GOP Must Offer Tax Plan

Posted June 11, 2010, at 10:52 p.m.

Drawing conclusions from electoral results is risky business, but the passage of Question 1 — which repealed the plan that reduced Maine’s income tax rate while widening the sales tax — suggests several voter beliefs. More important than divining the mind of voters on the issue, however, is what the new Legislature and governor will do to change the state’s tax code from its current configuration.

The tax plan, which voters repealed in a 60 percent to 40 percent trouncing, was developed by Democratic legislators as a way to make Maine more attractive to business and new residents, while also avoiding steep declines in state tax revenue that come with recessions.

By reducing the income tax rate from 8.5 percent to 6.5 percent for most, the plan made Maine competitive with other New England states. Since most Maine businesses file taxes in the same way as couples and individuals, the lower rate would have meant business owners would have kept more of their profits. To offset the loss in income tax revenue, the plan broadened the 5 percent sales tax to some entertainment and recreation activities, the labor on repair and maintenance services, and other services such as limousines and dry cleaning. It also raised the tax on meals and lodging from 7 percent to 8.5 percent so tourists would pick up more of the tax burden.

Obviously, the plan did not lend itself to a brief, easy-to-understand explanation.

The nonpartisan Maine Revenue Services ran thousands of actual income tax returns through the new system and concluded that 87 percent of Mainers would see an overall lower tax burden (including the expanded sales tax). Many voters apparently did not trust the source of this information, the government.

The Republicans who opposed the plan were able to win repeal by noting that it eliminated itemized deductions (including mortgage interest); they did not note that the deductions were replaced by a credit system that would be applied to returns.

They also were able to say the plan created 100-plus new taxes by counting each possible service to which the sales tax would be applied; so hiring jugglers and clowns, and using pet walking, pet grooming and pet boarding services each were listed as separate items.

If some say the defeat is part of a groundswell against government spending (even though the plan was revenue-neutral), the approval of the four bond issues is evidence to the contrary.

Now that the plan is no longer law (and it never went into effect, thanks to the veto petition), what will the Republicans do? Most say income tax rates are too high. Gubernatorial nominee Paul LePage has said he would reduce the income tax rate to 5 percent, balancing the loss in revenue through cutting spending, although he offered no specifics.

The ball now is squarely in the GOP’s court. If Republicans believe Maine’s tax code is hurting economic development, they must offer a detailed plan before voters elect a new governor and Legislature in November.

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