LD 1: Tax Reform For Maine?

_________________________________________

Darcy Rollins, Policy AnalystNew England Public Policy Center

Presentation to the Connecticut Legislative Program Review and

Investigations Committee

October 26, 2005

Presentation Road Map

• Climate behind recent tax law• LD1: Key Issues and Analysis

1. Competitiveness2. Education Finance3. Equity4. Adequacy

• Conclusions

LD1 Elements

1. Spending limits 2. Increased state aid for education3. Targeted property tax relief

The BIG Issues

• Competitiveness: The impact of the tax system on economic development

• Adequacy: The ability of the revenue system to meet fiscal need

• Equity: the fairness of the tax system, adherence to ability to pay principles

• School Finance

Presentation Road Map

• LD-1 Overview• Key Issues and Analysis

– Competitiveness– Education Finance– Equity– Adequacy

• Conclusions

Issue: Competitiveness

Source: Measures of Growth, 2005

Income Tax Burden as a Percent of Income in the Largest Cities of New England and Average Income Tax Burden, Family of Four, 2003

Source: Tax Rates and Tax Burdens In The District of Columbia -A Nationwide Comparison, 2003

Issue: Competitiveness

LD1 Response: Spending Limits

When Maine is ranked in the top 1/3rd nationally on tax burden:

(spending) “…may not exceed … the prior year multiplied by one plus the average real personal income growth rate, but not more than 2.75%, plus 10-year average population growth.

When ranked in the 2nd 1/3rd:

(spending) “…may not exceed … average real personal income growth rate plus 10-year average population growth plus forecasted inflation.

Presentation Road Map

• LD-1 Overview• Key Issues and Analysis

– Competitiveness– Education Finance– Equity– Adequacy

• Conclusions

Issue: Education Finance

Source: Maine Department of Education

$-

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

94 95 96 97 98 99 2000 2001 2002 2003 2004 2005

Fiscal years

Mill

ions

State Funding

Local Required

LocalAdditional

TeacherRetirement

State and Local Funds for Education, General Purpose Aid, 1994-2005

LD1 Response: Increased State Funding

Phase-in of state commitment:– 50% state share in FY06– 55% state share by FY08

Insurance– Mil rates for education limited– Funding formula reformed

Presentation Road Map

• LD-1 Overview• Key Issues and Analysis

– Competitiveness– Education Finance– Equity– Adequacy

• Conclusions

7.40%

6.00%

3.40%

4.70%

11% 11%

10%10%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1999-2000 2000-2001 2001-2002 2002-2003year

per

cen

t ch

ang

e

Per CapitaIncome

House Price

Source: Maine State Housing Authority and the Bureau of Economic Analysis

Issue: EquityPercent Change in House Prices and Per Capita Income, Portland MSA,

1990-2003

LD1 Response:Targeted Tax Relief

Expanded circuit breaker program income eligibility, increased credit amount

Homestead exemption increased– $13,000 of value of permanent residence

(was $7,000)– 50% of the exemption reimbursed by the

state

Presentation Road Map

• LD-1 Overview• Key Issues and Analysis

– Competitiveness– Education Finance– Equity– Adequacy

• Conclusions

Issue: Adequacy

(1=highest) Maine’s Fiscal Capacity Ranking

Maine’s Fiscal Need Ranking

Maine’s Fiscal Comfort Ranking

1987 22 47 181994 43 49 241996 42 49 301997 27 49 171999 36 48 24

Source: Tannenwald, Robert and Nicholas Turner. Interstate Fiscal Disparity in State Fiscal Year 1999. Public Policy Discussion Paper No. 04-9. Federal Reserve Bank of Boston. December 2004.

Presentation Road Map

• LD-1 Overview• Key Issues and Analysis

– Competitiveness– Education Finance– Equity– Adequacy

• Conclusions

LD1: Tax Reform, Relief or Not?

“This tax relief plan is bold, historic, comprehensive and bi-partisan” - Governor

“This plan is not perfect. But this plan is what is possible” – State Representative

“It is important…to recognize that this is not tax reform” – State Representative

The Continuing Saga

Maine Heritage Policy Center – Tax Payer Bill of Rights Ballot initiative

LD 1595 (Tabled)– Expand the sales tax base, creates a 6% flat tax rate

in Maine

Governor’s proposal– Decrease top rate of income tax, expand EIC, remove

business property & equipment tax

Grow Smart Maine - Brookings Institution – study of how to make Maine more economically

competitive

New England Public Policy Center

http://www.bos.frb.org/economic/neppc/