LD 1: Tax Reform For Maine? _________________________________________ Darcy Rollins, Policy Analyst New 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.Competitiveness 2.Education Finance 3.Equity 4.Adequacy Conclusions

LD1 Elements 1.Spending limits 2.Increased state aid for education 3.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 1/3 rd 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 1/3 rd : (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 State and Local Funds for Education, General Purpose Aid,

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

Source: Maine State Housing Authority and the Bureau of Economic Analysis Issue: Equity Percent Change in House Prices and Per Capita Income, Portland MSA,

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 Source: Tannenwald, Robert and Nicholas Turner. Interstate Fiscal Disparity in State Fiscal Year Public Policy Discussion Paper No 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