June 24, 2018
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Next Up, Tax Reform

Now that Maine lawmakers have agreed on a spending plan for the next two years, they can turn their attention to the revenue side of the equation. They now have an opportunity to craft a new tax system that gives Maine taxpayers a small break while providing more predictability in state revenue collection. Both are needed.

By carrying forward the bipartisan attitude and commitment to make difficult but necessary decisions that characterized the recent budget deliberations, lawmakers can pass tax reform legislation this year. The vehicle to do this is LD 1088, which would lower the state’s income tax rate while broadening the sales tax.

Maine sales tax applies to the fewest items of nearly any state in the country. As a result, tax collections are extremely volatile. New cars and building supplies account for nearly a third of the state’s sales tax collections. Both fall rapidly during bad economic times. Part of the nearly $1 billion budget gap that lawmakers closed this year was due to tax collections being much lower than predicted due to the national recession. Sales tax is responsible for a significant portion of that drop.

Applying the tax to more items won’t eliminate the ups and downs but will make them less severe, enabling state officials to better anticipate how much money Maine will actually collect.

Extending sales tax to more items and services, such as ski lift tickets, dry cleaning and auto repairs, will mean that Mainers will pay a bit more in sales tax. But that is more than offset by decreasing the state’s income tax rate. Under LD 1080, the state’s top rate will be reduced from 8.5 to 6.5 percent. Since the top tax rate kicks in for a single filer with $17,350 in annual taxable income, the tax break will help most residents.

This will also help businesses. Since most businesses in Maine are partnerships or S-corporations, they file as individual income tax payers, so the discounted rate will apply to them as well. Retirees who spend much of the year in Maine but claim residency elsewhere may become full-time residents if the income tax is lower.

Moving Maine toward the national average for income taxes also sends an important signal. Putting to rest the slogan that Maine has the highest taxes in the country, which is oft-repeated even though it is not true, will do a lot to improve the state’s image for businesses and residents.

To remain revenue-neutral, in addition to a broader sales tax base, LD 1088 would increase the meals and lodging tax from 7 percent to 8.5 percent. Few, if any, travelers decide on a destination based on the taxes on a hotel room or restaurant meal, and Maine’s rate would still be lower than at many other locales.

Having passed a budget that spends $500 million less than the current level, lawmakers have shown they can work together to make tough decisions that will put Maine on a more sustainable economic course. Reforming taxes in a way that benefits residents and will provide a more predictable revenue stream is a logical next step.

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