Maine Democrats have had a strong argument to make against key elements of Gov. Paul LePage’s proposal to conform Maine’s tax code with recent tax changes enacted at the federal level.
To start, the funding source for the entire package of tax breaks was suspect.
The LePage administration proposed to pay for the first two years of the tax break package, worth $38 million, by piecing together funds from a range of accounts earmarked in law for other purposes. Those included casino revenue earmarked for public schools, money set aside in an account meant to help towns and cities share services, and funds from an account set aside for eventual income tax relief.
Second, the policy rationale was exceptionally weak.
The most expensive part of the package — worth $23 million over two years — was a state version of the federal government’s bonus depreciation tax benefit. The federal benefit allows a business to deduct 50 percent of the value of newly purchased business equipment from its taxable income in the equipment’s first year in service (as opposed to more gradual depreciation). The LePage administration proposed to allow businesses to claim a state-level tax credit — called the Maine Capital Investment Credit — comparable to the federal benefit.
But taxpayers would claim half of the $23 million in credits for 2015, rewarding them for equipment investments they’ve already made. The retroactive nature would render at least half of the package decisively ineffective at bonus depreciation’s original purpose — to offer businesses an incentive to make equipment investments when the economy was slow. As for the other half? A number of reviews by economists and surveys of business leaders have shown bonus depreciation’s effectiveness as an economic stimulus to be minimal at best.
Finally, Democrats had a strong argument to make against the conformity package because the Maine Capital Investment Credit — while intended to replicate a federal tax benefit at the state level — isn’t technically about conformity with the federal tax code and tax filing simplicity.
In order to claim the Maine Capital Investment Credit, a business first adds back to its taxable income any amount the business has deducted for bonus depreciation on its federal tax return. The business then claims the capital investment credit from that additional taxable income.
Democrats could have taken their strong hand and made the argument that Maine’s tax conformity bill should be much smaller than the one proposed by LePage — limited, for example, to the teacher expense, mortgage insurance, college tuition and small business bonus depreciation deductions — for the simple reasons that the state can’t afford the capital investment tax credit and that it’s ineffective tax policy.
Instead, Democrats in the Maine House have introduced an entirely unrelated element to the debate — a $23 million infusion for Maine’s public schools. And Democrats are relying on a similarly suspect funding mechanism to pay for the package: They’re proposing to dig into state reserves for the additional public school money.
There’s a legitimate debate to be had about appropriate levels of state funding for schools, about a funding formula that so often surprises local school officials and complicates their budgets, and about appropriate strategies to contain ballooning special education costs. A tax conformity bill, however, isn’t the venue for such a debate.
Instead, Democrats should be using their strong hand against LePage’s tax conformity bill to call for fiscal responsibility and effective tax policy. Our hope is that the final tax conformity compromise forged by legislative leaders reflects those values.