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Article Excerpt
INTRODUCTION
Over the past several years, the burden of local property taxes has become a topic of widespread discussion and concern among Maine residents. It has led to calls for legislative action, citizen referenda, consideration of tax and spending caps, and broader discussions of tax fairness and tax reform. The burden of property taxes inspired the appointment of a special legislative panel in late 2004 and the highly publicized passage of LD1 as the first order of business in Maine's 2005 legislative session. LD1 was crafted as a property tax reform measure, and included in its provisions spending growth benchmarks at all levels of government, an increasing state share of K-12 school funding, and increases in the homestead exemption and circuit breaker programs offered to Maine resident homeowners. While the impact of the LD1 reforms will be experienced over time, three recent studies have analyzed its effect on property taxes in the first year (see Gabe (2006), Maine State Planning Office (2006), and Maine State Chamber of Commerce and Maine Municipal Association (2006)). These reports show modest progress over the past year in reducing the average burden of property taxes among Maine taxpayers.
In this study, we focus less on the average property tax burden in Maine and more on its distribution across the population of Maine residents. We draw attention to the segment of Maine's resident population whose property tax burden is above the average and, in some cases, far above average. Most of these high-burden households are eligible for property tax refunds through the state's "circuit breaker" program, which was enhanced as part of the LD1 reforms. Our aim in this study is to understand better the burden of property taxes on Maine resident homeowners--both before and after their circuit breaker refunds.
The primary conclusion of the paper is that the circuit breaker has a very significant impact on those with the highest burden of property taxes. We also find that the potential effectiveness of the circuit breaker in reducing property tax burdens is enhanced substantially by the LD1 reforms enacted in 2005. With no circuit breaker refunds, 33 percent of Maine resident homeowners pay more than six percent of their income in property taxes. By taking full advantage of the reformed circuit breaker in LD1, the percentage of households with a net property tax burden over six percent of income is reduced from 33 percent to 11 percent. If all households eligible for circuit breaker benefits applied for them, the number of households with a property tax burden over six percent of their income would drop from 125,000 to 40,000. The number of households with a property tax burden over ten percent of income would drop from 66,000 to 18,000. The number of households with an extreme property tax burden over 20 percent of their income would drop from 25,000 to 6000.
The paper is divided into five sections. The first section contains background information about the property tax in Maine and why property taxes have increased for many Maine homeowners. It also estimates the distribution of gross property tax burdens across Maine households, highlighting the wide variation in tax burden across the population and its relationship to household income and geography. The second section discusses property tax relief measures, focusing most extensively on the circuit breaker program, and its enhancement in LD1. The third section estimates the impact of the circuit breaker on net property tax burdens of Maine residents. The fourth section describes those households that still have high net property tax burdens, even after accounting for the circuit breaker refunds they are eligible to receive. The fifth section is a review and discussion of the findings.
PROPERTY TAXES IN MAINE
In fiscal year 2005, about $1.7 billion was collected in property taxes in Maine. (This compares with about $1.4 billion from state income taxes and about $1 billion from sales taxes.) Property taxes are collected locally, and are used to support local public schools, municipal services, such as road maintenance, police and fire protection, and county services. Close to half of income and sales tax revenues, while collected at the state level, are also transferred to municipalities as the state's share of education and municipal costs. As spending on education and municipal services has increased over time, both the state's contribution to support these services and the amount of property tax collections have also increased.
The Uneven Out-of-Pocket Burden
Property taxes differ from most other forms of taxation because they are imposed on an asset value, rather than on a payment stream. Income and sales taxes are collected when people are receiving or spending money and, thus, reflect to some degree the cash resources available to the taxpayer when they are paying the tax. Property taxes, on the other hand, are based on the gross value of the property, regardless of income, and regardless of the accessibility of financial resources to pay the tax. As a result, property taxes may represent a small, moderate, large or very large fraction of income, depending on the circumstances of the individual homeowner. The wide variability in tax burdens across households, and the very high burden among some households, generates more intensive criticism of property taxes, compared with income and sales taxes, and raises legitimate questions of tax fairness.
There are many reasons individual homeowners may face a high burden of property taxes. Much of southern and coastal Maine, for example, has experienced property tax increases that result from rapidly rising property valuations. Abrupt...
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