Nearly 20 years ago, state lawmakers were worried that a recently approved referendum requiring the state to spend more money on public education would lead to higher taxes on residents. So they passed a law limiting future growth of the state budget.

That spending cap, which is tied to the average personal income growth over the previous decade, never became an issue because the state ignored the voters’ demand that it cover 55% of the cost of public education.

But all that changed once the state finally reached the funding target two years ago, triggering a new limit on new spending. And that long-dormant cap could now play a big role in the negotiations over Gov. Janet Mills’ proposed $10.3 billion two-year budget and Republican demands for a smaller budget that allows for tax cuts.

Mills’ two-year budget proposal would increase state spending by $900 million, which is about $400 million more than the cap allows. It includes a wide range of priorities, from continuing support for education, pre-kindergarten programs and free community college tuition to massive investments in roads and bridges.

All of the proposed spending increases are funded by increased revenue projected by a nonpartisan group of state economists, not tax increases.

As a legislator in 2005, Mills voted for the bill that set the spending cap. But now, as governor, she is seeking to change that law to accommodate the budget proposal being reviewed by lawmakers. Republicans are hoping to leverage that cap during negotiations to reduce income or sales taxes, or both.

The spending cap debate is expected to take center stage as budget negotiations heat up in the coming weeks. It will frame every other budget decision that follows, including whether Republicans will join Democrats to pass a bipartisan budget before July 1, averting a potential government shutdown.

“We will have a candid discussion,” said Rep. Sawin Millett, a longtime Republican lawmaker from Waterford who is respected by both parties as a budget negotiator and expert. “That will be an early decision. If we agree on an alternative, it changes the overall cap.”

Democrats currently control the House and Senate, in addition to the governorship. They could pass a majority budget, without Republican support, but would need to do so before the end of this month to avoid a government shutdown. That’s because majority budgets don’t take effect until 90 days after enactment, whereas budgets enacted with two-thirds support take effect immediately after the Legislature adjourns.

Mills proposes setting a new baseline at 98% of the nonpartisan revenue projection over the next two years, which is estimated to be $10.5 billion. Updated forecasts are expected early next month. The growth cap would apply to that figure in the next budget cycle, resulting in hundreds of millions of dollars of new spending.

Spokespeople for Mills did not respond to a request to interview the governor. Spokesperson Ben Goodman said in a written statement that Mills continues to support a growth cap in the state budget, which is why she hasn’t proposed eliminating it. Instead, she wants to “modernize” the baseline to reflect the spending priorities already approved by Democrats and Republicans in recent years but that only now will be included in the growth cap.

Goodman challenged Republicans to outline which budget proposals they’d eliminate to meet the existing cap.

“If Republicans want to renege on the very commitments they previously supported, then they have an obligation to the people of Maine to clearly state what $394 million in programs and services they want to cut from the proposed budget,” he said.

“In the meantime,” he continued, “the Mills Administration believes the better approach is to modernize the cap, maintain the bipartisan commitments previously approved, which Maine people have come to rely on, and continue to address the serious challenges Maine is facing through the biennial budget process.”

Spokespeople for Democratic leadership in the Senate and House did not respond to interview requests in time for this story to discuss whether they support Mills’ approach or would rather eliminate the cap altogether.

But Rep. Melanie Sachs, D-Freeport, who co-chairs the budget-writing committee, said in a written statement that the committee will revisit “this outdated formula” in a “transparent and bipartisan manner that aims to achieve the best outcome for Maine families and communities.”

“The state is finally paying its full share for public education, helping to ensure that every Maine kid has access to an excellent education,” Sachs said. “We’ve also put a record amount in the Rainy Day Fund, fully funded municipal revenue sharing, and we’re meeting other crucial obligations. This strong fiscal management has put us in a place where we need to revisit a measure that originally passed nearly 20 years ago.”

The current growth cap was enacted in response to a successful statewide referendum in 2004 championed by the Maine Municipal Association, an advocacy group for towns and cities. It required the state to pay 55% of kindergarten through 12th grade education costs.

The following year, then-Gov. John Baldacci, a Democrat, convened a special committee to devise a plan to implement that law. The panel recommended ramping up education spending over a three-year period because of the significant increase in costs. That timeline was further delayed by the Great Recession of 2008.

At the same time, lawmakers were well aware of residents’ frustration with taxes, with one lawmaker at the time alluding to “a property tax revolt throughout the state” that would later manifest itself in two citizen efforts to limit tax increases through a taxpayers’ bill of rights.

A central theme of the 2004 campaign to have the state pay a larger share of local education costs was the argument that the measure would reduce property taxes.

In fact, that promise was embedded in the question: “Do you want the State to pay 55% of the cost of public education, which includes all special education costs, for the purpose of shifting costs from the property tax to state resources?”

The referendum passed with 55% of the vote, but it didn’t specify a funding source, leaving that to lawmakers.

Cognizant of the impact on state coffers, state lawmakers sought to cap state spending to avoid significant increases in income or sales taxes to generate more revenue to fund the voter mandate.

“Spending caps are the major provision in the bill to lower our overall tax burden,” Rep. Dick Woodbury, a Yarmouth independent who helped negotiate the law, said in a Jan. 19, 2005, floor speech. “The spending caps in this bill apply to all levels of government, and they will put pressure on every level of government toward prioritization, cost efficiency and regionalization of service delivery. The level of the spending caps we proposed is restrictive.”

Some Republicans were concerned about a provision that would allow the Legislature to override that cap with a simple majority vote, rather than a two-thirds supermajority.

House Republican leader David Bowles of Sanford said the threshold to override the cap should be higher, because Republicans and Democrats alike “have an innate ability to control ourselves, to be disciplined.”

“The override provisions are very weak,” Bowles argued on the House floor. “Most of these spending caps can be overridden very easily, and possibly they will be. And if you’re in the Legislature and there’s a vote to override, you’ll be proving correct all the people who are opposed to this legislation, and who have suggested that the spending caps did not have real meaning.”

Some of the law’s supporters now hold key positions in the Legislature. Senate President Troy Jackson, D-Allagash, and Sen. Peggy Rotundo, D-Lewiston, who co-chairs the Legislature’s budget-writing committee, both supported the 2005 bill with the spending caps. Jackson served in the House at the time, while Rotundo served in the Senate.

Last year, the state finally achieved 55% of education funding. To maintain that commitment over the next two years, Mills’ biennial budget includes an additional $101 million.

State funding for essential programs and services for kindergarten through 12th grade education accounts for 27%, or nearly $2.8 billion, of the governor’s two-year budget proposal.

Her budget proposal is a 9.6% increase over the current budget of $9.4 billion. However, the current law caps that increase at 4.31%, which is the 10-year average of personal income growth, according to the U.S. Bureau of Economic Analysis.

Sharon Huntley, a spokesperson for the Department of Administrative and Financial Services, said the baseline needs to be adjusted to account for current spending, which includes MaineCare expansion and increased rates for health care providers.

Huntley pointed to a series of bipartisan budget proposals that need to be included in the baseline, including for a senior property tax relief program created by a bill sponsored by Senate Minority Leader Trey Stewart, R-Presque Isle. That program is expected to cost $46 million over the next two years and more in subsequent years, she said.

Other bipartisan budget initiatives justifying a new baseline, Huntley said, include $200 million to expand the state’s homestead tax exemption, $112 million for free school meals and funding to maintain revenue-sharing with municipalities.

“The current cap does not take into account these bipartisan commitments in law,” Huntley said. “Without a rebase of the cap … the State would fail to meet its obligations under current law for education funding, municipal revenue sharing, property tax relief, behavioral health services, and other crucial measures that were approved, if not championed, by Republicans when they voted for the supplemental budget last year.”

The budget also changes how surplus funds are used once the state’s Budget Stabilization Fund, or rainy day fund, reaches its statutory limit of 18% of general fund revenues. DAFS Commissioner Kirsten Figueroa told the Legislature’s budget-writing committee on Feb. 8 that the fund would likely hit the limit at the end of the current fiscal year in June because of surplus money flowing into it.

Figueroa said current law is unclear about what happens with surplus funds once the statutory limit is reached, so the budget proposes sending 80% of the excess revenue to road and bridge projects, 10% to the school revolving loan fund and the rest to the state pension fund.

The proposed budget left about $6.3 million in projected revenue unallocated.

Republican leaders say they will make the spending cap central to their push for tax relief, which is also being championed by at least one Democrat. Republicans also point to the state’s historically high revenues and surplus to support the argument for tax cuts.

Assistant House Minority Leader Amy Arata, R-New Gloucester, said lawmakers can comply with the existing cap while still increasing spending by roughly $400 million and without cutting any existing programs or services. She said lawmakers, including Mills, should not renege on their past commitment to taxpayers.

“This was a promise that was made to the people of Maine back in 2005 and it took a lot of work to get to 55% of education funding, so now the people of Maine should reap the rewards of that hard work,” Arata said. “This should be a no-brainer. You can comply with the law as it stands and not have to cut anything in the existing appropriations.”

Note: This story was updated Monday, March 6, to clarify that a spokesperson for Senate Pres. Troy Jackson did respond to an interview request, but the interview could not be scheduled in time for this story.