One of the many ways in which inflation trickles down to hurt consumers is that it raises the cost of everything for government at all levels, not just for private businesses.
Private businesses have two options to tackle the problem of rising costs. They can either simply pass on the cost to consumers by raising their own prices, or they can swallow the rising cost and accept a less robust profit margin. If you’re only a consumer, and you have no role in setting the prices, it may seem as if everyone is doing the former and nobody the latter. In fact, that’s not the case.
The truth is that many businesses – especially the small, locally-owned ones – may be raising their prices, but they’re probably not raising them enough to keep up with the cost of inflation. They’re probably also doing everything they can to avoid layoffs or cut their employees’ wage and benefits, moving them ever closer to being unprofitable. Being less profitable is still a better option than simply closing for good.
Governments operate a little differently.
For one, when their costs go up, they don’t have the option of reducing their profit margin. Instead, they face two different choices when faced with rising costs: Raise taxes to pay for them or dramatically cut investment in services like education or public safety. Neither of these options are ever politically popular, but lately people seem more willing to accept tax increases than spending cuts, especially here in Maine, and that appears to be the route many municipalities are taking. Just like private businesses, they’re using a two-pronged strategy; though they may not be cutting spending, many of them are at least trying to be slightly fiscally responsible by avoiding increased spending.
That’s a good start, but it would be better still if municipalities could write budgets that avoided tax increases completely.
That’s especially true in Maine because the primary source of municipal tax revenue is property tax, a regressive tax that’s based on the perceived value of the property rather than one’s income. Unfortunately, increasing property taxes has much the same financial effect as raising interest rates – it not only increases the costs for businesses, it makes it harder for consumers to spend money as well. Raising property taxes right now is like a hidden interest rate hike because of how it slows down economic activity.
Fortunately, Maine has a potential solution to this problem, staring it right in the face, that neither party in Augusta seems to have recognized.
Even as towns and cities across the state face budget crunches thanks to soaring costs, the state has yet another budget surplus. Right now, both parties are mired in their usual ideological divide. Republicans want to send the surplus back to taxpayers in the form of income tax cuts focused towards lower and middle-income taxpayers. Gov. Janet Mills and majority Democrats, meanwhile, want to spend the money, because that’s what they always want to do. This time, they’re at least claiming that they’re interested in spending it on one-time expenses rather than new programs that will raise the baseline for future budgets, though that definition can tend to be in the eye of the beholder.
In any case, both sides are wrong here.
Rather than using the surplus on new spending or tax cuts, the parties should come together to craft a bipartisan plan to assist local governments. This should be a priority that both sides should embrace. Republicans can call it a tax cut, since it will help stave off property tax hikes; Democrats can frame it as a new investment in local governments. It would be hard for Democrats, who consistently characterized cuts in revenue-sharing as a property tax increase when Paul LePage was governor, to reject something like this out of hand with a straight face.
It shouldn’t be a one-time special program, either. It should be established as a source of continuing assistance whenever certain conditions are met. These should include interest rates rising above a certain level in a certain time period, paired with a state budget surplus. Moreover, the conditional aid should come with strings attached: if a town accepts it, it can’t raise property taxes that year. With the economy in such an uncertain state, now is the time for legislators to think outside the box and forge innovative solutions, rather than retreating to their usual ideological corners.
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