Before we can reach consensus about tax reform and public spending policy, we will need to define some basic terms.

What do we mean when we say something is “fair,” “effective” or “enough”?

Indeed, the coming legislative struggle to put into practice the recently approved initiative to add a surcharge to the state income tax and allocate the proceeds to K-12 education will be but the first of what is certain to be a series of such efforts at definition that will arise over the next several years.

In fiscal year 2014 (the most recent year for which comparable data are available from the Maine Municipal Association’s Fiscal Survey Report and the state Office of Fiscal and Program Review’s Municipal Funding Report), Maine’s municipalities spent just over $4 billion.

In the same year, these municipalities received just under $1.3 billion in revenue from the state government. The vast majority of this money – nearly $1.1 billion – was dedicated to K-12 education.

Of the balance, $59 million went directly to property-tax payers in the form of a homestead exemption, $68 million went (in the form of revenue sharing) to whatever uses local officials chose, and smaller amounts went for public safety, public works and human services based on local budgeting decisions and state program requirements.

Based on crude averages for total spending for all towns across all categories, state revenue sources accounted for 49 percent of human services spending, 45 percent of K-12 education spending, 31 percent of general administration spending, 7 percent of public safety spending and 5 percent of public works spending.

In thinking about these figures, several questions arise. Is the current total of $1.3 billion coming from state revenue sources (largely income and sales taxes) and going to municipal governments (largely dependent on local property taxes) fair (whatever that may mean)? Is it effective (whatever that may mean)? Is it enough (whatever that may mean)?

In that regard, I think one central question must be answered at the start: To whom is the state’s largesse directed, a program recipient or a municipality?

Is state assistance intended to serve a particular set of citizens regardless of where they live? Or is it intended to serve a municipality that, because of the full range of public services required and fiscal capacity, has greater need for state assistance than other municipalities?

State aid for education as currently formulated is clearly an example of the first possibility. It is directed to the individual student.

Every student in the state should, at least to a state-defined level of “essential programs and services,” have access to an equal level of financial resources. This minimum was most recently calculated as $8.30 per $1,000 of a town’s taxable property base. If applying that mill rate to a town’s state tax valuation did not raise enough money to reach the essential programs and services minimum, the state kicked in the balance. If it did reach the minimum, state education aid was zero (except for certain items for which state aid applies to all towns). In effect, state aid for education ignores all non-education characteristics of a city or town and all other demands for services in the town.

At the other end of the spectrum, state General Assistance reimbursement is directed to those municipalities that spend over 30 cents per $1,000 of assessed property value on qualifying assistance. While a far cry from the $1.1 billion allocated for education, the $12.5 million allocated through this program does recognize the level of need in certain cities and towns as the basis for state support. Similarly, much of the $46 million in state aid allocated to transportation and criminal justice programs is in response to municipal initiatives and requests rather than automatic state allocations to particular recipients.

The state revenue-sharing ($66 million) and homestead exemption ($58 million) programs fall somewhere in the middle. Revenue sharing (in essence) allocates 5 percent of state sales and income tax revenues to all municipalities in proportion to population as weighted by relative property tax base. The homestead exemption allows full-time residents of any municipality to apply for an exemption of $15,000 on the assessed value of their primary residence. The resulting reduction in property taxes collected by the town is reimbursed by the state. Both of these sources of state revenue go to municipalities to be used as they see fit within their overall budgeting procedures. The program beneficiaries are those who complete and are approved for homestead exemptions and all of the taxpayers in a town whose property tax bills are reduced by whatever amount the town receives in revenue sharing.

Clearly, the present system of allocating state financial assistance to municipalities is dominated by the fact that 85 percent of the total goes to K-12 education on the theory of equalizing resources per student regardless of location. As this system is re-evaluated, it seems to me inevitable that a more complete analysis of the widely divergent characteristics and community needs of Maine’s 490 municipalities must be incorporated into all of the state local assistance programs.

Consulting economist Charles Lawton, Ph.D., can be contacted at:

[email protected]