A “compromise” Maine budget passed last week, and it contains many poorly designed tax changes that move Maine in the wrong direction.
The way the compromise was drafted in secret by the four top party leaders in the Legislature made it impossible to produce sound tax policy.
It appears these four legislators invented a new kind of math where you can increase budget spending (between July 1, 2015 and Dec. 31, 2017) by about $244 million and still declare that Maine residents will have yearly net tax cuts of $135 million.
They point to a Maine Revenue Services report that shows a $135 million tax cut for year 2017, factoring in sales, property and income taxes.
There are two major problems with this new math. First the Maine Revenue Services report has several errors, which when corrected reduce the 2017 tax cut to just $36 million. It also ignores the period between July 1, 2015 and Dec. 31, 2016.
Here is a breakdown of what’s wrong with Maine Revenue Services’ tax cut projections:
1. The report understates the sales tax increase by about $14 million.
2. It overstates the homestead exemption benefit by $14 million.
3. The report ignores about $53 million in additional property tax increases to Mainers that will result from cutting revenue sharing by $71 million.
4. By cutting the income tax, it means Maine residents will have less to deduct on their federal tax returns. The report ignores what is essentially a federal income tax increase of $18 million.
In the six months preceding Dec. 31, 2015, Maine residents will have a net tax increase of about $58 million, and the tax cut for 2016 will only be about $4 million.
All of this means that the net tax increase for the 30 months between July 1, 2015 to Dec. 31, 2017, will be about $18 million, with the bottom 90 percent of Mainers receiving about $16 million of that tax increase, according to my calculations.
There is no tax cut.
In addition, Maine businesses will have large sales and property tax increases that are not talked about in this compromise deal.
As expected with a rushed tax plan that had no public hearings, the vast majority of the legislators who voted for this plan did not understand the details. Several legislators have praised the tax cuts, especially how they were able to save the tax benefit of home ownership through itemized deductions for mortgage interest and property taxes.
As noted above, while there is a $36 million net tax cut in 2017, the legislators have ignored the net increase in the 18 months ending Dec. 31, 2016, which turns the tax cut into a net $18 million tax increase.
Here are more things you need to know about the budget.
The benefit of itemized deductions is phased out for single and married taxpayers starting at income levels of $70,000 and $140,000, respectively. For middle-income taxpayers with incomes below $140,000, the benefit of itemized deductions was eliminated by increasing the standard deduction amount to $23,200 for married couples. The vast majority of married taxpayers with income under $140,000 have less than $23,200 in Maine itemized deductions.
To help pay for the revenue loss from increasing the standard deduction, the plan increases the tax rate from zero to 5.8 percent on the first $5,200 and $10,450 for single and married taxpayers, respectively. For taxpayers who do not itemize deductions, the tax rate change and the increase in the standard deduction offset each other. For those who itemize deductions, they will have an income tax increase.
For the top 1 percent of Maine taxpayers, the Maine Revenue Services report states that about 80 percent of that group will have an average income tax cut of $4,543, while the other 20 percent will have an average income tax increase of $4,446.
This is the result of the total elimination of itemized deductions. The sad fact is that the largest itemized deduction for most of the taxpayers with a tax increase is charitable contributions. Accordingly, this tax plan gives large tax cuts to the wealthy who give little or nothing to charities and gives large tax increases to our most philanthropic residents.
People in assisted living
Another group of big losers under this tax plan are those taxpayers living in assisted living facilities. Under current Maine law, all of the payments made to assisted living facilities are subjected to the 5-percent service provider tax. Under this plan, the tax is increased to 6 percent.
For taxpayers who pay $90,000 a year to these medical facilities, their service provider tax will increase from $4,500 to $5,400 a year.
But to make it even worse, many of these taxpayer will also see a several-thousand dollar Maine income tax increase from the elimination of the medical itemized deduction.
Finally, the biggest group of winners in this budget are a few millionaires (many of whom are non residents), who will save $17 million a year from the elimination of the Maine estate tax.
Of course, Maine can fund this estate tax break with the surplus from replacing the $58 million property tax circuit breaker program with the $16.5 million property tax fairness credit (from 2014 tax returns).
It is too late to fix this tax plan by July 1, 2015, but the Legislature should come back this summer and reverse most of the poorly designed tax plan. Any Democrat or Republican who refuses to revise this tax plan should be challenged either during the primaries or during the general election in 2016.
Albert A. DiMillo Jr. of South Portland is a retired corporate tax director and CPA with more than 30 years of tax experience and can be reached at email@example.com.