Sunday, March 11, 2007
Maine people value fairness, and most Maine people today believe that our tax system, largely unchanged since the 1960s, is no longer fair. It also hurts our state's economy.
Twice in recent years, voters have been asked to consider (and have rejected) proposals to make painful cuts in public spending to reduce their property taxes. The governor and Legislature struggle to respond to growing public discontent.
While most attention has been focused on the property tax, the problem is far broader. Maine needs not just first aid for the property tax, but comprehensive tax reform as well. To create a fair, balanced and less burdensome tax structure, the Legislature needs to address five matters:
THE PROPERTY TAX
As property values have soared, Maine people have come to believe the property tax is unfair. Rising values have imposed tax increases on some longtime residents to the point where they face the possibility of losing their homes.
The problem with the property tax is that it is no longer related to ability to pay, as it once was. The current, state-funded "circuit breaker" program provides needed relief to homeowners and renters. It must reach more people, with relief increasing as income declines.
A fail-safe mechanism would limit property taxes on a principal residence to not more than 5 percent of the owner's personal income (up to a limit), with the excess paid from the state's general fund. The same limit would apply to renters as well. Under state law, 20 percent of rent is attributed to local property taxes. If the amount of rent that a tenant pays were to exceed 5 percent of his or her income, eligibility would be established. This will not require a constitutional amendment.
Most importantly, many people today fail to apply for the circuit breaker because they see it as welfare. It needs to be integrated with the income tax system, so that eligibility would be established on each person's tax return. Integrating the two would both eliminate the obstacle to participation and simplify administration.
At the same time, we should repeal the current "homestead exemption," now funded in part by the state with the effect of reducing municipal revenue. It goes to all homeowners, regardless of need, and imposes an unnecessary tax burden on cities and towns. State funds are better directed to those who really need the help, and eliminating the exemption could help reduce everyone's local property taxes.
THE INCOME TAX
The high rate of the Maine income tax hits middle-income people too hard, too soon, as they find themselves paying a flat tax of 8.5 percent on much or most of their income. Just three states - and the District of Columbia - have a higher top rate.
The solution is to adjust the tax brackets so that low- and middle-income families would see their income tax burden reduced; the highest rate would affect only the truly wealthy. Aligning the state personal exemption with the more generous federal exemption would also provide relief to low- and middle-income people.
Maine's corporate income tax now is an impediment to economic growth. It taxes only certain corporations and produces unstable returns. To make Maine more competitive, the corporate income tax should be replaced with a franchise tax and business profits tax along the lines of New Hampshire's. Small corporation income should no longer flow into Maine's personal income tax.
THE SALES TAX
Maine must reduce the long list of exemptions from the sales tax to just two - food and health care - and it must tax more services, the fastest-growing part of our economy. Meal and accommodation taxes must be increased to a level consistent with our competitor states or the national average.
These three steps would both stabilize and increase sales tax revenue, a sizable share of which would be borne by nonresident visitors to Maine. If needed to finance property and income tax reform, the sales tax rate may be set again at 6 percent.
THE INHERITANCE TAX
The rates and residency requirements of Maine's inheritance tax drive many of our residents out of the state permanently or for a significant part of the year (often to Florida, where there is no income tax). Others who might retire to Maine are persuaded by self-interest not to come. The economic and tax contributions of both groups are lost to the state.
We do not advocate abandoning inheritance taxation. However, in a state with the nation's highest median age and one that is interested in encouraging people to retire here the inheritance tax must not remain a barrier. Provided that Congress reaches a responsible solution at the federal level, we must again link Maine to prevailing federal standards, so no person who is exempt from the federal tax is subject to a Maine tax.
REDUCE PUBLIC SPENDING
Finally, no tax reform effort will succeed without controlling public spending - and the principle of government consolidation, of seeking greater efficiency in the delivery of needed services, is the key to long-term tax savings.
The recent LD 1 progress report shows that fully 57 percent of all state and local tax receipts in Maine now go to our school districts, municipalities and counties. Indeed, of all state spending today, almost one-half (43 percent) goes directly to the school districts, municipalities and counties; another one-third goes to health and human services programs.
As a result, the real efficiencies and savings in Maine public spending today are to be found in the operations of governments below the state level, in the redundancies we've built into them over recent decades. Gov. John Baldacci's proposal to consolidate K-12 school districts, or some version of it, is a fine beginning and it must be only a beginning.
Augusta requires county jails to house persons sentenced to a year or less in jail; this relieves the state's corrections budget and increases county costs paid out of the local property tax. Meanwhile, our older jails are over-full while newer ones are under-capacity and rent out vacant space. Inefficiencies abound within the system. An integrated, state-run corrections system that includes all prisons and jails and operates on a regional rather than a county basis would deliver significant savings over time.
A TIME TO ACT
Between work, play, worship and shopping, we all live regionally now, rather than locally. It is time we thought seriously about governing this way as well, where it would save tax dollars.
Maine makes relatively little use of special districts that can provide services on a regional basis. The elected Portland Water District shows how municipalities, working together, can meet common needs effectively. Acting alone, each member community would either be unable to provide the service or able to do so only at much higher cost to taxpayers.
We urge the Legislature to create a bipartisan Joint Select Committee on Government Efficiency to examine the operation and structure of sub-state governments in Maine, all of which are its creatures.
With help from within and without government, the committee would:
n recommend ways to strengthen the design, operation and efficiency of these governmental units, and to consolidate them where appropriate;
establish a more binding cap than LD 1 provided on all school district, municipal and county government spending; and, perhaps above all,
require a uniform system of accounts for all of these, so we may measure their progress on an ongoing basis.
Tax policy must not be set in stone. Policies that were once fair and effective become outmoded, even unhelpful, as times and circumstances change. The proposals made here are reasonable. They may be fine-tuned using the computer models at Maine Revenue Services. And they will bring Maine's tax system into the 21st century, to reflect the needs and abilities of Maine people today. It is time now to act!
Questions/Comments
Reader comments
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If there is so much resistance to the school plan, then real relief can be achived in other ways. First bring the state taxes in line with the Federal taxes. Second drop the top rate to 5% and start collecting that at 75k. Third eliminate the excise tax. This tax is crazy and what do we get for it? Broken roads and unsafe bridges. Where's all the gas tax money and bond money going, social programs??
The idea of property tax relief being applied when taxes are filed is great, you wouldn't need to fill out other forms and you wouldn't need other government workers to administer this program. It would be easy to see what % of income your property taxes are and then figure 5% of that and any overpayment would be refunded with your income taxes.
What's the chances of any of these things gettting done? I am afraid the answer is none as our folks in Augusta just can't make any decision except raising taxes. Geeting out as soon as I can.report abuse
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