Policy Wonk: Revenue sharing in Maine needs a permanent fix

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Preserving what remains of Maine revenue sharing by taking $40 million from two different reserve funds and earmarking unanticipated revenue receipts is at best a one-year fix.

Like spending a bonus or taking money from a savings account, once you’ve used it, it’s gone. Even if Gov. Paul LePage’s anticipated veto of LD 1762 is overridden, the need to fix revenue sharing will confront us again next year.

Moreover, the fix has two significant downsides. First, LePage may well be right: shrinking the “rainy day” fund could lead bond rating agencies to downgrade Maine bonds, and that would be costly.

Second, LePage has demonstrated that to get his way on unrelated fiscal issues he’s willing to freeze voter-approved bond sales, regardless of the harm this may cause. He promises to use this costly tactic again, and we should believe him. Democrats failed to challenge this arguably unconstitutional tactic the first time it was used; they are unlikely to challenge it now.

More to the point, the Democratic Legislature has missed the opportunity to permanently fix revenue sharing. The work of the Tax Expenditure Review Task Force provided the Appropriations Committee with a large number of revenue saving options that would scale down existing tax subsidies, exemptions, and loopholes. In short, much more than LD 1762 was possible.

A fair and balanced package of some of these options could raise not just $40 million to preserve a remnant of revenue sharing, but enough revenue to permanently restore revenue sharing to historic levels that Democrats and Republicans alike saw as necessary to stem rising property tax burdens.

For example, Task Force options would:

• Reduce Business Equipment Tax Reimbursements to corporations receiving more than $100,000 annually by 10, 20, or 30 percent.

• Reduce by 10, 20, or 30 percent the annual subsidies of withheld employee income tax payments in excess of $100,000 that are now reimbursed to, or retained by corporations.

• Reduce Maine’s income tax interest deductions for recreational and second homes to 70, 75, or 80 percent of what the federal government allows; reduce interest deductions for Maine homes over $1 million by the same percentage; or, more broadly, reduce all Maine itemized deductions to 70, 75, or 80 percent of what the Feds allow. Maine should end its slavish conformity of state and federal income tax deductions; we can’t afford to give away as much money as the federal government.

• In calculating Maine taxable income, reduce the level of excluded capital gains realized from the sale of a principal residence to 70, 75, or 80 percent of what the federal government allows.

• End Maine’s near-total exemption of services from sales taxation. The focus can and should be on high-end services used by wealthy individuals and corporations; at the same time all taxpayers could be given an annual income tax credit to offset a reasonable level of service related sales taxes.

The Democrats, however, even with the wind at their back (the public knows that without revenue sharing, already high property taxes will rise further), lacked the courage to enact any tax expenditure reduction package.

Only a handful of Republicans would probably have joined them, and LePage would probably have vetoed the enactment. The battle then would have been on the veto override. But the battle lines on this vote and – if the override failed – in the November elections would be clear.

The Democrats would stand for a proposition that is obviously true: tax expenditures are eating us alive. Maine currently gives away, and/or forgoes, more revenue than we actually collect – largely to wealthy corporations and individuals. We can’t afford this largess. A fair and principled cutting back of tax expenditures is essential and long overdue, because we need the revenue for schools, roads, police, firemen, revenue sharing, etc.

At the same time, the Democrats would stand for the proposition that a fully funded revenue sharing program is a now 40-year tax bargain between the state and local governments that must be kept. Taxing powers reside in the state government; it has numerous tax options. Municipalities only have the property tax.

In many municipalities the property tax base is small. These towns inevitably are faced with higher tax burdens, fewer services, or both. In short, revenue sharing at a meaningful level is essential, and tax fairness requires it.

But this standing up for principle, for long-term solutions to tax problems didn’t happen. At best, if the governor signs, or if the Legislature overrides his veto of, the present revenue sharing bill, the Democrats (and Republicans who join them) will have settled for a risky, one-year fix of an emasculated revenue sharing program. Maine people and municipalities deserve more.

Democrats I speak with acknowledge much of the above. But their response is a whispered promise similar to that of many losing sports teams: “Wait till next year.”

This has a desperate, hollow, ring to it. And it doesn’t pay the bills.

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Orlando Delogu of Portland is emeritus professor of law at the University of Maine School of Law and a longtime public policy consultant to federal, state, and local government agencies and officials. He can be reached at orlando.delogu@maine.edu.