For fairness, time for revenue-neutral tax reform

Posted April 03, 2009, at 6:18 p.m.

This year’s legislative debate has been dominated by discussion of what investments Maine can make to jumpstart our economy now and foster an environment favorable to future economic growth. There are many good proposals that will do this: investments in infrastructure, expansion of broadband access and the streamlining of state government to name a few. Even in the best of times it is difficult to choose which worthy investments to make; in the midst of cutting the state budget by $200 million it is near impossible.

The Legislature is debating one idea that has the potential to stimulate the economy, boost Maine’s small businesses and improve our overall economic climate, and it does not cost the state a dime. In fact, it will put an additional $100 to $500 in the pockets of most Maine people. The idea is tax reform.

Currently, Maine has one of the highest income taxes in the country. We not only tax people at a high rate, we start taxing them at this high rate at lower incomes than most other states. This puts too much burden on Maine people, hurts small businesses and stifles our ability to attract new businesses. Our high income tax has been a difficult issue, but there is something we can do to fix it.

The revenue-neutral tax reform plan introduced Thursday would lower the income tax from 8.5 percent to 6.5 percent for all Maine people. It would institute a system of refundable tax credits that will ensure that people at all income levels benefit and that will result in most people paying at a rate far less than 6.5 percent. All in all, Maine people will pay $160 million less in income taxes.

To keep the plan revenue neutral, the sales tax will be extended to some discretionary items that are not currently taxed as well as to some personal services like pet grooming and limousines. It will also modestly increase the taxes on rental cars, prepared meals and lodging, taxes that are largely paid by people visiting from out of state.

In fact, tourists will pay $75 million of these taxes, allowing Maine people to receive a substantial tax cut. Even after Maine people pay the new taxes on luxury items, dinners out and hotel stays they will still have an additional $100 to $500 in their pockets. And these are not new taxes to most tourists; most people who visit Maine get tax breaks here that they do not get at home. Now they will simply be paying their fair share, and Maine people will get a significant reduction in their tax burden.

Better still, by reducing the income tax rate we will be lowering the taxes for more than 90 percent of Maine’s small businesses. This will allow them to invest more money in growing their businesses. Cutting the income tax rate by more than 20 percent will also help to attract businesses to Maine and will make Maine more competitive in the global economy.

The lower income tax rate will also serve as an incentive for retired people to become Maine residents. Because our income tax will be lower than states like New York, New Jersey and Vermont, people from those states who own second homes in Maine will have a significant financial incentive to become Maine residents and Maine residents will have a financial incentive to remain Maine residents.

This tax reform package makes too much sense to pass over. By lowering the income tax, we will put more money in the hands of Maine families and more money into our economy. We can give small businesses a better chance to thrive and attract outside investment that will grow our economy in the coming years. Now is the time for tax reform, and we urge the Legislature to act swiftly on this proposal.

Sen. Joe Perry is the Senate chair of the Legislature’s Taxation Committee. He represents Senate District 32, which includes Bangor and Hermon. Rep. Elsie Flemings represents House District 35, which includes Bar Harbor, Cranberry Isles, Southwest Harbor and part of Mount Desert Island. She is a member of the Taxation Committee.

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