Tax Cap Analysis: What if the Cap had been in Place in 2003

September 21, 2004 Archives

Contact: Todd Gabe, Dept. of Resource Economics and Policy, 207-581-3307, todd.gabe@umit.maine.edu

ORONO– University of Maine economists have analyzed the impacts of the proposed one-percent property tax cap by estimating the effect on 2003 local government revenues and expenditures as if the cap had been in place. In a report issued today, they conclude that Maine towns would have had a shared budget deficit of $687.7 million if the tax cap had existed, as written, last year.

They also found that the tax rate for homeowners would have gone down in 391 towns. It would have gone up in 81 towns because of changes in the way homes are valued for taxes under the tax cap proposal.

The analysis was done by Todd Gabe, Jonathan Rubin and Tom Allen of the Department of Resource Economics and Policy and Catherine Reilly of the Margaret Chase Smith Center for Public Policy. Rubin is also interim director of the Smith Center.

The 53-page report includes 32 pages of tables showing changes in municipal tax revenue, state and local government expenditures, and taxes paid on a $150,000 home bought in 2003 under the property tax cap. The Maine State Planning Office, Maine Agricultural and Forest Experiment Station and the Smith Center provided financial support for the study.  The full report is available online at www.umaine.edu/mcsc/TaxCap.pdf.

The authors also reviewed the impacts of property tax caps in Massachusetts and California. In broad terms, they note that, in addition to reducing property taxes, tax caps shift tax burdens from some property owners onto others and encourage communities to look for funding from other sources.

“People need to know what they’re voting on in November,” says Gabe. “This is the most detailed town-by-town analysis that’s been done on the tax cap proposal as it is written. (If it passes), state and local governments could respond to it in many different ways, but based on the experience in other states, it could mean cuts in services and creation of new sources of income.”

The analysis demonstrates, says Rubin, that the tax cap proposal would have “unintended consequences that go beyond lowering taxes. It will be a shift in authority from local government to state and other centralized units of government.”

Had the Maine tax cap been in effect last year, the authors found that the following changes would have occurred:

  • Statewide, total property tax revenues, which amounted to $1.6 billion in 2003, would have dropped by $687.7 million or 43 percent. If the MMA bill, passed in June of 2004, had been in effect, the shared deficit could have dropped from $687.7 million to $535.2 million

  • Tax rates based on the tax cap were lower in 391 municipalities than the 2003 “full-state value” tax rate for residential real estate, but in 81 municipalities, the cap was higher than the 2003 tax rate for residential real estate.

  • In municipalities in which the tax rate would have increased under the tax cap, people who bought their homes in recent years would have paid higher taxes under the tax cap. People who have lived in their homes for at least several years would have paid lower taxes.

  • Statewide, owners of seasonal, or “vacation,” homes, would have paid $50.9 million less in property taxes in 2003. This reduction would amount to 31.9 percent of the taxes paid on these properties.

  • Total municipal spending of about $2.16 billion in 2003 would have been reduced to about $1.32 billion under the tax cap, after including additional state school spending. With the exception of education, debt payments and county taxes, total municipal spending for other purposes would have been cut by 69.4 percent.

If the property tax reduction had been replaced by state income or sales taxes, total state income taxes would have had to increase 64 percent, or the sales tax rate would have had to increase from 5 percent to slightly over 9 percent.

“The overall lesson learned from other states is that property tax caps can have impacts beyond the straightforward reduction of one type of tax,” the report concludes. “Changing local tax structures can shift the tax burden away from certain property owners, taxpayers, and businesses and onto others; can shift control of local revenues and expenditures from one level of government to another; can force communities to raise other fees; and can affect land use and property values.”