Could Maine counties spend property tax revenues from unorganized-territory TIF districts on county-wide economic development that would benefit organized areas, without violating Article IX, Section 8 of the Maine Constitution?

Subject

Whether L.D. 2229, which would have authorized county commissioners to use property tax revenues generated from tax increment financing districts within unorganized territory to fund "county economic and community development," violated Article IX, Section 8 of the Maine Constitution.

Currency note

This opinion was issued in 2008. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Plain-English summary

Most Maine TIFs are deals between a municipality and a developer. The municipality designates a TIF district, and the property tax revenue generated by new development inside the district gets earmarked, in whole or in part, to pay the developer or to fund infrastructure related to the development. In counties that include unorganized territory (areas not part of any organized municipality), the county commissioners can act as the "municipality" for TIF purposes and create a TIF district inside that territory.

L.D. 2229 would have widened the menu of allowable uses for unorganized-territory TIF revenues. Instead of being limited to "project costs" tied to the TIF itself, the bill would have let county commissioners spend the revenue on "county economic and community development" as defined in 30-A M.R.S.A. § 125(1)(A), meaning, in practice, employment-creation or preservation activities anywhere in the county. The Joint Standing Committee on Taxation asked the AG whether that violated Article IX, Section 8 of the Maine Constitution, which requires that taxes on real and personal property be assessed equally.

AG G. Steven Rowe gave a two-part answer. First, the bill is constitutional to the extent it requires that the spending result in a "special benefit" to the unorganized territory whose taxes are being spent. Second, the bill could violate Article IX, Section 8 to the extent it allowed unorganized-territory TIF revenues to be spent on activities that produced no special benefit to that territory. The AG recommended that, if the Legislature intended to enact L.D. 2229, it amend the bill to expressly require that authorized spending result in a special benefit to the unorganized territory.

The constitutional doctrine the AG relied on was set out by the Maine Law Court in McBreairty v. Commissioner, 663 A.2d 50 (Me. 1995). McBreairty allows the Legislature to create separate tax districts and tax them differently as long as the assessed taxes produce a "special benefit" to the taxed district. The Court has been somewhat flexible: in McBreairty itself the Court held that the unorganized territory's funding share of the Land Use Regulation Commission was constitutional because LURC delivered most of its services in the unorganized territory. But the Court has also struck down arrangements where tax revenues from one district were spent in a way that did not benefit the taxed district, as in Delogu v. City of Portland, 2004 ME 18, 848 A.2d 33.

L.D. 2229, as drafted, would have allowed county commissioners to spend unorganized-territory TIF taxes on county-wide economic development including in organized areas. The AG read McBreairty and Delogu as making that constitutionally vulnerable, and recommended a drafting fix tying the spending to special-benefit purposes.

Common questions

Q: What is "unorganized territory" in Maine?

It is the part of Maine that does not lie inside any incorporated city, town, or plantation. There is no municipal government for these areas. Counties act as the local government, and the State levies and collects property taxes through the unorganized territory tax district under 36 M.R.S.A. §§ 1601-1611.

Q: What does Article IX, Section 8 actually require?

It requires that all taxes on real and personal property "shall be apportioned and assessed equally according to the just value thereof." The Law Court has read this to allow separate tax districts taxed at different rates, so long as the taxes produce a "special benefit" to the taxed district. McBreairty v. Commissioner, 663 A.2d 50 (Me. 1995). It is the spending side, not just the assessment side, that matters when separate districts are involved.

Q: What is the "special benefit" requirement?

When taxes are levied only on a separate district, the revenue must be spent in a way that produces a special benefit to that district. The Court in McBreairty allowed Land Use Regulation Commission funding to come 10% from unorganized territory taxes because LURC's services flowed predominantly to the unorganized territory. The arrangement passed because the spending was tied to benefits to the taxed district.

Q: How could L.D. 2229 have been fixed?

By amending the bill to require that any "county economic and community development" spending using unorganized-territory TIF taxes produce a special benefit to the unorganized territory in that county. That ties the spending to the constitutional standard.

Background and statutory framework

Tax Increment Financing in Maine is governed by 30-A M.R.S.A. §§ 5221-5235. A municipality designates a TIF district, identifies the existing assessed value as the baseline, and earmarks the property tax revenue generated by new development above that baseline. Allowable "project costs" under § 5225 include improvements inside the TIF district, certain off-district improvements directly related to the TIF, and certain economic-development, environmental, or training expenses within the municipality.

For unorganized territory, § 5235 lets the county act as the municipality for TIF purposes. The county commissioners take the role of the municipal legislative body and have to consider whether the proposed district will contribute to the economic growth or well-being of the unorganized territory or to the betterment of the health, welfare, or safety of its inhabitants.

Article IX, Section 8 provides that "[a]ll taxes upon real and personal estate, assessed by authority of this State, shall be apportioned and assessed equally according to the just value thereof." The Law Court interprets this to allow separate tax districts taxed at different rates, with a constitutional check that the taxes produce a special benefit to the taxed district. See McBreairty v. Commissioner, 663 A.2d 50, 54 (Me. 1995).

This 2008 opinion does not break new ground. It applies McBreairty's special-benefit framework to a new statute that on its face permits unorganized-territory TIF revenues to be spent without ensuring that benefit, and recommends a drafting fix.

Citations

Constitutional provision:
- Maine Constitution, Article IX, Section 8 (equal taxation)

Statutes:
- 30-A M.R.S.A. § 125(1)(A) (county economic and community development, defined)
- 30-A M.R.S.A. §§ 5221-5235 (TIF)
- 30-A M.R.S.A. § 5223(2) (county TIF criteria)
- 30-A M.R.S.A. § 5225 (allowable TIF project costs)
- 30-A M.R.S.A. § 5227 (return of property tax to developer)
- 30-A M.R.S.A. § 5235 (county acting as municipality)
- 36 M.R.S.A. §§ 1601-1611 (unorganized territory tax district)
- 36 M.R.S.A. § 578 (Tree Growth Tax Law)

Cases:
- McBreairty v. Commissioner, 663 A.2d 50 (Me. 1995), separate-district taxation requires special benefit
- Sawyer v. Gilmore, 109 Me. 169 (1912), equal assessment plus distribution to subset is not "in itself fatal"
- Delogu v. State of Maine, 1998 ME 246, 720 A.2d 1153, Bath / BIW TIF reimbursement upheld
- Delogu v. City of Portland, 2004 ME 18, 848 A.2d 33: Portland Property Tax Relief Program struck down

Source

• Landing page: https://www.maine.gov/legis/lawlib/lldl/agops/agops.htm
• Original PDF: https://lldc.mainelegislature.org/Open/AG/Opinions/2008/ag_20080324.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

STATE OF MAINE
OFFICE OF THE ATTORNEY GENERAL
6 STATE HOUSE STATION
AUGUSTA, MAINE 04333-0006

G. STEVEN ROWE
ATTORNEY GENERAL

March 24, 2008

The Honorable Joseph C. Perry, Senate Chair
The Honorable John F. Piotti, House Chair
Members of the Joint Standing Committee on Taxation
123rd Maine Legislature
10 State House Station
Augusta, ME 04333-0100

Re: L.D. 2229, An Act to Expand the Economic Development Benefit of Tax Increment Financing in Counties that Include Unorganized Territories

Dear Senator Perry, Representative Piotti, and Members of the Joint Standing Committee on Taxation:

In your letter of March 13, 2008, you asked for an opinion concerning the constitutionality of L.D. 2229, An Act to Expand the Economic Development Benefit of Tax Increment Financing in Counties that Include Unorganized Territories. This bill would authorize county commissioners to use property taxes generated from tax increment financing ("TIF") districts within the unorganized territory of that county to fund "county economic and community development," as defined in 30-A M.R.S.A. § 125(1)(A).

It was suggested to the Taxation Committee that allowing county commissioners to use property taxes collected from TIF districts within the unorganized territories to support county-wide economic development may violate Article IX, Section 8, of the Maine Constitution when property taxes from taxpayers in the organized areas of the county are not contributing to such expenditures. Your letter asked for our opinion as to whether Article IX, Section 8, presents a barrier to the enactment of L.D. 2229 under these circumstances.

Based on the analysis described below, we believe that a court would likely conclude that the bill satisfies Article IX, Section 8, when the county's expenditure of property taxes from the unorganized territory for "county economic and community development" results in some special benefit to the unorganized territory. However, we also believe that a court may well conclude that L.D. 2229 violates Article IX, Section 8, to the extent that it permits property taxes from the unorganized territory tax district to be spent without providing a special benefit to the unorganized territory. We believe that the bill would more likely survive a court challenge under Article IX, Section 8, if it expressly required that the authorized spending by the county commissioners for "county economic and community development" must result in a special benefit to the unorganized territory within that county.

Background

As your letter states, TIF districts are ordinarily negotiated by a municipality and a developer to provide an incentive to economic development within that municipality. The specific requirements of TIFs are set out in Maine statutes. See, e.g., 30-A M.R.S.A. §§ 5221-5235. Typically, as your letter also notes, a portion of the property taxes derived from the TIF development district is returned to the developer, 30-A M.R.S.A. § 5227.

Authorized expenditures ("project costs") under a TIF are set out in 30-A M.R.S.A. § 5225 and include certain costs of improvements made within the TIF district. In addition, certain costs of improvements made outside the TIF district are allowed when they "are directly related to or are made necessary by the establishment or operation of the district." 30-A M.R.S.A. § 5225(1)(B). Certain costs "related to economic development, environmental improvements or employment training within the municipality" are also allowed. 30-A M.R.S.A. § 5225(1)(C). Generally speaking, allowable project costs do not include the cost of facilities, buildings, or portions of buildings used predominantly for the general conduct of government or for public recreational purposes. 30-A M.R.S.A. § 5225(1). The Commissioner of the Department of Economic and Community Development is charged with reviewing proposed project costs to ensure compliance with 30-A M.R.S.A. § 5225. See 30-A M.R.S.A. § 5225(1).

For the purposes of the TIF law, a county may act as a municipality for the unorganized territory within that county and may designate TIF districts within the unorganized territory in that county; when it does so, the county commissioners act as the municipality and as the municipal legislative body. See 30-A M.R.S.A. § 5235. As a result, Section 5223(2) requires the county commissioners to consider whether the proposed district or program will contribute to the economic growth or well-being of the unorganized territory or to the betterment of the health, welfare or safety of its inhabitants. L.D. 2229 would expand the range of allowable "project costs" under Section 5225(1) by authorizing county commissioners to use property tax revenues generated from a TIF district within the unorganized territory of that county to fund "county economic and community development," as defined by 30-A M.R.S.A. § 125(1)(A). "County economic and community development" means "assisting or encouraging the creation or preservation of new or existing employment opportunities for residents of a county, or any of its municipalities, through one or more" designated activities.

Analysis and Discussion

Under Article IX, Section 8, of the Maine Constitution, any and all taxes assessed upon real and personal property by the State must be assessed "on all of the property of the State on an equal basis." McBreairty v. Commissioner, 663 A.2d 50, 54 (1995), quoting Opinion of the Justices, 146 Me. 239, 240, 80 A.2d 421 (1951). Notwithstanding that general principle, the Legislature may create separate tax districts (such as the unorganized territory tax district, see 36 M.R.S.A. §§ 1601-1611) and tax those districts differently as long as "the assessed taxes result in some special benefit to the taxed district." McBreairty, 663 A.2d at 54. The Court explained that different tax rates for separate tax districts satisfies Article IX, Section 8, "[a]s long as all property within a given district is assessed at a uniform rate, and the benefit from the tax is for a public purpose within the district." Id. (emphasis added). Thus, the Court in McBreairty and other cases has suggested that, to satisfy Article IX, Section 8, property tax revenues from a separate taxing district must be expended for undertakings that result in a "special benefit" to that taxing district. See also Opinion of the Justices, 383 A.2d 648, 652 (1978).

In McBreairty, the Law Court considered several claims that statutes involving the taxation of property within the unorganized territory violated Article IX, Section 8. One of the issues involved the funding for the Land Use Regulation Commission ("LURC"). At that time, 10% of LURC's funding came from the unorganized territory tax district, and 90% came from the State's General Fund. According to the Court, LURC provided roughly 9% of its services to organized areas, and no property tax revenues from those organized areas were being assessed to fund LURC. Id. at 53-54.

The Plaintiffs in McBreairty (property owners from the unorganized territory) contended that such an arrangement violated Article IX, Section 8, because property tax revenues from the unorganized territory were being used to fund an agency (LURC) that provided services to both the unorganized territory and the organized areas. In other words, the Plaintiffs claimed that the statute imposing property taxes on them violated Article IX, Section 8, because a portion of their property taxes was being used to pay for services in the organized areas, while property owners in the organized areas were not similarly taxed.

The Court rejected this argument, pointing out that 91% of the work done by LURC took place in the unorganized territory, and only 10% of LURC's budget came from property taxes from the unorganized territory. McBreairty, 663 A.2d 53-54. "As long as the tax revenues LURC receives from the [unorganized territory tax district] are used to fund its services in the unorganized areas, no constitutional violation occurs." Id. at 54.

The Plaintiffs in McBreairty also contended that a provision in the Tree Growth Tax Law violated Article IX, Section 8. To encourage forest landowners to continue the forest use of their land, that law allowed all landowners to obtain reduced valuation rates, set by the State Tax Assessor, on their forest property. This reduced the owners' real estate taxes and resulted in the local taxing authority receiving less revenue than if the reduced valuation rates were not imposed. The State reimbursed a "municipality actually levying and collecting municipal property taxes … [for] 90% of the per acre tax revenue lost as a result [of the lower valuation rates]." 36 M.R.S.A. § 578(1) (1990 & Supp. 1994). However, the unorganized territory did not receive any reimbursement from the State under this law.

The Court rejected the Plaintiffs' contention that the Tree Growth Tax Law violated Article IX, Section 8. According to the Court, the plaintiffs' argument concerned only the distribution of tax revenues, not the apportionment or assessment of taxes. Id. at 54-55. The Court explained that:

[a]lthough Article IX, Section 8, requires equal assessment of property taxes, it does not apply to the manner in which the government chooses to spend tax revenues. There is no requirement that the Legislature distribute tax revenues equally, see Opinion of the Justices, 339 A.2d 492, 510 (Me. 1975) (legislative scheme for distribution of revenues lies outside scope of Me. Const. art. IX, § 8), and the method of distribution is not a factor for us to scrutinize when we consider a tax statute's constitutionality. Sawyer, 109 Me. at 174-76.

Id. at 55. The failure of the State to provide forest land reimbursements to the unorganized territory did not violate Article IX, Section 8, the Court held. Id.

Thus, the Law Court has held that certain spending decisions of the State and municipalities are immune from Article IX, Section 8, inquiry. See McBreairty 663 A.2d at 55. See also Delogu v. State of Maine, 1998 ME 246, ¶¶ 17-18, 720 A.2d 1153, 1156 (City of Bath's decision to reimburse Bath Iron Works ("BIW") all the property taxes directly attributable to TIF project in Bath involving BIW did not violate Article IX, § 8); Sawyer v. Gilmore, 109 Me. 169, 174-76 (1912) (fact that tax was assessed equally on unorganized townships, cities, towns, and plantations, but distributed only to cities, towns, and plantations to fund education was "not in itself fatal"). Nonetheless, the spending decisions at issue in those cases were not identical to those presented by L.D. 2229, which could result in the expenditure of a taxing district's funds totally outside that taxing district (i.e., in organized areas of a county) on development as to which property taxpayers in the county's organized areas would not be contributing. In addition to that factual distinction, the Law Court more recently struck down the City of Portland's "Property Tax Relief Program" as violating Article IX, Section 8, even though the City presented it as a tax spending measure. Delogu v. City of Portland, 2004 ME 18, ¶¶ 21-23, 30, 848 A.2d 33, 39, 40.

We are not aware of any Maine case that addresses the precise issue raised by L.D. 2229. Applying the general principles discussed above, property tax revenues from a separate taxing district like the unorganized territory need to be expended for undertakings that result in a "special benefit" to that taxing district. Therefore, we believe that a court would likely conclude that the bill satisfies Article IX, Section 8, when the county's expenditure of property taxes from a TIF project in the unorganized territory results in a special benefit to the unorganized territory within that county. Although a court might conclude that the spending decisions like those raised by L.D. 2229 are totally outside the purview of Article IX, Section 8 (see, e.g., McBreairty 663 A.2d at 55), we believe that a court may well conclude that L.D. 2229 violates Article IX, Section 8, to the extent that it permits property taxes from the unorganized territory tax district to be spent without providing a special benefit to the unorganized territory.

As noted above, we believe that L.D. 2229 would more likely survive a legal challenge brought under Article IX, Section 8, if it were amended to expressly require that the authorized spending by the county for "county economic and community development" must result in a special benefit to the unorganized territory within that county.

We hope that this letter is of assistance to you.

G. Steven Rowe
Attorney General