Last year Gov. Paul LePage’s proposed budget included cutting Maine’s top corporate income tax rate from 8.93 percent to 6.75 percent based on the myth that the lower corporate income tax rate would draw companies to Maine and create thousands of good-paying jobs.

The emphasis on the income tax rate alone ignores how the tax is calculated. It also ignores the fact that the vast majority of businesses looking to expand in or move to Maine will base that decision on many other factors, including location, a skilled workforce, overall labor costs, energy costs, and property, sales and use taxes.

Corporations operating in Maine often pay more property taxes than income taxes, and are concerned with sales and use taxes. In fact, the governor’s plan to reduce corporate income taxes was paid for with higher property and sales taxes. The $190 million in Maine corporate income taxes projected for the year 2016 is less than 3.4 percent of the $5.6 billion in state and local tax collections in Maine in 2013, according to Maine Revenue Services.

Corporate income taxes are deductible on federal returns at 35 percent, making the effective Maine corporate tax rate 5.8 percent — or a net cost to the corporations of $123.5 million. By comparison, for the majority of Maine individuals (non itemizers), their lowest effective income tax rate is now 5.8 percent, and some of their income is taxed at 6.75 percent and 7.15 percent.

The $123.5 million net corporate income tax is also less than the projected $210 million in meals taxes that will be collected in 2016. About $140 million of the $210 million in meals taxes are paid by Mainers, and these taxes are not deductible.

The proponents of Maine tax changes over the past several years have greatly over-stated the economic impacts of proposed “tax reform” and have been inconsistent in measuring the impact. The proponents of the governor’s $26-million corporate income tax cut believed that it would have significant economic benefits. In contrast, these same proponents had no problems with the meals tax increase from 7 percent to 8 percent (the U.S. average meals tax is only 6.9 percent), which increases the meals taxes in 2016 by about the same $26 million.

The proponents of the plan to cut Maine’s top corporate tax rate are ignoring how multistate corporations pay taxes to the states. The most important factor is not the tax rate; it is how the income is apportioned to Maine. Apportionment is the method by which the state determines how much of a corporation’s profits come from in-state or out-of-state, so it can tax the in-state portion. Maine uses the most favorable apportionment method in the U.S. (only 16 other states use it) for attracting business investment.

An April 2011 study prepared by Ernst & Young ranked Maine as the best state in the U.S. for lowest taxes on business investments. The study stated that “Maine uses a single sales factor corporate income apportionment formula. While Maine’s corporate tax rate is higher than average (8.93% in Maine compared to 6.7% nation-wide), Maine’s favorable apportionment regime more than offsets the rate differential.” This study was done before Maine added the current 9 percent Maine Capital investment credit, which just makes Maine even more favorable.

The traditional apportionment formula used by most states is a three-factor formula made up of sales, wages and property. Maine, by using only the sales factor, allows multistate businesses to have a disproportionate amount of wages and property (investments) in Maine and not pay a proportional amount of taxes to Maine. This formula does not benefit retailers like Walmart in Maine, but it does benefit corporations that either have corporate headquarters in Maine or businesses that are producing goods in Maine, but selling most of their goods outside of Maine.

If the goal is to attract out-of-state businesses (other than retailers like Walmart who come because of the customers), Maine’s single sales factor apportionment is more important to those business than lowering the corporate tax rate.

With regard to “small businesses” that operate only in Maine and do not benefit from Maine’s apportionment formula, the vast majority of those businesses do not pay corporate income taxes as their income is passed through to the owners, who pay Maine’s personal income tax at a top rate of 7.15 percent.

There are many ways to define what a small business is; one is based on the number of employees. A 2011 Small Business Administration report estimated that 95 percent of Maine businesses had less than 100 employees. However, the 5 percent of employers with more than 100 employees paid about 63 percent of the wages in Maine. A 2015 Maine Department of Labor report showed that only 32 employers had more than 1,000 employees in Maine. Only three were Maine-based businesses (which I define as having more than a 10-percent apportionment to Maine), and only one of the three is subject to Maine’s corporate income tax.

It is a reasonable conclusion that the majority of Maine’s corporate income taxes are paid by large multistate corporations, whose revenues in Maine are less than 10 percent of their total revenues.  

The actual breakdown should be released by Maine Revenue Services so the myth that the Maine corporate tax rate is hurting “Maine businesses” can be disproved. Walmart and the hundreds of other national corporations that operate in Maine do so because they can make a profit here. The Maine corporate tax rate had no part in their decision to come to Maine.

Their decision to expand or stay in Maine continues to be based on their ability to make a profit, not Maine’s corporate income tax rate.

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