Protecting Maine’s credit

A bill that aims to reduce the income taxes Mainers pay is coming up for action by the Committee on Appropriations and Financial Affairs perhaps as early as Wednesday. While it seems like a reasonable idea on the surface to withhold less from people’s paychecks, the long-term plan of how to pay for the tax cut should be clarified.

LD 849, “An Act to Provide Tax Relief for Maine’s Citizens by Reducing Income Taxes,” would use a portion of reserve funds to gradually reduce the income tax rate to 4 percent. The bill would have the state put 20 percent of money that now goes to the rainy day fund into an account to lower the income tax rate.

Fortunately, Rep. Kathleen Chase, R-Wells, is planning to insist on a corrective amendment, apparently with the support of the committee chairman, Sen. Richard Rosen, R-Bucksport. In addition to other measures, she would have more money enter the rainy day fund before it was used to lower the top income tax rate.

She said this measure should address the rating agencies’ worries about Maine’s reserves being too low. She would retain the bill’s gradual reduction of the income tax rate to 4 percent.

Without the Chase amendment, the bill risks lowering Maine’s AA+ credit rating. That would mean higher interest rates and a loss of investor confidence. These warnings are not just the widely reported notice in February by Fitch Ratings that changed its outlook for Maine’s credit-worthiness from stable to negative.

Moody’s Investor Services and Standard & Poor’s, the other two major credit rating agencies, have also served notice in the past eight months that Maine’s rating is in jeopardy because of tax changes that widen revenue gaps and deplete reserves.

S&P reported last October: “We believe the accumulated deficit position can pose a challenge to Maine, especially if revenue receipts are weaker than projected. We could lower the rating if there are further significant declines in the state’s financial or liquidity positions.”

LD 849 works in the opposite direction from what the rating agencies advise. It shifts funds out of the state’s reserve accounts and leaves future legislatures to deal with the revenue gap, as an alert by the Maine Center for Economic Policy puts it.

Jody Harris, a policy analyst with the liberal Maine Center for Economic Policy, doubts that the Chase amendment will satisfy the credit rating agencies, since they advise strengthening several other reserve funds.

Rep. Seth Berry, D-Bowdoinham, the lead Democrat on the Taxation Committee, also has doubts. He said that locking in at a lower tax rate for all future years, while paying only for the first year, must be removed or at least slowed, to improve Maine’s long-term credit. Otherwise, reserves will be used to lower taxes, and the low rate will remain even when there’s no extra money to pay for it.

Maine’s income tax rate ranges from 2 percent in the low bracket to 8.5 percent in the high bracket, according to the Federation of Tax Administrators. In New England, Maine has the second highest rate behind Vermont, which has an income tax rate that ranges from 3.55 percent to 8.95 percent. New Hampshire has no income tax.

It’s reasonable to want to adjust the tax rate in an effort to make Maine more competitive with other states, but attracting businesses and people depends on much more than income taxes. And approving the bill would be a dangerous move if it jeopardizes Maine’s credit rating or touches off a future budget crisis. It’s up to the Appropriations Committee to do the math.