One of the most pervasive policy challenges in Maine is relieving the burden of property taxes while still supporting the services we expect in our schools and communities.
Municipal revenue sharing is one approach that has been in the news a lot over the last several years. The basic idea of revenue sharing is to redistribute a portion of statewide sales and income tax revenues to cities and towns, so that less money needs to be raised from local property taxes.
The governor’s proposal to suspend all revenue sharing in the 2014-15 state budget ignited local opposition that was already brewing from revenue sharing cuts over the previous four years. As if anyone needed reminding, the proposal drew attention to the serious strain that property taxes place on many Maine families.
In truth, this latest budget controversy was just the next iteration in a long series of budget and policy failures in this area. The underlying policy challenge of delivering noticeable property tax relief at the local level has remained unfulfilled through multiple legislatures.
This background makes me especially enthusiastic about the property tax reform proposal released by gubernatorial candidate Eliot Cutler earlier this week. The proposal reinvents municipal revenue sharing, first by increasing dramatically the amount of aid distributed to cities and towns, and second by targeting that funding to the Maine residents who need relief most.
The headline feature of the proposal is a $50,000 homestead exemption up to half the value of every primary home in the state. So if your home is worth $120,000, you would pay taxes on just $70,000 of that value.
How much would you save? Well, if that $120,000 home were in Bangor, your estimated taxes would drop from $2,288 to $1,524. That’s a $764 savings. You can estimate the effect of the plan on your property taxes by going to the plan calculator at www.cutlerformaine.com/calculator. Most Maine homeowners would see property tax reductions of between 20 and 40 percent.
The complicating policy question is how to keep municipal budgets whole if resident property taxes are reduced so substantially.
The Cutler plan works because alongside the homestead exemption, it establishes a new municipal aid formula that buffers municipalities from adverse consequences. The plan also fully funds an increase in local aid of $100 million. For Bangor, the estimated increase in municipal aid goes from about $2.8 million this year — including revenue sharing and homestead exemption reimbursements — to about $4.4 million.
The key difference between the Cutler plan and traditional revenue sharing, however, is not just the number of dollars distributed to cities and towns. Just as important is how those funds translate into property tax relief to residents.
With traditional revenue sharing, much of the tax relief goes to nonresident property owners and to wealthy homeowners. Within any community, for example, traditional revenue sharing delivers ten times the tax relief, in dollar terms, to the owner of a $1 million home, as compared with a $100,000 home, and it delivers that relief regardless of whether the owner is a Maine resident.
The Cutler plan is much more effective at targeting relief to the resident owners who need it most. And by concentrating the funds on residents with more modest homes, the magnitude of tax relief provided is substantially greater than it would be under traditional revenue sharing.
The Cutler plan is also more effective at targeting municipal aid to the communities that need it most. For example, communities with low property values or very high existing property tax rates will be almost fully reimbursed for the cost of the homestead exemption. Communities with very high property values and very low existing tax rates would be reimbursed for at least half the cost. Tax rates rise modestly, but resident taxes are reduced dramatically.
While focused primarily on resident homeowners, the plan also creates a new tax credit for small businesses, farms, and owners of rental property (up to $2 million of value) that is intended to offset any tax rate increases for those Maine-based small businesses that already struggle with property taxes.
Finally, the plan is funded by sales taxes that are paid in part by nonresidents, while the property tax relief goes almost entirely to residents. The plan is in my view both ambitious and realistic; and with very substantial effect in addressing this very challenging area of public policy.
Dick Woodbury is an economist and Maine state senator. He has served five terms in the Legislature and has been involved in numerous bipartisan groups interested in reforming Maine’s tax system. Woodbury was involved in developing Cutler’s property tax reform plan.