AUGUSTA, Maine — Seeking to avoid a potential veto by Gov. John Baldacci, lawmakers approved last-minute changes to a tax restructuring bill that aims to reduce income taxes for Maine residents while broadening the sales tax.
Baldacci formally proposed the changes Thursday afternoon after allowing a similar tax overhaul measure passed by the Legislature to linger on his desk for nearly a week.
The central features of the original bill were unchanged in the governor’s proposal. Namely, Maine’s top income tax rate will drop from 8.5 percent to 6.5 percent or lower for most Mainers. The governor’s bill also kept the proposed increase to the meals and lodging tax from 7 percent to 8.5 percent and will apply Maine’s 5 percent sales tax to more goods and services, including car repairs and dry cleaning.
But the Baldacci bill removed several recreational activities that would have been subject to the sales tax under the legislative proposal. For instance, ski resorts, bowling alleys, golf courses and arcades will be exempt from the sales tax.
The bill passed the House by an 84-61 vote and the Senate by a 20-13 vote, and now heads to the governor’s desk for his signature.
Another major difference is that Baldacci’s bill, LD 1495, taxes Mainers earning more than $250,000 a year at 6.85 percent, which is still lower than the existing rate.
The governor also eliminated an increase on the real estate transfer tax on homes worth more than $500,000 and makes the earned income tax credit refundable for low-income residents.
The result, according to the bill’s leading advocates, will be that Mainers will save roughly $55 million after the new tax structure goes into effect. Nearly 90 percent of Mainers will see a tax break under the bill, with the average savings roughly $160 a year, supporters predict.
The change is expected to be revenue-neutral, however, because tourists and out-of-state visitors will end up paying more taxes to the state for goods, services, meals and lodging.
Moments after the final vote, Baldacci described the bill as “significantly improving our tax system.”
“The compromise is more progressive, more families see a direct benefit, and we provide greater support for our tourism industry without negatively affecting the fragile real estate market,” Baldacci said in a statement.
“When all is said and done, people will have more money in the their pockets,” said Rep. John Piotti, a Unity Democrat and House majority leader who was the lead sponsor on the original bill, LD 1088.
The mostly Republican critics warned the bill could overburden small businesses, increase taxes on the poor and elderly and harm the critically important tourism industry. They also accused the Democrats of forcing through a major tax change with no time for debate or public hearings.
“It’s been run through the process,” said Rep. Josh Tardy, a Newport Republican and House minority leader. “I believe there is a risk that in excess of 100,000 families will see a tax increase.”
Democrats countered that the bill enacted Thursday was nearly identical to the measure debated last week except for a few clearly delineated changes.
In addition to lowering most Mainers’ tax burden, supporters claim the bill will stabilize revenue flow into state coffers by relying more on sales taxes rather than income and capital gains taxes and sales taxes from cars and other big-ticket items.
Reducing Maine’s 8.5 percent income tax rate — one of the highest in the nation — will also help lure more businesses to the state while convincing others to stay, supporters said.
“It might only be a couple of bucks a week but the structural changes go well beyond that,” said Sen. Joe Perry, a Bangor Democrat and co-chairman of the Taxation Committee.
The opposition countered that the bill was too confusing and could place additional hardships on those struggling to get by.
“I don’t believe it meets the straight-face test,” said Sen. Jonathan Courtney, a Springvale Republican and Senate majority leader. “I think we can do better.”
House Democrats defeated an effort to send the issue out to voters. Some opponents are already threatening a people’s veto.