Executive Summary 

            The Education Funding Reform Committee was established during the First Regular Session of the 120th Legislature by Public Law 2001, chapter 439, Part SSS.  The Committee was directed to develop a comprehensive package of tax reform legislation to update and equalize the method of raising money for education including finding ways to reduce the State’s reliance on property taxes for elementary and secondary schools.  The Committee included 14 legislators: eight from the Joint Standing Committee on Taxation, three from the Joint Standing Committee on Appropriations and Financial Affairs and three from the Joint Standing Committee on Education.  

            The Committee met four times to receive and discuss information from staff, state agencies and other interested parties.  A subcommittee was appointed to review four proposals submitted by members of the Committee and present one proposal to the full Committee for consideration.  During it’s fourth meeting, Committee members reviewed the proposal presented by the subcommittee.  Rather than endorse the substantive changes contained in the subcommittee proposal, a majority of the 12 committee members present reached a consensus that the proposal should be forwarded to the Legislature for further consideration.  A minority of those voting to move the proposal forward would recommend adoption of the substantive elements of the proposal.  A separate minority voted against forwarding the proposal to the Legislature at this time. 

            The proposal consists of two bills.  One is a proposed constitutional amendment authorizing different property tax maximum rates for different classes of property and exempting personal property from property tax if an excise tax is adopted on certain property.  The other includes the statutory changes developed by the Committee and direction to the Taxation Committee of the 121st Legislature to develop additional necessary components of the plan.  The proposal contains the following elements.

Element 1.  Element 1 would place a cap on the amount of property tax revenue that could be raised on the local level for education.  Two maximum rates would be established – 6 mills for primary residential property, commercial, agricultural and industrial property and tracts of undeveloped land not enrolled in a current use tax program and 12 mills for all other property.  The remainder needed to fund a quality education would be provided by the State.  Municipalities would be able to raise additional amounts through the property tax but could impose the additional tax only against primary residential property.

Element 2.  Element 2 would repeal the property tax on personal property first owned or placed in service after April 1, 2003 if there is an excise tax on certain personal property at a rate that would be less than the property tax. 

Element 3.  Element 3 would repeal the homestead property tax exemption because the proposed property tax rate maximums will, in most instances, provide greater relief.

Element 4.  Element 4 would phase out the Business Equipment Tax Reimbursement Program for property first placed in service after April 1, 2003.  This phase-out occurs automatically as the personal property tax exemption takes effect.  Property that became eligible for BETR on or before April 1, 2003 would continue to be eligible for 12 years.

Element 5.  Element 5 would provide for the establishment of an excise tax on personal property to support part of the cost of municipal government.  The details of the excise tax would be developed by the 121st Legislature.

Element 6.  Element 6 of the proposal would require a statement on property tax bills to inform taxpayers of the impact of the property tax rate maximums on their property tax bills.

Element 7.  Element 7 directs the Taxation Committee of the 121st Legislature to develop funding sources for additional State revenue for education with special consideration of sales tax base expansion, an excise tax on certain personal property and an education funding stabilization fund to ensure adequate revenues for education costs in the event that economic conditions result in a situation where revenues do not keep pace with education costs.

I.            INTRODUCTION 

The Education Funding Reform Committee (“Committee”) was established during the First Regular Session of the 120th Legislature.  The authorizing legislation for the Committee grew out of LD 970, “An Act to Limit the Use of Property Taxes to Fund Education”, which was sponsored by Representative Bernard McGowan of Pittsfield and introduced as a concept draft to the First Regular Session of the 120th Legislature.  This bill was referred to the Joint Standing Committee on Taxation (“Taxation Committee”).  The concept draft proposed to accomplish the following:

 v     To equalize the levy of property taxes, sales taxes and the personal income tax;  

 v     To cap the mill rate on property taxes earmarked for education at 4 mills for primary residences and business properties;

v     To recover the revenues lost by implementing this change by increasing the sales tax and eliminating selected exemptions as recommended by the Taxation Committee or by an alternative plan to be recommended by the Taxation Committee; and

v     To phase in the changes proposed by the bill over a 3-year period by decreasing the property tax rate 1/3 of its present rate each year for 3 years. 

The committee amendment to LD 970 (H-216) proposed to replace the bill with a resolve to establish the Education Funding Reform Committee to make recommendations to the Legislature that would:  (1) reduce the State's reliance on the property tax as the primary source of funding for education; (2) identify other funding sources that could ensure equal educational opportunity; (3) provide a more equitable balance among funding sources; and (4) stabilize the State's tax structure.  The study committee would have been required to make recommendations to the Legislature by December 31, 2001.  It was also the intent of this resolve that the study committee's recommendations must be submitted to the voters at a public referendum at the time of the general election in November 2002.

While the bill as amended by the Taxation Committee was not adopted, a provision to establish a study committee to examine the issues presented by LD 970 was approved by the Appropriations Committee and included in the Part 2 Budget Bill (see LD 855, Public Law 2001, chapter 439, Part SSS).  A copy of the authorizing legislation is attached as Appendix A.  

Scope and Focus of the Committee

 The Education Funding Reform Committee was established to develop a comprehensive package of tax reform legislation to update and equalize the method of raising money for education including finding ways to reduce the State's reliance on property taxes for elementary and secondary schools.  The scope of the Committee study was limited to investigating sources of revenue to fund elementary and secondary school education; and not to investigate the existing distribution formula or the development of the essential programs and services funding model.  In developing its recommendations, the Committee was charged with studying alternate sources of revenue for elementary and secondary education that meet the following criteria: 

            1.  Provide more state money for education and consequently ensure equal educational opportunities for all students of the State; 

            2.  Provide property tax relief for home owners, farmers and businesses to encourage new businesses to locate to the State and new businesses to expand and to entice more people to live in the State; and 

            3.  Balance the primary methods of raising taxes between the property tax, sales tax and personal income tax. 

The Committee was also given the authority to introduce legislation during the Second Regular Session of the 120th Legislature to implement its recommendations.  The authorizing legislation further provided that the Legislature may adopt or reject the Committee's recommendations or submit the Committee's recommendations to the voters at a public referendum at the time of the general election in November 2002. 

The Committee included 14 Legislators, eight of whom serve on the Joint Standing Committee on Taxation, three of whom serve on the Joint Standing Committee on Appropriations and Financial Affairs and three of whom serve on the Joint Standing Committee on Education and Cultural Affairs.  The Committee membership is listed in Appendix B.  The Committee was convened on October 16, 2001 and held three additional meetings on the following dates:  November 5, 2001; November 30, 2001 and December 18, 2001.  Following its third meeting, the Committee established a subcommittee – which met on December 11, 2001 -- to develop a proposal for consideration by the Committee at its fourth meeting. 

The Committee requested technical assistance from the Department of Administrative and Financial Services, Bureau of Revenue Services and the Department of Education.  In addition to the information and analysis presented by state officials, the meetings also provided an opportunity for Committee members to deliberate on information provided by representatives of the Maine Municipal Association, the Maine Education Policy Research Institute and other interested parties.  

The Committee used the first meeting to discuss the purposes of the study and to formulate a work plan.  Committee members decided to focus the next meeting on gathering information about the legislative history and the current policies concerning K-12 public education funding and to review Maine’s tax structure.  During its second meeting, the Committee received detailed information regarding the following policy issues: 

v     The recent history of the “state share” in K-12 education funding in Maine;

v     The revenue sources used to fund K-12 public education in Maine school administrative units, including revenues from state, local and federal sources;

v     The revenues available to fund K-12 public education in other states and recent examples of education finance “reforms” in other states;

v     A summary of previous legislative studies of tax/education funding;

v     The factors affecting residential property tax “burden” -- defined as property taxes paid as a percentage of household income;

v     A summary of Michigan tax policy changes and school finance reform (pre- and post-1994), including a videotape of the process that Michigan lawmakers used to craft their school finance reform package;

v     A description of Maine Municipal Association data sources and data analysis of education tax burden for municipalities; and

v     A description of the Maine tax incidence model developed by the Bureau of Revenue Services, including statewide analyses of the amount of state and local taxes actually paid by Maine residents and the distribution of state and local taxes for Maine taxpayers broken out by income levels.

Following discussion of the information provided, Committee members were invited to identify and propose policy options for consideration during the third meeting. 

During the third committee meeting, written proposals were introduced by Senator Mills, Representative McGowan and Representative Green; and a fourth proposal was put on the floor by Representative Cummings.  Copies of these proposals are attached as Appendix C.  The Committee established a subcommittee to explore these alternative proposals and to bring back a more detailed proposal for further consideration.  Sensing that the Committee required further time to complete its work, Committee members also agreed to seek an extension of the reporting deadline from the Legislative Council.  

            The authorizing legislation established December 31, 2001, as the deadline for the Committee to provide its report to the 120th Legislature.  Due to the short time period in which the Committee had to complete its work after the October 16, 2001 convening date, the Committee chairs petitioned the Legislative Council for an extension of the reporting deadline.  The extension request was denied. 

During its fourth meeting, Committee members reviewed the proposal presented by the subcommittee.  Rather than endorse the substantive changes recommended by this proposal, a majority of the Committee members present reached a consensus that this proposal should be forwarded to the Legislature for further consideration by the Taxation Committee.  A minority of Committee members present recommended adoption of the substantive elements of the subcommittee proposal; and a separate minority of the Committee voted against forwarding this proposal to the Legislature. 

II.            COMMITTEE PROPOSAL 

            The Committee voted to present to the Legislature the following legislative proposal for further consideration and review during the Second Regular Session of the 120th Legislature.  The proposal includes 2 bills.  They are presented separately only because part of the proposal includes a proposed amendment to the Maine Constitution, and a proposed constitutional amendment cannot be included in the same legislative document as legislation to make statutory changes. 

Element 1:      Property tax rate cap on property taxes raised to fund education.  Element 1 of the proposal  would place a cap on the amount of property tax revenue that could be raised on the local level for education.  Two maximum rates would be established                    

                               

These mill rate caps would represent the maximum amount that could be collected through the municipal property tax to fund K-12 education.  A municipality that could fund its education costs at a lower mill rate would not be required to raise more than it needed.  The remainder of the cost of K-12 education determined necessary by the State would be paid from State revenue sources.  The Legislature is currently in the process of evaluating a system for defining a level of “essential programs and services” that are necessary for an adequate K-12 education.  It is envisioned that this level of funding would be the standard against which the State’s required participation would be gauged.  If a municipality or school unit wished to exceed the level of “essential programs and services,” it would be able to do so by a vote of the legislative body of the municipality or school unit, but the additional revenue could only be assessed against primary residential property. 

Implementation of Element 1 requires an amendment to Article 9, Section 8 of the Maine Constitution which requires that “ … taxes upon real and personal estate, assessed by authority of this State, shall be apportioned and assessed equally according to the just value thereof.”  This provision requires that all property taxes be assessed at the same rate.  The proposed Constitutional Amendment grants authority to the Legislature to establish limits on the property tax rates that may be assessed against different classes of property for purposes of financing K-12 public education. 

Property taxes for the noneducation components in the municipal budget would continue to be assessed and apportioned under current law and constitutional requirements. 

Element 2:      Repeal of property tax on personal property first owned or placed in service after April 1, 2003 and substitution of an excise tax at a reduced rate.  Element 2 of the proposal provides a property tax exemption for personal property first owned or placed in service after April 1, 2003.  In order to protect municipalities from a portion of the loss of property tax revenues from personal property, an excise tax, similar to the excise tax on motor vehicles but at a lower rate, would be substituted for the personal property tax for personal property first placed in service after April 1, 2003.  This proposal would be implemented by an amendment to the Maine Constitution.  Including this proposal in the Constitution guarantees municipal access to revenues from personal property in the form of an excise tax.  If the Legislature failed to implement an excise tax or repealed it, the property tax on personal property would be reinstated.  Establishing the exemption in the Constitution, rather than in statute also eliminates the requirement created by Article IV, Part Third, Section 23 of the Maine Constitution that the Legislature reimburse municipalities from state revenue sources for at least 50% of the revenue lost from a newly enacted property tax exemption.  

Element 3:      Repeal of the homestead property tax exemption.  Element 3 of the proposal is the repeal of the homestead property tax exemption.  Property tax relief provided by the proposed limit on property tax rates for education will, in most instances, result in far greater relief than the current $7,000 homestead property tax exemption.  Therefore, this proposal would repeal the homestead property tax exemption in order to be able to use those funds to achieve the maximum relief from a property tax rate limit. 

Element 4:      Phase-out of Business Equipment Tax Reimbursement Program.  Element 4 is the gradual phase-out of the property tax on personal property for property first owned or placed in service after April 1, 2003.  This phase-out recognizes the phasing out of need prospectively for the Business Equipment Tax Reimbursement  (BETR) program which reimburses qualified businesses for taxes on qualified business property.  Personal property first placed in service after April 1, 2003 would be exempt from property tax so no reimbursement is required.  Property place in service on or before April 1, 2003 would continue to be subject to property tax and would be subject to the current rules regarding BETR reimbursement.  BETR reimbursement is limited to 12 years under current law; therefore, after 12 years no reimbursement would be available.  Property first owned or placed in service before April 1, 2003, whether eligible for BETR reimbursement or not, would continue to remain subject to property tax under this proposal. 

Element 5:      Excise tax on certain personal property.  Element 5 recognizes that it is appropriate for personal property to continue to bear some of the cost of municipal government but that the property tax is an inflexible, unwieldy and unfair method for obtaining that revenue.  The Committee discussed adopting an excise tax on certain personal property similar to the excise tax on motor vehicles that would establish some measure of original cost as the base of the tax with declining annual tax rates to reflect the obsolescence of the property.  This tax would be assessed against individual items of personal property with a value over a base amount.  The tax would be collected and retained by municipalities.  This element is included in the proposal presented by the Committee; however, the Committee did not have sufficient time to work on the details of the excise tax and has included in the legislation implementing the proposal a direction to the Joint Standing Committee on Taxation of the 121st Legislature to develop the excise tax more fully with the goals of  balancing the state’s interest in establishing a uniform, stable and competitive industrial tax obligation compared to other states, removing disincentives to replace or modernize business machinery and equipment, and obtaining revenues from the personal property tax base that the Legislature considers reasonable to support municipal support services and a fair-share of the cost for kindergarten to grade 12 public education. 

Element 6:      Taxpayer information.  Element 6 of the proposal is a statutory requirement that property tax bills contain information to enable property taxpayers to identify the impact of the changes implemented by this proposal on the amount of their property tax.  Property tax bills would be required to identify property tax mill rates for both the education component and the municipal and county budget component of the property tax bill both before the implementation of caps on the education component and for the year covered by the property tax bill. 

Element 7:      Directives to 121st Legislature.   Element 7 contains several legislative directives to the 121st Legislature.  The proposal directs the joint standing committee with jurisdiction over taxation matters to develop legislation for consideration by the First Regular Session of the 121st Legislature to implement components of the proposal not contained in the initial legislation.  The 121st Legislature could adopt legislation or refer the proposals to the People for a referendum vote.  These components include the following. 

·        Development of legislation to generate the additional state revenue from General Fund sources sufficient to meet the state’s obligation to fund K-12 education.  In developing this legislation the Taxation Committee would be directed to reflect the work of the Joint Standing Committee on Education in the determination of the standard for establishing the total level of funding necessary to ensure an adequate education for all students in the State; 

·        Development of legislation establishing an excise tax on personal property first owned or placed in service in the State after April 1, 2003.  The excise tax would be imposed on items of person property with a value over an amount to be determined.  It would be based on the original cost of the property with a rate that would decrease over a number of years to a minimum floor amount. 

·        Development of an educational funding stabilization fund.  In developing this fund, the Taxation Committee would be directed to consult with the Joint Standing Committee on Appropriations and Financial Affairs.  The education funding stabilization fund is intended to provide a cushion to ensure that adequate state revenues are available to fund the state’s education funding obligations in the event that economic conditions result in significant stress on General Fund revenues.  Legislation establishing the fund should carefully delineate the conditions that would trigger contributions to the fund and the conditions identifying when resources would be released from the fund. 

Element 8:      Referendum; contingent on approval.  Element 8 of the proposal is the recommendation that all elements of the proposal be submitted to the voters in the form of a referendum at the general election in November 2002.  The elements of the proposal  amending the Maine Constitution must be submitted to the voters for approval under the terms of Article 10, Section 4 of that Constitution.  The Committee also recommends that the other elements of this proposal also be submitted to the voters at the same time as the constitutional amendment and that the statutory changes become effective only if the proposed constitutional amendment is approved. 

III.            ESTIMATED FISCAL IMPACT 

            Several factors contributed to the difficulty of estimating the fiscal impact of the  proposal developed by the Committee.  Materials presented to the Committee by the Maine Municipal Association at the request of members of the Committee attempted to present an approximation of fiscal impact by looking at education data for fiscal year 2000-01 and property tax data for property tax year 2000.  These figures identified the following impact if the proposal presented by the Committee were implemented in that year. 

             Complete estimates of future potential impact of the proposal were not possible given the time available to the Committee for presenting a final report.  Any such estimates are complicated by the fact that the Legislature is currently in the process of considering revisions in the way educational costs are defined and apportioned, making future total education costs difficult to estimate at this time.  Additionally, several aspects of the proposal will need additional details worked out before fiscal estimates are possible.