and private schools represent the bulk of those organizations in Maine, but many churches would also fall into this category, as would museums, arts centers, and land trusts.

Although LePage has said there would be no taxing of churches or stateowned property, it is difficult to imagine a scenario in which it would be constitutional to charge property taxes on a museum or arts center or a hospital or a land trust and not on a church in the same community, and taxing churches would seem to be proscribed by the first amendment. It would likely cause numerous lawsuits filed by the other nonprofits in the community, according to Secretary of State Matt Dunlap.

“That would be the first line of defense,” he said. “While there’s really no law about taxing nonprofits — except for churches it’s probably not unconstititutional — as corporations they may believe they should be treated equally under the fourteenth amendment, which would tie everything up until the law was settled.”

Besides, according to Giroux, it is difficult to say how many towns would be willing to tax entities that may be among their largest employers or purveyors of culture or open space, and with whom the towns have reached a good working relationship outside of the tax code.

For instance, Bath’s Patten Free Library is registered as a nonprofit, but serves six separate communities. Because it is located in Bath, the city would have the option of taxing the library, even though the City owns the land, and other towns contribute to its support. The Library’s assessed value is more than $2 million. Just down the street, Elm Street Baptist Church, which keeps the city’s clockworks and chimes the hours, is assessed at $811,600. And Thorne Head, part of the Kennebec Estuary Land Trust, is assessed at $1,554,800. KELT owns three parcels of land similarly valued in the city of Bath alone.

“That would probably be enough to put KELT out of business,” Dunlap said sadly.

“It’s early days,” KELT’s executive director Carrie Kinne said. “I am hopeful that there will be changes to the proposal during the legislative process. But the numbers are concerning. We’ll have to stay on top of this.”

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