Proposal would let towns tack 1% municipal-services tax onto existing local-option levies; $3M seed proposed for town-highway grants

Legislative counsel outlined a draft allowing municipalities that currently assess one or more local option taxes to impose an additional 1% local option municipal services tax on one or more of those taxes, with the goal of creating a steady revenue stream for town highways and related municipal transportation needs.

According to the draft read to the committee, 50% of the non-aviation portion of receipts from that additional tax would be returned to the municipality where collected and available for municipal services (not education). Forty percent would be deposited into a new Local Option Municipal Transportation Special Fund managed by the Agency of Transportation, and any remaining revenue would be deposited into the pilot special fund. The draft preserves federal restrictions that require sales tax on aviation jet fuel to be redirected for aviation purposes.

Counsel said the new fund would provide additional state aid under section 306 (state aid for town highways) and that revenues from the new fund would be distributed as additional appropriations rather than reduce existing base appropriations or be subject to the current inflator applied to existing statutory appropriations.

The draft also includes a one-time appropriation: $3,000,000 transferred from the pilot special fund to seed the new transportation special fund and provide initial grants for class 1, 2 and 3 town highway programs. Legislative counsel told members that the $3,000,000 transfer is intended as a start-up appropriation and confirmed it is a one-time transfer for the coming fiscal year.

Members raised several substantive questions: whether towns would adopt the extra 1% (the revenue is hypothetical until towns opt in), whether the distribution formula perpetuates structural inequities in current town-highway allocations, and whether taking funds from the pilot special fund is the proper use of that money. Several members urged the committee to get feedback from municipal leaders and the League before finalizing the proposal.

The committee also debated short-term fixes (use of general-fund surplus or a purchase-and-use revenue proposal) versus longer-term reforms such as vehicle-miles-traveled fees. Members agreed the proposal could be a component of a multi-source revenue strategy but is unlikely alone to solve long-term funding shortfalls.

Committee members requested technical follow-up with the Tax Department, municipal representatives (including towns considering local-option taxes), and the League of Cities and Towns. Counsel and staff were asked to refine draft language and return with fiscal analysis and municipal feedback.