The Taxation Committee is working on tax reform legislation that would broaden the sales tax to include more services in order to lower income and property taxes – restructuring that has failed before but could pass this time, proponents say, because the process is starting early.
The goal is to reduce the state’s income tax rate and give property tax relief through an expanded Homestead Exemption for all Maine-based homeowners and larger tax rebates for low-income owners and renters.
Those tax breaks would be funded by generating more sales taxes on currently exempt items, with the intent of “exporting” more of the state’s tax burden on the backs of tourists and part-time residents.
The committee’s two chairmen – Sen. Joe Perry, D-Penobscot County, and Rep. John Piotti, D-Unity – say they want something to present to the Legislature by the end of this week.
While many question whether such an accelerated timetable is doable, the idea is to get tax reform in the mix along with the deliberations on the state budget and bonds.
“There’s leverage on each of these pieces,” said Sen. Richard Nass, R-York County, and working them together “increases the chance of success.”
Nass has proposed a tax reform plan with his political opposite on the Taxation Committee, Sen. Ethan Strimling, D-Cumberland County.
In addition to broadening the sales tax to lower income and property taxes, it also includes a carrot for Republicans: a constitutional amendment that would require a two-thirds vote of the governing body to raise tax rates at the state and local level.
And, as Strimling predicted early on, that already has turned off some Democrats who don’t want to give up majority rule.
Opponents of the overall tax reform discussion say it is just another attempt to package tax shifts as tax relief, pointing to the myriad products and services that could be subject to the 5 percent sales tax. That list includes amusement and recreational services, like movie and ski lift tickets, health club memberships and golf lessons; personal property services, like dry cleaning, car repair and mooring rentals; personal services, from pet grooming to diaper services; real property services, from building repair, painting, property maintenance and house cleaning to pest control and lawn and landscaping services, just to name a few.
Proposals being reviewed by the Taxation Committee also would raise the meals and lodging tax, currently at 7 percent, to anywhere from 8 to 10 percent; increase the tax on beer and wine; and, reinstate the sales tax on snack food.
Tax plans
The most radical plan, sponsored by Rep. Dick Woodbury, an independent from Yarmouth, raises $400 to $500 million largely by broadening the sales tax and raising the rate from 5 to 6 percent.
In return, it would cut the current graduated income tax rate – with a top rate now of 8.5 percent – to a flat 4 percent rate for everybody. It would establish a new earned income tax credit for low and middle-income workers, to keep the tax progressive.
Woodbury also would like to combine the Homestead Exemption – or the amount homeowners can exempt on the value of their home before paying property taxes – with the rebate program targeting lower-income owners. His plan would effectively limit the amount any Maine-based homeowner pays in property taxes to no more than 5 percent of income.
Rep. Thomas Watson, D-Bath, also has a proposal in that would raise an additional $170 million in sales taxes by eliminating a series of exemptions, largely on services.
He would then drop the top income tax rate from 8.5 percent to 8.25 percent and increase the low income tax credit so 50,000 of the state’s lowest income payers would drop off the tax roles.
Watson would keep the Homestead Exemption at its current $13,000, but have the state pick up the full cost of the tax break, instead of sharing it equally with cities and towns. He would also increase the maximum rebate for low-income homeowners.
Taxation Committee Chairmen Perry and Piotti also have a plan that would create a flat income tax rate for individuals of 6 percent, with an earned income tax credit to keep it progressive, and increase the Homestead Exemption to $26,000 – 50 percent of which would be paid by the state.
It also looks at allowing municipalities to retain 20 percent of the future growth in local sales tax revenues and to charge service fees to nonprofits, like hospitals and private colleges, which don’t currently pay property tax. Like the other plans, it largely relies on expanding the sales tax to pay for the tax breaks.
Bipartisan approach
Nass and Strimling are promoting their bipartisan tax package because they say it will take a bipartisan effort to get anything passed in the Legislature.
The plan essentially eliminates $250 million in income and property taxes and raises $250 million largely on the back of increased sales taxes, but a Maine Revenue Service analysis shows $127 million of the new taxes would be exportable. That means they are paid by out-of-state residents visiting the state or by out-of-state corporations.
“That’s $127 million worth of tax relief for Maine residents,” Strimling said.
What sets their plan apart is the two-thirds vote requirement to raise taxes. A constitutional amendment would be proposed requiring a two-thirds vote of the Legislature to increase the income, excise or sale tax rate; and a two-thirds vote of a local elected body or town meeting to increase the mil rate.
Nass said Republicans won’t like the tax increases. Those include:
• Taxing services and amusements now exempt from the 5 percent sales tax to raise $160 million.
• Bringing back the snack tax to raise $15 million.
• Raising the meals and lodging from 7 to 9 percent to raise $47 million.
• Increasing the tax on beer and wine to raise $20 million.
• Flattening the corporate income tax rate at the high end of 8.93 percent to raise $8 million.
What the two senators hope will bring people together are the tax relief plans those increased taxes will buy. Those include:
• Raising the Homestead Exemption to $50,000 – half of which would be reimbursed by the state.
• Increasing the rebate lower-income residents can get back on their property taxes.
• Reducing the top income tax rate from 8.5 percent to 6.9 percent.
• Reducing the top rate for other income tax brackets.
• Refunding the federal earned income tax credit at 25 percent and conforming to the federal personal exemption.
• Increasing the low income tax credit from $2,000 to $10,000.
• Eliminating standard and itemized deductions, in favor of a lower rate for everyone – a move that would shift some burden onto richer taxpayers.
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