ENHANCED FISCAL FLEXIBILITY AND VOTER CONTROL THROUGH EXPANDED LOCAL GOVERNMENT REVENUE-GENERATING POWER AND SPENDING RESPONSIBILITIES.

To achieve optimum efficiency and transparency in the use of tax revenues, a major decentralization of state government fiscal control and a restructuring of local government, including the long-term possibility of significant consolidation, will be necessary. However much that a full treatment of that endeavor remains well beyond the scope of this proposal, there are reforms of the state and local tax structure which can play a major role in facilitating achievement of those even broader reforms.

As explained earlier, one important reform would be the use of block grants whereby the Legislature funds all public schools, on an equal per student basis to satisfy the constitutional “thorough and efficient” standard, but leaves specific school expenditure and management decisions to local educators, and parents, guided primarily by the need to achieve objectively measured educational attainment outcomes. Beyond that, there are other steps that should be taken in the direction of expanding local governments’ revenue-generating options and capacity. These would include the reallocation of the entire regular levy tax authority over RE and PU property, and encumbrance of the State’s current share of the property transfer tax, to or for the benefit of counties and municipalities.

Under the Fair 55 Tax Reform Plan©, even greater flexibility in local taxing and expenditure decision-making would be the result of a ballot initiative repealing both the property tax rate limits and rate classifications now embedded in the State’s Constitution. This would yield many progressive government reforms which include: (a) enabling local levying bodies (including school boards seeking voters’ consent for excess levies on RE) to actually coordinate tax rates with spending plans; (b) imposing the extraordinary fiscal discipline resulting from linking the relative level of tax rates on all taxpayer groups as described in detail in Section J. infra and (c) removing the highly regressive effect of the double tax rate paid (via their landlords’ rent) by typically lower income occupants of rental residential property when compared to the rate paid by the relatively more affluent owners of their own residences. At the same time, the more targeted relief intended by the Constitutional requirement, that farm land be valued based on its use as such (and not on its highest and best use), would be retained, along with the long-term, income-method, currently used to set taxable values of managed timberland, and adopted pursuant to the Constitution’s separate Forestry Amendment.

Then, with a reformed structure in place, to address the fundamental political question of the proper levels of taxation and spending, the corollary regime, for reviewing disputes as to the measurement of the base of the property tax (i.e. determining taxable value), must also be reformed. The current system, whereby such disputes are decided by elected officials (assessors and county commissioners) whose primary public duty it is to assure the availability of adequate tax revenues, whose personal political interests lie with favoring voting residents to the extreme prejudice of non-voting business entities and non-residents and whose raises in their personal compensation are statutorily tied to increased taxable values, has been sarcastically referred to as “… perhaps not a scheme whose design would prompt nomination for the Nobel Prize …”

Indeed, because of the previously criticized constitutional tax rate limitations, when combined with the growing need for revenue, the actual rates, imposed by most levying units, are often at or near the maximum levels, making the other side of the tax liability equation, to-wit: the taxable value of property, the only place to which revenue-starved local officials have to turn for fiscal relief. At the same time, the county assessors cannot explain often enough (with both straight faces but only superficial accuracy) that they just set values and do not determine tax burdens.

Toward the end of a more straightforward, transparent and accountable system for determining levels of taxation, it would be a significant improvement in terms of fairness and independence, if we simply returned to the arrangements in place in this State between 1909 and 1933, whereby taxable value matters were reviewed by independent officials who had property valuation knowledge and who were appointed by the state-level Board of Public Works. Further, to minimize the volume of disputes by improving objectivity and accuracy of proposed values in the first instance, a property valuation system modeled on Maryland’s approach is recommended. Specifically, in that neighboring state, trained professionals, who are entirely independent of elected local taxing bodies, do both the work of initial valuation and of reviews.

Beyond reforming the administration of the property tax, in addition to the authority to impose a piggy-back GCT, both counties and municipalities should also have the same power with respect to ECT, and certain of the other consumption taxes, such as the various sin taxes (e.g. on sales of alcohol and tobacco). In that manner, depending on their location, they can balance their specific concerns about retail border competition with revenue-generating and expenditure objectives.

Further, it is proposed that, instead of forcing municipalities to eschew their local business and occupation tax as a trade-off if they want to adopt a piggy-back GCT, they should be given greater options to tailor their tax system to local circumstances by eliminating not only that mandatory trade-off, as imposed under the current tepid version of “Home Rule” now allowed, but by repealing the obsolete rate limits, and by eliminating the industry-specific rate differentials, in the former tax as well. Moreover, extending business and occupation tax authority to counties, allowing them, to impose it on business activities outside municipal limits, would not only immediately expand their revenue-generating capacity, but would eliminate the inherent revenue leakage otherwise suffered by the municipalities due to the “tax free” zone that the surrounding unincorporated parts of the county now represent.

Finally, in time, such more balanced taxing authority, between municipalities and counties, should foster greater interest in coordinated fiscal policies, and government service expenditure programs, between and among contiguous jurisdictions. This, in turn, could be an important first step promoting voluntary cooperative public service agreements, and, ultimately, could encourage mutually agreed (not forced) consolidation based on local referendum votes. That is, the State should not (and, politically, probably cannot) try to mandate any such consolidation, but it should act not only to remove any and all barriers to enabling local governments, and local voters, to adopt it as they see it being to their mutual advantage, but to pro-actively foster such progressive initiatives.

For example, recent legislation, enabling multiple, local jurisdictional bonding compacts and authorities to finance road-building and maintenance and other infrastructure projects, through proposed expansion of local revenue-raising authority, should, if/when implemented, help relieve the presently unsustainable burden on the State of secondary road construction and maintenance.

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Have a tax question, contact Michael Caryl.

The Fair 55 Tax Reform Plan (Part 1)

The Fair 55 Tax Reform Plan (Part 2)

The Fair 55 Tax Reform Plan (Part 3)

The Fair 55 Tax Reform Plan (Part 4)

The Fair 55 Tax Reform Plan (Part 5)

The Fair 55 Tax Reform Plan (Part 6)

The Fair 55 Tax Reform Plan (Part 7)

The Fair 55 Tax Reform Plan (Part 8)