Tax Reform Back on Track

Posted June 11, 2009, at 6:10 p.m.

Lawmakers in Augusta have another chance to pass tax reform legislation this session. They should not let it pass by, even though Gov. John Baldacci has put them in the difficult position of having to support his plan or do nothing.

Last week, the House and Senate passed LD 1088, which would have lowered the state’s top income tax rate from 8.5 percent to 6.5. This was offset by extending the state’s sales tax to more items, including ski lift tickets, golf courses, dog grooming and auto repair labor. The governor did not sign the bill.

On Wednesday, his alternative was presented to lawmakers. It would reduce the top income tax rate, except for the portion of individual income over $250,000, which would be taxed at 6.85 percent. This is still an important reduction, which will benefit many businesses in addition to individual tax-payers.

Gov. Baldacci’s proposal also adds a refundable earned income tax credit, which especially benefits low- and moderate-income residents. These changes make the package less regressive, something the governor aimed to accomplish.

While the overall scope of the governor’s plan is positive, he caved in to overblown concerns from the real estate industry and nixed an increase in the real estate transfer tax that was included in LD 1088. The bill would have raised the tax on the portion of real estate sales over $500,000. Few homes in Maine sell for that much and many of those that do are bought by part-time residents. But Realtors were concerned the tax increase would create a perception that would dampen sales in Maine. They spearheaded a group called “Not This, Not Now,” that sought a veto of LD 1088.

The governor also dropped the portion of the bill that expanded the sales tax to recreation-related services, such as golf courses, tennis and skiing. He stuck with an increase in the meals and lodging tax from 7 percent to 8.5 percent, with an additional $2 million directed to tourism marketing.

Although some of the governor’s changes are motivated more by industry lobbying than what is best for all of Maine’s taxpayers, this version of tax reform, on balance, is worth supporting.

The alternative is to do nothing. This is an unacceptable option that will shortchange the state’s residents and businesses.

Maine’s income tax rate is too high. Its sales tax base is much too narrow, causing especially sharp rises and drops in state revenue. This tax reform proposal addresses both.

Lawmakers have talked for decades about fixing these problems, but prior efforts at tax reform — including one only two years ago — have failed. This one came close to crumbling as well, but lawmakers appear on track to passing a revised tax reform bill that the governor will sign.

Reforming taxes in a way that benefits residents and provides a more predictable revenue stream is long overdue. That is why lawmakers are right to support this plan.

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