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January 22, 2007

The big chill | Critics worry Baldacci's property-value freeze would shift the tax burden to small businesses

By Chris Churchill
Gov. John Baldacci says he has heard the complaints and knows Mainers want tax relief. And though other relief attempts have mostly failed, he insists this time it will be achieved. But the governor's primary tax-relief proposal, a move to freeze land values for homeowners, is drawing fire from business and real estate leaders who believe it will hurt the state's economy.

Many questions remain about the proposal, but as outlined recently by Baldacci and Martha Freeman, head of the State Planning Office, the property-value freeze would apply to the land beneath primary homes owned by Maine residents. It would not apply to second homes, apartment buildings or commercial properties.

Some believe the proposal will simply lead cities and towns to set higher mil rates. "This is really just a shifting around of the property-tax burden," says Michael Starn, spokesman for the Maine Municipal Association. "When you freeze one person's value and there's no money coming in to offset that, the shift goes to people who don't qualify."

And businesses don't qualify. "The potential for a significant shift to the small-business sector is quite large," says David Clough, head of the Maine chapter of the National Federation of Independent Business. "It's more money that business owners would have to come up with, and it would have an effect on the economy."

Freeman says the governor is aware of the business community's concerns. But she says the property-value freeze only should be considered within the framework of several tax relief plans outlined in recent weeks by the governor, including the consolidation of school districts, an increase in state aid to local school districts and other proposals. To look at the effects of one tax-relief proposal without considering the others, she says, is unfair.
Under the proposal, the valuation freeze would hold land values until the property changes hands. At that point, the higher value would be assessed ˆ— and the original homeowner would be asked to retroactively pay the taxes they would have paid had the value not been frozen. "It's not a forgiving forever of the taxes owed," Freeman says. "It's just putting it off until the time you have the income."

The proposal worries some real estate agents, who fear Mainers will hesitate to sell homes if doing so results in an increased tax burden. They also fear the proposal would wallop first-time homeowners or newcomers to the state, because both would face high valuations and tax rates. "It will create a tax trap," says Linda Gifford of the Maine Association of Realtors. "People will end up not making smart decisions about where they live. The house might be too big or too small, but they won't want to leave it."

An answer to TABOR
To be sure, the freeze will not be easy to enact. It requires a constitutional amendment, and that necessitates two-thirds approval by both legislative chambers and approval from voters statewide. Legislators are likely to weigh the proposal during the current session, and it's unclear if Baldacci's plan will ever make it to voters. Lawmakers rejected a similar tax proposal two years ago, and many in the Legislature are receiving it coolly this time around.

But state Sen. Peter Mills says Baldacci's proposal has "a chance because of the governor's enthusiasm for it" and because it's popular with voters. Mills once backed similar legislation, but says he has since lost his enthusiasm for valuation freezes of any kind, especially because a recently enacted freeze on working waterfront real estate has "generated nothing but hate mail" from other property owners.

But Mills says he understands why Baldacci would push the measure. "He had to have an answer to TABOR," Mills says, referring to the Taxpayer Bill of Rights, the referendum rejected by voters last November. "And his answer is this because it polls so well."
Because the governor is pairing the home valuation freeze with a proposal to dramatically reduce the number of school districts statewide, the cynics on talk radio claim Baldacci is proposing pie-in-the-sky tax reforms he knows won't succeed, but for which he hopes to get credit for at least trying.

But Freeman and others say Baldacci is pushing the measure out of a sincere desire to help Mainers struggling with rising property taxes. The governor, in his inaugural speech, said he met many such people during the recent gubernatorial campaign, adding that he would "insist" on the measure's passage. "This must be done to prevent people from being tax-valued out of their homes," he said.

Many in the business community note that they, too, have complained to the governor about high property taxes, and say they are frustrated that his primary proposal threatens to increase what they pay. Chris Hall, vice president of the Maine State Chamber of Commerce, even believes the proposal could make it harder for businesses to attract employees to the state. "Affordable housing is a real issue for Maine employers," he says. "There's a business dimension to having two similar houses taxed at different levels depending on length of ownership."

Other critics say the proposal can't be called reform, because it doesn't address Maine's over-dependence on property taxes for its revenue. "The valuation freeze Baldacci is proposing is nothing more than a gimmick," says Orlando Delogu, a professor at the University of Maine School of Law who specializes in real estate issues. "It pits various classes of property owners against one another, and in no way reduces the degree to which we rely on property taxes to fund local and state government."

There's even debate on whether property taxes in Maine are high. There's anecdotal evidence that housing sales in York County benefit from incoming New Hampshire residents looking to pay lower tax rates. And Gifford, a Realtor, says out-of-state buyers often say Maine rates are significantly lower than what they pay at home. "They think our property taxes are great," she says. "It's the people living in Maine who think our taxes are high, and that's because incomes [here] are low."

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