On May 1, a group of 11 Maine legislators unveiled the fourth significant tax reform plan of the last decade. It would be unusual for a proposal as sweeping as this not to have major flaws, which it does. But, at its heart, it is a sincere, intelligent attempt to overhaul a tax code that nearly everyone agrees must change. It is an especially welcome offering in the face of Gov. Paul LePage’s proposed 2014-15 budget.
Maine Revenue Services has not yet released a distributional analysis of LD 1496, largely designed by independent Sen. Dick Woodbury of Yarmouth, who has a Ph.D. in economics. More details about who, exactly, would benefit and who would suffer under the potential changes will continue to emerge. This plan should be viewed as a starting point for discussion and as a work in progress.
It would raise Maine’s 5 percent sales tax to 6 percent and broaden it to apply to nearly all consumer purchases, such as groceries and heating oil, though it’s designed to exclude business-to-business transactions, health care and education. Every tax reform plan of the last decade has attempted to raise sales tax revenue, as the state currently over-relies on the property tax revenue stream and under-relies on revenue from sales. This plan would use the expansion of the sales tax to fund income and property tax relief, with an overall goal of shifting more of the tax burden to nonresidents.
But Maine residents and legislators will have to be convinced that taxing essential household items such as food and heating oil is necessary. Doing so is possible if the financial impact is offset in other areas. And that is the goal. To mitigate the sales tax increase, the plan would create a sales tax fairness credit — for Maine residents only — worth up to $2,000, depending on the type of household. The question is whether it will be an adequate counter to the sales tax increase for specific groups of people, namely middle-income earners.
To offset the regressive burden of property taxes, the plan would expand the homestead exemption to apply to the first $50,000 worth of property, up from $10,000, and replace the circuit breaker program with a property tax fairness credit, worth up to $1,000. The expansion of the homestead exemption and an additional proposal, to replace the current municipal revenue sharing formula with one that directs more money to towns with higher-than-average property tax rates, offer more targeted property tax relief. But legislators should examine the impact of the proposal on people who rent apartments or business space, as they won’t benefit from the homestead exemption and will be hit by an increased sales tax. The full implications of the revenue-sharing cut and homestead exemption increase on municipal budgets also needs to be better understood.
In a major shift, the tax reform plan would essentially cut the income tax rate in half, eliminating the three-bracket system currently in place and replacing it with a 4-percent flat rate for everyone except those with very low incomes. Nearly every tax exemption would be abolished. Some people testifying before the legislative Taxation Committee on Friday pointed out that the income tax reduction would help many Maine-based businesses, which often pay taxes through the individual income tax filings of their owners. But the Legislature will need to ensure that cutting the income tax so drastically — creating the greatest benefit for the very wealthy — won’t stall the Maine economy’s slow recovery. The revenue the state collects from the income tax tends to rebound most quickly after an economic slump. By cutting deeply now, the state could forgo an improving revenue stream and hurt long-term funding for education and other services.
The plan also would lower Maine’s corporate income tax rate to 7.5 percent from 8.93 percent on income greater than $50,000. Because the tax is collected proportional to the amount of sales a business does in the state, lowering the rate would have no bearing on a corporation’s decision to locate in Maine and would be an obvious giveaway of money. Lawmakers would be best advised to develop a plan that they favor, and not cater to LePage, so they can override a veto.
With some exceptions, that is what they’ve done. Having a tax reform plan spearheaded by five Democrats, five Republicans and one independent is rare. It ensures a greater chance of passage. Former state Sen. Peter Mills, a Republican who worked on previous tax reform proposals and now directs the Maine Turnpike Authority, said, “I think it’s a good plan, an intelligent plan. These things keep getting better and better.”
The plan may also have come at the right moment. Legislators can’t return home having approved LePage’s budget, which eliminates municipal revenue sharing, so this option will be appealing. And there is time to refine it. Many Maine residents will oppose the proposal because they dislike parts of it. But rather than reject it outright, they should speak to their local legislator and offer suggestions to help to make the plan work. It has promise.