Tax reform plan to debut before panel next week

Posted March 27, 2009, at 8:40 p.m.

AUGUSTA, Maine — Democratic leaders in the State House are gearing up for a major debate over tax reform next week on their proposal to collect fewer taxes from Maine residents and more from out-of-staters.

Lawmakers are considering a variety of tax-reduction measures this session dealing with everything from levies on new cars and trucks to the amount the state treasury skims from individuals’ paychecks.

At 1 p.m. Thursday, the Legislature’s Taxation Committee will hear public comments on a plan to replace Maine’s four-tier income tax structure, which has a top tax rate of 8.5 percent, with a flat tax of 6.5 percent. The bill’s authors predict that with the numerous tax credits built into the proposed system, most Mainers would pay substantially less than 6.5 percent.

Switching to a maximum rate of 6.5 percent is estimated to reduce tax revenues flowing into state coffers by about $160 million.

To cover those losses, the Democratic leadership wants to increase the meals and lodging taxes from 7 percent to 8.5 percent. The bill, LD 1088, also proposes collecting sales taxes on a host of items now exempt, ranging from tickets to amusement parks and miniature golf courses to candy purchases and car repairs.

While the proposal has received a chilly reception from some in the business and tourism industries, Rep. John Piotti, D-Unity, predicted that the net result will be Mainers paying less and visitors to the state paying more.

“The bottom line … is that with this new system, after all of the sales taxes are paid, Mainers are still going to have an additional $75 million in their pockets,” said Piotti, House majority leader and the bill’s lead sponsor.

To support that claim, Piotti’s office on Friday provided to the Bangor Daily News a number of general scenarios.

A married couple with two children earning $75,000 annually pays roughly $3,324 in income taxes. Under the new tax structure, that couple’s income taxes will drop $649. After accounting for an anticipated $130 in additional sales taxes, the couple would still save $519 annually, according to the scenario.

Likewise, a single parent who makes $25,000 and has one child would see a total tax reduction of $228 after accounting for the additional sales taxes. A single Mainer with no children earning $50,000 would see a reduction of $484, according to Piotti’s office.

“Every income group is getting a break,” Piotti said. “It’s not a huge amount of money, but it’s a step in the right direction.”

Some Republicans and business leaders disagree.

The Maine Restaurant Association, the Maine Innkeepers Association and other business groups have expressed concerns that raising taxes on goods and services sends the wrong message. Critics also contend that contrary to popular belief, it will be Mainers — not out-of-state tourists — who foot most of the bill for the additional sales taxes.

Sen. Kevin Raye, a Perry Republican and minority leader in the Senate, has serious reservations about the timing of the bill. In particular, Raye questions the logic of trying to squeeze more tax revenue out of tourists when that industry is widely regarded as critical to Maine’s economic revival.

“There is a view that the tourism industry can become a cash cow,” Raye said. “But particularly the mom-and-pop stores operating at the margin are concerned about anything that can have an impact.”

Instead, Raye said he supports a proposal by Sen. Jonathan Courtney, R-Springvale, that would require the state to earmark any excess year-end revenues above a spending cap toward tax reduction. The policy, which is modeled on a report from the Committee on Future Maine Prosperity that received overwhelming bipartisan support, would eventually lower the income tax rate to 4.5 percent.

“It’s tax relief as opposed to a tax shift,” Raye said.

Sen. Doug Smith, R-Dover-Foxcroft, has introduced his own proposal to cut in half income tax rates over the course of three years. Smith describes his bill as the first of numerous steps the state has to take to attract additional businesses. Smith acknowledged that covering the deficit created by his proposal would have to be worked out, however.

“My job as part of the loyal opposition is to try to educate, to bring the bigger issues forward and to let people know that there is a choice in this,” Smith said.

Gov. John Baldacci, a Democrat, has indicated that he would like to see some form of tax reform enacted this legislative session. Baldacci spokesman David Farmer said the governor met with Piotti this week and was impressed with the way the Democrats’ proposal has been rolled out, although he has some concerns about aspects of it.

“At this point it is still early in the process, but the governor wants to work with Representative Piotti to try to build a coalition to get things done,” Farmer said.

Most of the Legislature’s Democratic leadership, including Senate President Elizabeth “Libby” Mitchell and House Speaker Hannah Pingree, have signed onto Piotti’s bill as co-sponsors.

Democrats managed to secure House approval for a somewhat similar tax reform proposal two years ago but the measure failed in the Senate. Since then, Piotti and others, including Bangor Sen. Joseph Perry, have reworked the bill and tried to build support in both chambers.

Perry said the challenge now is building public support for the plan.

“This time we are out in front with the public letting them know what the proposal does,” Perry said. “And when they know, I think they will support it.”

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