AUGUSTA, Maine — Members of two legislative committees are questioning proposals that would step up enforcement of certain tax laws and change the way Maine implements some taxes.
Gov. John Baldacci’s administration made the proposals as part of the governor’s biennial budget plan.
“These have been before us before, some just last year, and were rejected by the Legislature,” said Sen. Richard Nass, R-Acton, a member of the Taxation Committee. “I have a problem with these tax policy questions coming forward in the budget.”
Lawmakers heard criticism of proposals to change the way some tobacco products are taxed, the way the state estate tax is figured, the way telecommunications property is taxed, and the way the state corporate income tax is assessed.
“This is commonly called ‘throw out,’” said Joe Crosby of Cumberland, representing the Council on State Taxation, a national group representing more than 600 large corporations. “Throw out is highly unusual; it is only used by two states.”
“Throw out” is an income tax assessed on a business for money made in another state that does not tax that income. The two states using this tax are New Jersey and West Virginia.
More importantly, he said, the methodology is being challenged as unconstitutional with a case expected to be heard by the U.S. Supreme Court this spring. He said the state would be making a mistake to adopt the method that has yet to be vetted by the high court.
“This also discourages investment in a state,” he said. “Maine can’t afford to do that.”
The proposal is estimated to generate a little more than $5 million over the two-year budget.
Lawmakers also were told the telecommunication tax itself could face a constitutional challenge over the way it is imposed. That was raised by telephone company representatives upset at the tax rate increase proposed for the two years of the budget. It is estimated to raise $3 million, with most of that paid by FairPoint Communications.
On another proposal, Nass said, “the estate tax was one of the most debated last year, and the Legislature rejected it and yet it is back here again.”
Finance Commissioner Ryan Low told Nass it would be short-sighted not to look a proposals that have been rejected in the past, saying it is done all of the time at the State House.
“After all, we don’t do that with legislation,” he said. “There are a lot of proposals back this year that have been defeated in the past.”
Jerome Gerard, acting director of Maine Revenue Services, said after the debate last year the agency was urged to continue to review the issue. He said new data on federal audits of estate taxes prompted the agency to propose the change and ask for additional staff to audit estate tax returns. Maine exempts the first million dollars of an estate, so there are relatively few that are subject to tax in the first place.
“The big complaint was that the federal government would be auditing returns, so why should the state,” he said. “We average between 400 and 500 taxable estates a year, and the IRS on average audits no more than 12 a year.”
Gerard said the two agents assigned to estate tax collection are generating from $1.5 million to $1.9 million a year by auditing tax returns. He said the language change would allow the state to audit estates even when they are accepted by the IRS, and is estimated to generate about $2.3 million in the first year and $39.5 million in the second year of the budget.
Sen. Richard Rosen, R-Bucksport, also criticized the portion of the proposal that would include taxation on any gifts made for three years before a person’s death.
“I object to this being called a loophole,” he said. “This is a change in policy that needs to be debated and discussed.”
Lawmakers also questioned the hiring of additional agents and the funding for overtime for other agents to collect taxes. Rep. David Webster, D-Freeport, said he wanted to see more information on how the state knows there is a tax collection problem and where more agents will improve collections.
“The more criminal work we do, the more and more we find,” Gerard said. He said a recent prosecution of a single tax preparer found more than $3 million in taxes due by the preparer and his clients.
He is proposing adding two criminal agents to the five now employed at the agency. He said the agents would cost about $340,000 and would bring in more than $1 million in additional revenues.
Gerard also is proposing about $500,000 in overtime for collections agents at the agency. He said working some evenings and weekends have proved successful in contacting taxpayers that owe the state money.
He also said the estimates do not take into account any increase in cases that may occur as the result of the recession.
“We have a backlog of cases now, “he said.