With the state cutting back on financial support for Maine’s towns, those communities essentially have two options — raise local property taxes or cut services. Bangor City Councilor Ben Sprague is suggesting another way — local option taxes.

He plans to present a proposal to the city’s finance committee next month in hopes of gaining fellow councilors’ support for local option taxes. But for any such taxes to be allowed, the Legislature must change state law.

“If there was ever a moment when it was right, it would be now when [the Legislature] is bogged down in the revenue sharing debate and nonprofit taxation debate,” Sprague said last week. “A local sales tax option could move us past both of those things.”

Local option taxes have been around for decades, and three-quarters of states already allow them. Maine is one of just 12 states where municipalities or counties don’t have the authority to levy local option sales taxes and one of just five states that don’t allow local hotel taxes. Thirteen states allow local income taxes.

Local option taxes grew in popularity in the 1970s and 1980s as states cut back funding to local governments while also increasing requirements, often called unfunded mandates.

In 1970, 23 states allowed local option sales taxes, and 10 authorized local income taxes, according to the National Conference of State Legislatures. User fees expanded even more quickly. During the same period, reliance on income taxes to fund government was on the rise, going from 19 percent of state tax collections in 1970 to 31 percent in 1994, the group reported in a 1997 guide to local option taxes.

Property tax pressures

During this period, from the 1970s to the 1990s, pressure to reduce property taxes — the primary revenue source for Maine’s municipal governments — grew on three fronts. First, taxpayer revolts. The best known is Proposition 13, passed by California voters in 1978, which capped property taxes and restricted state tax increases. Measures such as these first gained popularity in the west and slowly spread across the country, with New England states last and most resistant to them. Voters in Maine have twice rejected a Taxpayer Bill of Rights, which would have required voter approval for tax and fee increases.

Most states now have some type of limit on property taxes and their growth. In Maine, voters passed LD 1 in 2004, which set limits on growth of local property tax levies in exchange for the state increasing education funding to 55 percent. Town residents, however, can — and do — vote to exceed the tax increase limits.

The second front was school funding equity. In several states, courts found that school funding systems — heavily reliant on property tax collections, which vary widely based on communities’ property values — were unfair. This was usually remedied by increasing state funding for schools.

The third front for reducing property taxes was rebalancing unbalanced tax structures. As we know in Maine, the state sales tax’s heavy reliance on vehicle sales and construction materials means a drop in revenue during economic downturns. And, when the state has less money, it usually passes costs on to municipalities, which raise property taxes to balance their budgets.

Hence, the growing use of local option taxes, which are much more prevalent in the tax-cap happy West and a more recent phenomenon in New England, with Massachusetts, Rhode Island and Vermont allowing local hotel taxes.

Local option taxes

Thirty-eight states allow local option sales taxes, with 22 allowing both municipalities and counties to levy such taxes. Most states limit the rates that can be assessed beyond the state sales tax, ranging from an additional 0.25 percent in Mississippi to 6.625 percent in Missouri; 1 percent is a common limit. The taxes are often earmarked for specific purposes, such as education and tourism.

“Among the advantages to local option taxes is that they provide cities and towns with greater revenue diversification and autonomy,” the Connecticut Office of Legislative Research wrote in a 2013 research report. “They can reduce a municipality’s reliance on the property tax and state aid and potentially shift some of the tax burden off of residents and onto nonresidents who come into town to work, shop or vacation.”

Disadvantages of such taxes include creating disparities among cities and towns and increasing administrative and compliance costs for taxpayers, according to the Connecticut report.

Connecticut lawmakers have not approved local option taxes though they have considered them. A similar effort in Kentucky failed in the state Senate this month, although it had been passed by the House and was supported by Gov. Steve Beshear, a Democrat. A poll in Kentucky found that 63 percent of residents supported the tax plan, which would amend the state constitution so town residents could vote on whether to levy a local sales tax of up to 1 percent.

In Maine, past efforts to begin the local option tax process — municipal votes would have been required to levy the taxes — have all failed in the Legislature. In 2013, the House passed a proposal to allow municipalities to assess sales taxes of up to 5 percent, but the Senate rejected it by a resounding margin.

This year, Sen. Linda Valentino, D-Saco, has sponsored LD 594, which would allow towns to assess a local sales tax of up to 1 percent. Large items, such as cars and household appliances, would be exempt and the tax could be seasonal.

Right time for Maine?

Valentino represents Old Orchard Beach, which sees its year-round population of 8,000 swell when 100,000 people visit the oceanfront town in the summer. These visitors put a large burden on the town’s services. A local sales tax would enable the town to get revenue from these visitors to support local services, which are now paid for largely by residents.

The 1 percent tax Valentino’s bill would allow would generate about $16 million in tax revenue annually for Bangor, Sprague has calculated, allowing Bangor to lower property taxes by nearly 29 percent.

This could be the year that local option taxes gain support. In his two-year budget, Gov. Paul LePage has proposed to reduce, then eliminate municipal revenue sharing, a decades-old program that allocates 5 percent of state sales tax revenues to municipalities in recognition of the services they provide. Cuts to — or elimination of — revenue sharing especially hurts service-center communities, home to social service, retail and nonprofit entities used by people who live beyond the host community’s boundaries and don’t directly pay taxes to support the infrastructure they require.

To make up for the loss of money from revenue sharing, the governor has proposed that towns assess property taxes on nonprofit entities. No state taxes nonprofits. Entities such as homeless shelters, hospitals, colleges and youth centers provide needed social services that benefit the community and state. If they have to pay property taxes, they will compensate by providing fewer services or raising fees.

Local option taxes could offer an alternative for communities, especially service centers such as Bangor, Portland and Caribou, to maintain services for their residents and visitors.

“I don’t like the idea of having an extra tax in Bangor,” Sprague said, “but with the continued challenges and the plan to ultimately eliminate revenue sharing, I know that we need to do something to diversify our tax base.”