Time for Tax Reform

Posted March 20, 2009, at 9:54 p.m.

A proposal that would shift Maine’s tax burden away from income tax and onto more discretionary spending — including discretionary spending by out-of-state visitors — deserves serious consideration by the Legislature. Though the phrase “tax reform” is bandied about the halls of the State House every few years, this plan, LD 1088, is not change for change’s sake, but rather “a smarter way to collect taxes,” as its proponents argue.

Sen. Joe Perry, D-Bangor, and Rep. John Piotti, D-Unity, who co-chaired the Legislature’s Taxation Committee two years ago, have returned to the basics of a plan they crafted then. It calls for reducing the top income tax rate from 8.5 percent to 6.5 percent. And with ample tax credits, more than 90 percent of Mainers will see income tax rates below 6.5 percent, the men said. Since the top tax rate kicks in for a single filer with $17,350 in taxable income, the tax break will help most Mainers.

Other states are reducing income tax rates, Rep. Piotti said, so acting now keeps Maine competitive. Massachusetts, for example, reduced its top income tax bracket from 12 percent to a 5.3 percent flat rate.

To replace the revenue lost through lower income tax rates, the plan broadens the sales tax. The sales tax now is assessed on only 25 items. The proposal would extend the tax to recreational and amusement sales (such as movie and concert tickets, games of golf, ski passes), repair and maintenance services (auto repairs, but not home repairs), taxi and limo services, and some personal property services such as dry cleaning, pet boarding and storage units.

Another new revenue source under the plan is a higher meals and lodging tax, now at 7 percent; the Perry-Piotti plan would raise it to 8.5 percent. The proposal also raises the tax on short-term car rentals from 10 percent to 15 percent, and increases the real estate transfer tax from 0.44 percent to 1 percent on the portion of a residential building sale over $500,000.

These taxes will be borne in large part by out-of-staters.

Though Mainers will pay more in consumer taxes — meals, lodging, auto repair, movie tickets — the income tax side provides for more than an offset, so on balance, most people will have $100 to $500 more in their wallets each year. It’s not much, Sen. Perry and Rep. Piotti admit, but the dividends paid by sending the message that Maine is dropping its income tax rate are just as important.

Since most businesses in Maine are partnerships or S-corporations, they file as individual income taxpayers, so the discounted rate would apply to them as well. Further, many retirees who would like to make Maine their full-time residence would be encouraged to do so.

LD 1088 would reduce the state’s reliance on revenue from the sales tax on auto and building supplies, which always drop in a recession, and move the burden to more discretionary items.

While legislators will want to carefully consider the ramifications of the plan, its carefully crafted equity and logic will unravel if special interests pull it apart. In any tax shift, there are winners and losers. This plan chooses the right winners — working people and small businesses.

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