A New Local Option Sales Tax Proposal Would Let Maine Cities and Towns Keep All of What They Take

Yet another bill aiming to allow Maine municipalities to adopt a local option sales tax has been introduced in Augusta just days after the legislative committee that reviews tax proposals rejected a similar “revenue raiser” for towns and cities.

Unlike the previous local option sales tax proposals considered by the Taxation Committee, however, LD 1641 would allow municipalities to retain a hundred percent of the revenue it generates.

Additionally under this bill, no restrictions would be placed on how cities and towns could use the proceeds from the tax, meaning that municipalities could direct the funds toward any aspect of their budgets that needed to be bolstered.

LD 1641 — sponsored by Sen. Tim Nangle (D-Cumberland) — would give localities the option of adopting via referendum a local option sales tax of up to half of one percent on the sale of any taxable good or service.

Any tax adopted under the auspices of this law would need to be applicable on a year-round basis, meaning that cities and towns could not pursue seasonal sales taxes, targeting out-of-state tourists instead of residents.

The Taxation Committee has not yet scheduled a public hearing for this bill, but it is expected that one will be placed on the calendar in the near future.

Click Here for More Information on LD 1641

Earlier this month, the Taxation Committee unanimously rejected LD 632, which would have created a two percent local option sales tax on hotels to support affordable housing.

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.

[RELATED: Committee Unanimously Rejects Two New Hotel Taxes, But Others Still On the Table]

At the end of March, Taxation Committee members also voted on a similar bill that would have given municipalities a great deal of leeway with respect to how they spent the revenue generated from the sales tax.

Furthermore, unlike LD 632, this bill would allow municipalities to retain 90 percent of the revenue collected through this tax, as opposed to 85 percent.

Lawmakers on the Taxation Committee were divided over this proposal, with all Democratic members voting in support of an amended version of the bill alongside Rep. Russell P. White (R-Ellsworth). The remaining Republicans on the Committee all voted against the proposal.

The Committee, however, has not yet reported out their official recommendation to the Legislature, so lawmakers could potentially change their position on this bill in the meantime.

This also means that the amended text supported by the majority of Committee members has not been made readily available online, so it is not clear exactly what policy they have moved to advance.

[RELATED: Towns and Hospitality Industry Debate Dueling Proposals for a 2% Local Option Sales Tax on Lodging in Augusta]

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.

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.”

[RELATED: Maine Dems Propose Using a Local Option Sales Tax to Fund Affordable Housing Initiatives]

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.

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