21st century tax reform for Maine

Posted June 02, 2010, at 6:44 p.m.

On June 8, Maine residents will be voting on Question 1, which asks whether they want to repeal LD 1495, Maine’s latest attempt to reform the state’s tax structure. This law was passed in June 2009, but is now on hold pending the outcome of the referendum. A yes vote on Question 1 will repeal the new law, leaving Maine’s obsolete and flawed tax system in place. A no vote rejects the effort to repeal the tax reforms, and will allow the new law to take effect.

There are many misconceptions about this important but complex new law. For example, many people do not realize that the LD 1495 tax reforms are designed to create net tax cuts for the vast majority of Maine residents. According to state economists, 96 percent of Maine residents would have reduced income taxes, and 87 percent of Maine residents would have a net reduction in their combined sales and income taxes.

The tax law is called “revenue neutral” — it does not increase or decrease tax revenue to the state overall, but rather shifts where the revenue comes from. The new tax structure is also intended to “export” more of Maine’s taxes to nonresidents, and it improves access to property tax relief.

The LD 1495 tax reform reduces state income taxes, while stabilizing state revenues through expanding the sales tax base to a wider number of services. This would help to bring Maine’s tax structure into the 21st century.

The law also includes a modest increase in the sales tax on a few items such as lodging and meals, and automobile rentals. With the sales tax extended to more services (e.g., installation and repairs, entertainment, and “personal property” services), most residents would pay somewhat more in sales taxes, but the income tax reductions would counterbalance the increased sales taxes for most residents. The groups more likely to pay higher income taxes include nonresidents, and some high-income families with high itemized deductions.

The tax reform law seeks to fix longstanding concerns with Maine’s taxes, particularly the 8.5 percent top marginal rate in income taxes, which starts at a low income level, and an obsolete sales tax system, which is narrowly based on the products-oriented economy of the past. This results in volatile revenues and budget shortfalls that threaten basic state services, such as road construction and maintenance, education, health care and public safety. Far from being “draconian,” as one recent letter suggested, the tax reforms in this new law would help the state to construct budgets and do planning without unpleasant surprises, and would help to avoid further drastic budget cuts which threaten the state’s economic recovery.

The new income tax structure of the LD 1495 law has created some confusion. Essentially, the law replaces the current graduated income tax system with a 6.5 percent “flat tax” system, plus another 0.35 percent for incomes over $250,000. However, the tax law adds another critical component that mitigates the regressive impacts of the flat tax, through a new system of “household credits” which replaces tax exemptions.

These household tax credits, based on household size and income, are “calibrated” to offset the increase in sales taxes, and to restore fairness to the income tax system. The credits are “refundable” for low-income residents, but phased out for higher income residents, so the published 6.5 percent income tax rate is more graduated in its implementation than it first appears. As a result, the LD 1495 tax reform structure is actually “moderately more progressive” than our existing system, according to the Maine Center for Economic Policy.

As Maine struggles to recover from the recession, it is clear that having adequate and reliable state revenues from taxes is critical to economic growth, a solid infrastructure such as decent roads and an educated work force, and a functioning state. A broad range of Maine groups are now urging a no vote on the repeal, including several regional chambers of commerce, the Maine Council of Churches, and the Maine AFL-CIO. The Maine State Chamber of Commerce has also “voted overwhelmingly to support No on Question 1,” stating that they are “asking citizens to allow the law to stand.”

It is critical that Maine voters understand the Question 1 tax reform referendum. A no vote says “no repeal,” and will allow the range of much-needed tax reforms in the LD 1495 package to take effect. A yes vote on the question will repeal or reject the LD 1495 tax reform, leaving the state to continue with the obsolete tax structure we now have.

Valerie J. Carter is a research associate and William C. Murphy is the director of the University of Maine’s Bureau of Labor Education. This OpEd is based

on a longer paper, available at: http://dll.umaine.edu/ble/.

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