Maine Dems Propose Using a Local Option Sales Tax to Fund Affordable Housing Initiatives

A group of Maine Democratic lawmakers have introduced a bill that would allow municipalities to adopt a local option sales tax to fund affordable housing initiatives.

If approved, this law would give cities and towns the option of imposing a two percent sales tax on the cost of hotel rentals.

While the majority of revenue generated would be returned to municipalities, 15 percent would be reserved for the Maine State Housing Authority and administrative costs.

To opt into this program, residents would need to approve of the sales tax in a referendum vote. To be valid, the total number of votes cast would need to be at least 20 percent of the total number of ballots submitted in the municipality during the most recent gubernatorial election.

Participating municipalities would only be allowed to use their share of the revenue collected for qualifying affordable housing programs.

For the purposes of this bill, a “program for affordable housing” is defined as one of three things: (1) a housing development that is “wholly or partly” subsidized by municipal funds where at least half the units are affordable, (2) rental assistance for lower and moderate income households, or (3) another program that provides “assistance for or support[s] affordable housing.”

The 15 percent allocated toward the Maine State Housing Authority would be reserved for affordable housing and rental programs in rural areas.

A small fraction of the funds collected could be spent on administrative costs — either two percent of the total revenue generated or the actual expenses, whichever is less.

In any municipality that approved them, local option sales taxes would take effect on the first day of the first month beginning 120 days after the referendum in which they were passed.

This proposal, LD 632, was sponsored by Rep. Charles A. Skold (D-Portland) and cosponsored by Rep. Michael F. Brennan (D-Portland), Rep. Janice S. Dodge (D-Belfast), Speaker of the House Ryan D. Fecteau (D-Biddeford), Rep. Gary Friedmann (D-Bar Harbor), Rep. Cheryl A. Golek (D-Harpswell), Rep. Tavis Rock Hasenfus (D-Readfield), Rep. Ann Higgins Matlack (D-St. George), and Rep. Ambureen Rana (D-Bangor).

A public hearing for LD 632 has been scheduled for March 12 at 1pm in State House Room 127. Testimony may also be submitted online at www.mainelegislature.org/testimony.

Click Here for More Information on LD 632

Another Democrat-led bill seeks to impose a local option sales tax on prepared food and living quarter rentals to fund a property tax stabilization program for Maine’s seniors.

Under this bill, those granted property tax stabilization would not see their property tax bills further increase. Whatever amount was owed for the year in which stabilization was requested is what the homeowner would continue to pay going forward.

Because this would inevitably result in a loss of revenue to municipalities, the measure would grant them the authority to establish a one percent local option sales tax on lodging and prepared food.

Cities and towns that exercise this option would, in turn, only be permitted to use the money generated by this tax to cover the stabilization program’s cost.

[RELATED: Maine Lawmakers Again Consider Stabilizing Seniors’ Property Taxes — Here’s How They Plan to Fund It.]

Allowing municipalities to adopt a local option sales tax is not a new concept in Maine, but previous attempts to pave the way for such policies have been met with resistance.

In response to a bill brought forward in 2019, multiple Maine-based think tanks issued reports denouncing local option sales taxes.

A policy brief published by the Maine Policy Institute argued that these taxes “would alter consumer behavior to hurt Maine businesses.”

Evidence included in the report demonstrated that local option sales taxes increase “cross-border shopping from high-tax jurisdictions to low-tax jurisdictions by 10 to 14 percent.”

Because New Hampshire imposes no sales tax, Maine businesses already lose customers to their competitors across the border, and the Maine Policy Institute suggested that the implementation of a local option sales tax would only exacerbate this phenomenon.

“Per capita retail sales in New Hampshire border counties ($19,644) outperform per capita retail sales in Maine border counties ($11,962) by nearly $7,700 per person,” the think tank reported.

Although the local option sales tax included in the recently introduced legislation would apply only to lodging, the tax burden could still be expected to fall largely on Mainers, not tourists.

According to the Maine Policy Institute’s 2019 report, “Mainers account for about 70 percent of meal sales and 30 percent of lodging sales statewide.”

This report also shows that the sales taxes, in general, are regressive, as the “lowest 20 percent of income earners in Maine pay an effective sales and excise tax rate of 6.1 percent whereas Maine’s top earners pay just 0.7 percent.”

Some similar arguments were advanced at the time by the Maine Center for Economic Policy (MECEP).

In a 2019 policy brief, MECEP argued that local option sales taxes “disproportionately affect lower-income Mainers” and “deepen economic inequality.”

MECEP also argued that all municipalities would not benefit equally from local option sales taxes, as just ten localities are responsible for 45 percent of the state’s meals and lodging tax revenues while being home to just 16 percent of the population.

“Local option sales taxes are a tool that would empower some communities while doing little — or even nothing — for others,” MECEP wrote. “That’s because such taxes are feasible for those municipalities with enough commerce to raise meaningful revenue but not for those communities, often rural ones, without such a sales base.”

According to the Tax Foundation — a Washington D.C. based think tank — local option sales taxes first emerged during the Great Depression and were intended to increase the amount of money being collected by state and local governments, as well as to help diversify local revenue structures.

The Tax Foundation suggests that today, local option sales taxes help “counties and cities with growing commercial activity and personal consumption” to achieve greater financial stability and independence by establishing an additional source of local revenue.

Disclaimer: The Maine Wire is a project of the Maine Policy Institute.