A consistent theme emerged over the past month as legislators held public hearings on Gov. Paul LePage’s two-year budget proposal: opposition to a budget that scales back or cuts out key state programs that offset local property taxes.

Now that those hearings are done, it falls to lawmakers to deal with the fallout and determine which parts of LePage’s budget to keep in the final package they negotiate and which parts to scrap. If they reject the governor’s money-saving measures, they’ll have to find their own way to balance the budget.

“These are very troubling proposals that have come from the governor,” said Rep. Peggy Rotundo, D-Lewiston, the House chairwoman of the budget-writing Appropriations Committee. “Our job ahead of us is to find alternatives to these proposals. How we’re going to resolve this, I don’t know yet.”

Two years ago, lawmakers in the Republican-controlled 125th Legislature included major tax reductions in the two-year budget they approved. They cut the top individual income tax rate to 7.95 percent from 8.5 percent and eliminated state income taxes for 70,000 low-income earners. And they doubled the estate tax exemption. Starting this year, the first $2 million of a deceased person’s estate is exempt from the tax, double the size of the previous $1 million exemption.

The income and estate tax reductions, which took effect at the start of the year, account for about $400 million of the $880 million gap LePage’s proposed budget is meant to fill, according to a September 2012 analysis by the Bureau of the Budget.

While LePage has said he’s opposed to raising state-level taxes, will the Legislature slip in some revenue-raising changes as an alternative to his budget proposals?

Budget dilemma

LePage submitted a budget package to the Legislature in January that proposed a two-year suspension of the state’s revenue sharing program, which, when fully funded, sends 5 percent of state sales and income tax receipts to municipalities as a way to keep property taxes down. The move would save the state $198 million.

The budget proposal also shrinks two major property tax relief programs and limits their benefits to residents 65 and older.

Scaling back the circuit breaker program, which offers 200,000 low-income homeowners and renters a maximum property tax or rent refund of $1,600 a year, would save the state $73.4 million over the next two years. And eliminating the $10,000 homestead exemption for those under age 65 — through which anyone who has owned a home for a year doesn’t pay tax on the first $10,000 in property value — saves $9.1 million in the two-year budget cycle that starts July 1.

Under the LePage plan, the homestead exemption would double, to $20,000 for older residents.

“Generally, there was dissatisfaction with some of the impacts on local communities,” Sen. Patrick Flood, R-Winthrop, an Appropriations Committee member, said of the budget hearings. “It didn’t seem to matter where somebody lived. We have to find ways to deal with that.”

The Taxation Committee voted earlier this week to drop the proposed circuit breaker and homestead exemption cuts from the budget, and the committee voted 6-3 Friday against the revenue-sharing suspension.

“It’s been very clear to me that the governor’s proposal is a major property tax shift, that the state already relies on property taxes too much, and that property taxes are the most regressive, unfair of taxes,” said Rep. Adam Goode, D-Bangor, the Taxation Committee’s House chairman.

While Republicans on the panel supported the revenue-sharing suspension in Friday’s vote, they pledged to work with others on the committee to devise an alternative, rather than pass that cut on to municipalities.

“I don’t want to be shifting taxes onto the property owners. Neither does the governor,” said Rep. Gary Knight, R-Livermore Falls, the committee’s ranking Republican. “This isn’t something anybody wants to do, but constitutionally we have to have a balanced budget.”

That means if the committee restores revenue sharing, it has to devise another way to find $198 million for the two-year budget.

Filling the hole

During budget hearings, legislators heard repeated suggestions to raise statewide taxes — such as sales, lodging or tobacco taxes — rather than pass cuts on to municipalities where local leaders say they’ll be forced to raise property taxes.

“Everyone, Republicans and Democrats on this committee, understands that revenue needs to be discussed,” Rotundo said.

Maine Revenue Services has crunched the numbers for a variety of possible state tax increases, said Mike Allen, associate commissioner for tax policy.

Hiking the sales tax from 5 percent to 6 percent would generate $163 million more in revenue for the state during the first year of the coming two-year budget cycle, he said. The 6 percent rate would tie Maine with 12 states for the 16th highest sales tax in the nation, up from its rank of 31, according to the Tax Foundation.

Boosting Maine’s lodging tax to 10 percent from its current 7 percent level would raise $20.3 million more in revenue for the coming fiscal year, Allen said. In New England, a 10 percent state tax on hotel stays would place Maine in the middle of the pack, behind Connecticut (15 percent) and Rhode Island (12 percent) and ahead of New Hampshire (9 percent), Vermont (9 percent) and Massachusetts (5.7 percent), according to the National Conference of State Legislatures.

Raising the meals tax to 10 percent from 7 percent would direct $72 million more to state coffers for the first year of the coming biennium, according to Allen.

And restoring the top income tax rate to 8.5 percent for those earning $100,000 or more, as one bill proposes, raises $25 million annually, he said.

Some of those estimates, along with the state’s entire revenue outlook, could change at the start of May when Maine’s Revenue Forecasting Committee releases new projections for state tax collections.

For Goode, the answer to offsetting the $198 million revenue sharing gap could lie in a series of revenue-raising bills to be introduced in the coming weeks that propose sales, income, cigarette and lodging tax hikes, often to pay for specific programs.

“The state has an $800 million gap,” Goode said, referring to the structural gap between revenues and expected expenditures that’s determined before the governor refines his budget proposal. “We can either expect municipalities and taxpayers to deal with it, or we can do the dirty work ourselves.”

For Republicans, however, the “dirty work” is less likely to involve state tax increases.

“I don’t subscribe to that being the only way to address the problem,” said Knight. “I would suggest there are myriad potential ways to address it. We could continue to look for inefficiencies in government overall.”

Two decades ago, Maine’s last Republican governor, working with a Democratic Legislature, faced a budget gap in the midst of a recession. Gov. John McKernan and lawmakers agreed to a temporary solution that ended up lasting a decade, crafting a budget that raised the sales tax to 6 percent in 1991.

The rate dropped to 5.5 percent in 1998 under a formula in state law that lowered the tax when year-over-year revenues grew by 8 percent. And it dropped back to 5 percent in 2000 — nine months later than it was supposed to under the formula — as part of a state budget deal.

Whether something similar emerges as the solution this year, when a Republican governor and Democratic Legislature again face a difficult budget, is up in the air. The only certainty, said Flood, is that crafting a budget won’t be easy.

“Clearly, the options are many and are all terrible,” he said. “What I’ve been trying to convince my colleagues of is to have very low expectations and to expect that by the end of May, everybody in the State House is going to be pretty miserable. We’re going to have to do uncomfortable and difficult things.”

Matthew Stone is a reporter in the BDN’s State House bureau.