Maine’s state and local taxes, including income, sales, property and estate taxes, are the subject of various proposed bills in the Legislature. Mainers would be best served if tax changes are based on informed sound tax policy. However, politics and the lack of detailed understanding of tax laws by the vast majority of legislators, business leaders, economists and Maine voters will make passing sound tax policy difficult.
Recent history
In 2009, the Democratically controlled Legislature passed a poorly designed “tax reform” plan that increased sales taxes and lowered income taxes that would have given a $35 million tax cut to a group of less than 5,000 wealthy Mainers, while all other Mainers would have had a net tax increase. I worked with the Republicans and the Green Party to overturn the law with a June 2010 people’s veto, which 61 percent of Mainers voted for. The Republicans in November of 2010 took control of the Legislature in part by pointing to the Democrat’s tax plan that favored the rich over low and middle class working Mainers.
Once in power, the Republicans turned their back on the middle class by passing legislation that cut the estate tax by $30 million a year in 2013 and 2014. They also passed income tax changes beginning in 2013 that were disproportionately weighted towards the top 10 percent of Mainers. During the 2012 elections, the Democrats pointed to the Republican’s tax changes and how they favored the rich and questioned how the $400 million in income and estate tax cuts would be paid for. The Republicans and Gov. Paul LePage pointed to the fact that 70,000 low-income Mainers will no longer have to pay any income tax. What the Republican’s don’t tell you is that the average income tax saved for the bottom 20 percent of Mainers (135,000 tax families) in 2013 is estimated to be only $12 each, according to the Maine Revenue Services estimate.
The governor’s 2013-2015 biennial budget funds the $400 million income and estate tax cuts by directly raising property taxes by cutting the circuit breaker and homestead property tax programs and indirectly by raising property tax by cutting revenue sharing to the cities and towns. Even if you accept the governor’s weak argument that cutting revenue sharing is not a property tax increase because the cities can cut their expenses, there is no way to justify the $100 million circuit breaker and the homestead program property tax increases in his biennial budget.
Maine Revenue Services estimates that the bottom 60 percent of Mainers will have a total income tax cut of $30.3 million, or about $75 each, in 2014. The governor’s tax increases from changes to the circuit breaker, homestead and the elimination of indexing on income taxes will cost the bottom 60 percent of Mainers about $35.2 million, resulting in a net increase in tax of $4.9 million. This compares to more than a $43 million estate and income tax cut to the top 1 percent of Mainers.
Two alternatives
In response to the governor’s budget that will significantly increase property taxes, there are now two major alternatives. LD 1496, a “tax reform” plan by a so-called bipartisan legislator “gang of 11,” or the Democrat’s proposal to delay the $400 million a year income and estate tax cuts that are scheduled for 2013.
Clearly LD 1496 (which was amended for the second time on May 30) is not the answer, as it is much worse than the 2009 “tax reform” plan that the voters rejected in 2010. This plan has been proposed in part to fund revenue sharing to the cities and towns, which will reduce the need to increased property taxes. However, that is just the smoke screen; the real purpose of the plan is to increase consumption taxes by $700 million and reducing income taxes for the wealthy. Because consumption taxes are both more regressive than property taxes and not deductible, increasing them to lower property taxes is irrational.
One might ask how could the “gang of 11” be so wrong. The answer is, why would you expect them to craft sound tax policy when not one of them has a tax background and worse only two of the members had any historical dealings with past tax reform. The gang also met in secret and ignored testimony of tax experts who testified on tax reform in front of the Legislature’s taxation committee in 2011. Asking this gang of 11 to come up with tax reform would be like asking a group of tax experts to reform the building electrical code. I am not sure what is worse, the gang’s ignorance of Maine’s tax structure and tax laws or their unfettered arrogance in promoting it as good tax policy for Maine. Maine’s tax structure is already significantly regressive and this plan will make it more regressive and unfair.
The promoters of LD 1496 claim that Mainers will have a net tax cut because substantial amounts of the consumption tax increases will be paid by non residents. Of course, those claims are not true. The total consumption taxes that will be exported amounts to about $60 million, which will be offset by about $35 million in income and estate tax cuts to non-residents. Accordingly, the net exporting of taxes to non-residents is only $25 million.
In addition, what they don’t understand is that because Maine’s consumption taxes are not deductible on federal tax returns, but Maine income, property and estate taxes are deductible, the shift in Maine taxes will result in a net $95 million in increased federal taxes paid by Maine residents. The net tax increase paid by residents will be $70 million ($25-$95 million). The distribution of the tax increase will result in a group of about 5,000 wealthy individuals getting a net tax cut of about $45 million, while all other Mainers will get a net tax increase of $115 million. The “Gang of 11” doesn’t seem to understand the interaction of the federal and Maine tax laws. or simple math.
There are too many irrational tax policy provisions in LD 1496 to address in detail, but here are just a few:
– The plan gives millions in estate and income tax cuts to a small group of millionaires under the myth that these tax cuts will keep Mainers from leaving Maine. The only credible studies done have shown that states that lower taxes to keep residents from migrating to lower tax states resulted in significant decreases in net tax revenues.
– The plan includes taxing Social Security benefits, which are currently not taxed in Maine. For most retirees, taxing Social Security will more than offset the lowing of the income tax rate.
– The plan eliminates itemized deductions, which will result in many elderly taxpayers with high medical deductions to have an income tax increase. The elimination of all itemized deductions will also cause many middle income taxpayers to have an income tax increase.
– The plan will cause significant consumption tax increases for more than 100,000 low income taxpayers that don’t currently file an income tax return. A substantial number of these taxpayers will not file a return to get the refundable tax credit under the plan.
– The 45 percent increase in consumption taxes will drive even more Mainers near the New Hampshire border to shop for groceries and other goods in New Hampshire.
The only rational alternative to the governor’s budget is to reverse a portion or all of the income and estate tax cuts passed in 2011 that take effect in 2013 and use the revenue to fund the circuit breaker and homestead property tax programs. Any remaining revenue should be use to fund revenue sharing.
Al DiMillo is a retired CPA who lives in South Portland.
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