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Best Practice Fiscal Policies for Maine

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. Strengths: Natural Beauty. Maine is 32 nd in tourism employment as share of workforce

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Best Practice Fiscal Policies for Maine

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  1. 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

  2. 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

  3. Strengths: Fiscal Responsibility • Good bond rating (not best because raters don’t like TELs) • 30th in level of tax-supported debt – per capita or as percent of personal income

  4. Maine Debt Service Well Below 5% of General Fund Revenues Source: Maine Office of the Treasurer http://www.maine.gov/treasurer/debts_bonds/debt_summary.html

  5. Less Regressive than Most States

  6. 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

  7. Taxes = Strong Services • Ranks bestin 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

  8. 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

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

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

  11. Abysmal Assessment Practices • 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 Best practices (IAAO): assessment at 100% market value, annual valuation, and periodic reassessment

  12. 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

  13. Results of Assessment Practices • Poor assessment and valuation practices lead to general perception that the property tax is unfair • If property values aren’t 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

  14. 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: wouldn’t need to re-do for aid allocation

  15. 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

  16. 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

  17. 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?

  18. 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

  19. 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)

  20. 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)

  21. Local Option Tax Could Directly Relieve Property Tax • Maine’s 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

  22. Balancing Local Option Tax • Would additional sales tax make Maine’s 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

  23. 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)

  24. 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

  25. 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 createdzerojobs • 1 received $1.02 million and did not report • Katahdin Paper received $1.82 million and was the only oneto create jobs (127) • All recipients of TIF: net loss of 769 jobs Source: Maine Department of Economic and Community Development

  26. Evidence Other Tax Breaks Also Don’t 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-effectivemanner • 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

  27. 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

  28. 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

  29. 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?

  30. 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

  31. 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

  32. 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

  33. 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 Major Services Taxed by CT

  34. 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

  35. Summary • 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” Enhance incomes of residents; invest in ways that enforce state’s strengths – for example:

  36. 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

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