Gov. John Baldacci’s proposal to eliminate the personal property tax on business equipment would gradually cut local tax revenue for cities and towns while reducing the state’s expenses – an uneven tradeoff that would hit some communities harder than others.

Portland last year took in $14 million on the tax followed by South Portland, which collected more than $9 million largely on its high-tech giants – National Semiconductor and Fairchild. Bath Iron Works pays its host community about $4.7 million and Bucksport gets $4.4 million largely from its paper mill.

Many communities have almost nothing to lose, however, and the numbers can be deceiving even for commercial centers.

“For us it wouldn’t have that dramatic an impact,” said South Portland City Manager Jeff Jordan, largely because the state plans to reimburse communities for some of what they could have been collecting once the tax is eliminated. South Portland also gives its larger businesses a tax break of about 50 cents on the dollar to encourage development, so the way Jordan sees it, “we’re whole” under the governor’s plan.

Bucksport, however, is worried.

“It’s a big deal to us. Most of the value of the mill is personal property,” said Carol Oliver, the town’s assessor. Ticking off the dollars the town currently receives largely from International Paper and an ancillary power generation plant, she said, “you can see why we don’t want to lose it.”

The governor’s plan calls for elimination of the business equipment tax – known as the personal property tax and paid to municipalities just like regular property taxes – by April 1, 2007.

It also calls for what some see as rather minor changes to the income tax code – the most dramatic sounding being the elimination of the income tax for 40,000 low-income workers, who make $4,750 or less a year of taxable income.

It does not include a proposal for a local option sales tax, which was considered by the governor, but ultimately rejected. Such taxes were to be tied to specific projects, like a new civic center for Portland and Bangor. Baldacci indicated, however, he would entertain a local option tax if it came from the Legislature.

The governor’s plan and more than a half-dozen others are being considered by the Taxation Committee this week. Several call for lowering the sales tax rate and broadening the base – a concept that has some bipartisan support.

Governor’s plan

Right now the state reimburses businesses for the tax they pay through the Business Equipment Tax Rebate (BETR) program to the tune of about $70 million annually. The governor’s plan would reimburse cities and towns instead for lost revenue, once the tax is eliminated. But, the rate would eventually be 50 percent of what it is now, meaning the state’s expenses would be cut by 50 percent, while cities and towns would lose half of their personal property tax revenue base.

“I’m worrying we’re shifting the tax burden,” said Sen. Ethan Strimling, D-Portland. “The money would have to come from somewhere. It’s a shift from businesses to homeowners.”

When the tax is eliminated, the plan calls for 75 percent reimbursement to municipalities in the first two years and 50 percent in the years after that on any equipment purchased after April 1, 2007. The reimbursement would be based on the depreciated value of the equipment until it is no longer used. Equipment is depreciated over 5 to 12 years, and bottoms out at about 10 percent of its purchase price.

Cities and towns would get 100 percent tax reimbursement on the depreciated value of equipment that had been purchased prior to April 1, 2007, for as long as the equipment is being used.

The governor’s income tax changes take an equally long view.

The plan calls for eliminating upfront the income tax for the lowest income workers and lowering the state’s top tax rate of 8.5 percent to 8.45 percent – equal to a $5 tax break on taxable family income of $45,000. All four income tax rates used by the state would be lowered by 1 percent each year for 10 years. By 2017, income tax rates collectively will have dropped by 12 percent, the administration predicts.

The money to do that would come from not adjusting the state’s four tax brackets for inflation for five years, raising $6 million or more each year. That indexing is done to protect workers from being kicked into a higher tax bracket simply because of inflation.

Rep. Harold Clough, R-Scarborough, a member of the Taxation Committee, was skeptical of the governor’s plan. “I’m not going to be waiting 12 years to make my decision,” he said.

Other plans

The Taxation Committee was scheduled to hold public hearings this week on the governor’s plan and others before it crafts one bill its members could support. Several plans, including one proposed by the chairmen of the committee, center on lowering the sales tax rate but broadening the base.

Strimling and Sen. Richard Rosen, R-Bucksport, have co-sponsored a bill that would reduce the sales tax rate to 2 percent, but eliminate all exemptions, including materials used in manufacturing. They also would lower the income tax rates and increase the amount of income earned before the rates kick in. Right now the highest rate – 8.5 percent – is applied at $17,350 for individuals and $34,700 for joint filers.

Rosen said there is bipartisan support for lowering the sales tax rate and expanding the base. “The concept has been discussed in both caucuses for many sessions,” he said.

Taxation chairmen, Rep. Richard Woodbury, an independent from Yarmouth, and Sen. Joe Perry, D-Bangor, have proposed lowering the sales tax rate to 4 percent and eliminating all exemptions, except material used in manufacturing. They would put a flat 6 percent income tax in and eliminate the brackets.