Tax Analysis Points to Size of Potential Revenue Cap
Contact: Todd Gabe. Dept. of Resource Economics and Policy, 207-581-3307, todd.gabe@umit.maine.edu
Nick Houtman, Dept. of Public Affairs, 207-581-3777, houtman@maine.edu
ORONO– An analysis of potential state budget changes resulting from the tax cap proposal on the November ballot identifies the magnitude of funding choices that state legislators could face in the next biennium. Todd Gabe, an economist in the University of Maine Dept. of Resource Economics and Policy (REP), performed the work to identify potential consequences for higher education spending, including state support for the University of Maine System.
“The idea behind the study is to get a sense of how the Palesky tax cap could affect Maine’s finances, if the state helps municipalities bridge the gap between local expenditures and estimated revenues under a 1 percent property tax cap,” Gabe says. “Right now it is unclear how Maine towns and the state would find new revenue sources to support local services, so I am looking at the impacts of the tax cap under the assumption of no additional revenues,” he adds.
Gabe has calculated the potential budget effects under several scenarios. One of the most significant factors affecting those scenarios is how local governments and the legislature implement Question 1, which the voters passed in June. That measure requires the state to pay 55% of local education costs, up from the current 43%.
Assuming that local governments reduce their own spending by the same amount that they receive in additional state support, says Gabe, the proposed tax cap could require the state to reallocate at least $372.5 million in each year to meet the property tax limits imposed by the tax cap.
If municipalities were to shift spending from education to other purposes and not reduce their overall expenses, the state would have to come up with up to $529.7 million annually to meet the tax cap limitations.
Both scenarios assume a level two-year state budget of $5.22 billion. Hypothetically, state programs could be reduced by an amount consistent with their relative portion of the state budget.
In the first case, the University of Maine System would be reduced from current 6.8 percent to 4.2 percent of the total state budget. The reduction would be more drastic, to 3.6 percent of the state budget, in the second case.
Gabe presents his analysis in a REP staff paper that has been posted to the department’s website. The fifteen-page report includes ten tables that show current state budget allocations and how expenditures could hypothetically change under each scenario.
Figures used in the analysis came from the Maine Municipal Association, Maine Department of Education, Maine Revenue Services and the State of Maine Budget Website. Uncertainties stem from using figures from different sources, Gabe notes. The study did not account for growth in the state economy or the possibility that the legislature could replace property tax revenue with increases in income or sales taxes.
Gabe sees the study as a first look at a complex economic policy issue. He concludes, “I still have some questions about how the Palesky tax cap would be jointly implemented with Question 1, and the extent to which the tax cap could shift the tax burden from out-of-state property owners to Maine residents who pay other state taxes.”