Referendum mirrors divide on state tax reform

Posted May 07, 2010, at 8:24 p.m.

BANGOR, Maine — Although much of the focus leading up to the June 8 vote has been on the seven Republicans and four Democrats seeking their parties’ nomination for governor, voters also will ponder a referendum question that has gone relatively unnoticed.

Question 1 reads: “Do you want to reject the new law that lowers Maine’s income tax and replaces that revenue by making changes to the sales tax?”

In Maine — and just about everywhere else — tax talk typically evokes black-and-white emotional responses. No new taxes, opponents say. Shift the tax burden more evenly, reform supporters counter.

In reality though, LD 1495, An Act To Implement Tax Relief and Tax Reform — which passed in the Legislature last year and now faces possible repeal — is complicated and represents a philosophical divide on tax policy approach.

The reform bill, in a nutshell, lowers Maine’s top income tax from 8.5 percent to 6.5 percent for all residents earning less than $250,000 a year, although in some cases, the rate will be even lower. For someone earning $30,000 a year, that’s a savings of $600.

To make up for the lost income tax revenue, the bill broadens the state’s sales tax to more categories of goods and services and raises the meals and lodging tax from 7 percent to 8.5 percent.

“It’s sound tax policy and it’s the right thing for the state of Maine,” said Rep. John Piotti, D-Unity, the House majority leader and chief architect of the tax reform bill. “Lower income taxes will spur economic development by luring new businesses and retaining existing [ones]. But it also will stabilize revenues and lower the overall tax burden on about 90 percent of Mainers.”

If Piotti is the bill’s chief architect, Sen. David Trahan is its toughest critic.

“We don’t think cutting income tax is bad, I think we all agree that cutting income tax is good, but how we do it matters,” said Trahan, a Waldoboro Republican who led the effort to put the repeal on the ballot. “The biggest reason I opposed the bill is because it creates too many victims, such as seniors and small-business owners.”

The case for reform

Piotti, who has been working on tax reform for several years, doesn’t pretend that his bill is a tax cut. While many Mainers would likely see decreases, the changes represent more of a tax shift.

The difference is the public response to income tax versus sales tax, he said.

“People don’t look at sales tax the same way,” he said. “Sales tax can be exported. And businesses don’t look at sales tax when locating their companies.”

Maine Revenue Services, part of the state Department of Administrative and Financial Services, has projected a $55 million reduction in tax burden for Maine residents.

“I think Maine Revenue’s economic analysis department provides a lot of useful information,” said Richard Woodbury, an economist and former Independent legislator from Yarmouth. “High income tax is one of the biggest disincentives for business.”

Several business groups, including the Maine State Chamber of Commerce and the Bangor Region Chamber of Commerce, supported the tax reform bill last year.

The reform bill eliminates income tax deductions and exemptions from the state’s tax code, something repeal supporters claim hurts businesses.

“Those with very high itemized deduction will be affected,” said Woodbury. “But that’s a small percentage of filers.”

Supporters of reform further point to a refundable tax credit included in the bill that specifically helps Mainers with low incomes.

“Even if 68 percent of Mainers end up paying a little more in some sales tax items, it’s a benefit,” Piotti said. “It’s like paying 68 cents for a dollar’s worth of benefits.”

The biggest positive, though, is stabilizing state sales tax revenue, Piotti said. That revenue line is now dominated by two industries: car sales and construction supplies.

“Those things plummet exactly when the state needs more revenue,” he said.

The case for repeal

Trahan has led the tax reform repeal effort, which included gathering the 55,000 signatures needed to put a referendum question on the ballot.

The legislator and the political action committee Still Fed Up With Taxes have been working hard to discredit the claims made by supporters of LD 1495.

“Exportability is a myth,” Trahan said of the notion that tourists will help shoulder the sales tax burden. “In most cases, an expanded sales tax hurts Mainers 2 to 1.”

Trahan pointed to items that would be taxed such as car repairs, pet grooming and dry cleaning that would hurt everyday Mainers.

“No one can argue that these are luxury items,” he said.

Trahan said the tax reform bill should be scrapped and replaced with a new tax reform that cuts taxes rather than shifts taxes.

“If the economy was doing well, this shift might have a better opportunity to succeed,” he said. “But many of these retail businesses are already at risk. If they lose business because of higher sales taxes, that could be different.”

Albert DiMillo Jr., a lifelong Democrat and an experienced accountant, has been a staunch advocate of the repeal, primarily because he sees the tax reform bill as a giveaway to the wealthy.

Trahan bristled at the fact that some industries that had been targeted for new sales taxes — including the skiing industry — were ultimately left alone.

“Anyone with a strong lobby got taken out, but everyone else suffered,” he said. “That’s unfair.”

Business groups whose members would be most affected, such as the Maine Innkeepers Association and the Maine Restaurant Association, have supported repeal efforts.

The politics

The tax reform issue has come up recently in Republican and Democrat debates and, not surprisingly, the issue is largely partisan. All four Democratic nominees support the tax reform initiative with gusto. The seven Republicans, with the notable exception of Peter Mills, oppose LD 1495 and support a repeal. Mills was the only Republican senator to support the bill last fall.

“Tax policy is one of the most complicated issues that the state deals with, and it’s too bad that the debate has become ideological,” Piotti said.

Trahan largely agreed that it has become partisan, but he doesn’t believe it’s a partisan issue.

Even the conservative Wall Street Journal ran an editorial piece last year titled “Maine Miracle” that praised Maine’s tax reform effort for dropping Maine’s income tax rate from seventh to 20th highest in the country. The Tax Foundation, a longtime critic of Maine’s high tax rate, also called LD 1495 a positive step forward.

Interestingly enough, the Maine Green Independent Party has stood with state Republicans on the tax issue. Trahan said he hopes Greens turn out to vote, even though they don’t have a gubernatorial primary.

Woodbury, who supports the reform effort, said allowing the public to decide ultimately will make the shift more credible.

“The public needs to buy in for it to be successful,” he said.

If the law is not repealed, changes would go into effect in January 2011. Trahan, however, predicted that if the repeal is not successful, the bill could be challenged in court.

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