Mainers may face tax hike of $550 million

Posted Sept. 16, 2010, at 8:18 p.m.

AUGUSTA, Maine — If Congress fails to extend the tax cuts that expire Dec. 31, state officials say Mainers will face a tax increase of more than $550 million in 2011, and that could prolong the recession.

“This could have a significant effect on both the state and the national economy,” said Mike Allen, research director for Maine Revenue Services. Allen presented the estimate at a Thursday meeting of the Appropriations Committee.

Like those in about a dozen states, Maine’s tax laws are intertwined with federal tax codes. Allen said the next Legislature could have some significant tax decisions to make depending on what Congress does, or some Mainers could face increased state tax bills as well.

Of course, Mainers would not be alone in seeing their tax bills rise if the soon-to-expire Bush-era tax cuts aren’t extended.

A typical U.S. family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500.

Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $52,300.

The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level.

Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That’s true, but they also reduced taxes for the working poor, the middle class and just about everyone in between.

Those tax cuts expire at the end of the year, setting the stage for a high-stakes debate just before congressional elections in November. If Congress fails to act, families at every income level will see more taxes being withheld from their paychecks come January.

President Barack Obama wants to extend the tax cuts for individuals making less than $200,000 and joint filers making less than $250,000 in adjusted gross income. That’s income from wages, capital gains and dividends, before standard deductions and exemptions are subtracted.

Republicans and a growing number of Democrats in Congress want to extend all the tax cuts, at least temporarily.

Sen. Olympia Snowe, R-Maine, said Congress should extend all of the tax breaks that are set to expire. She said even though she had opposed some of the tax cuts when they were first passed, she believes they all should be extended as the recession continues.

“It is the worst possible time to increase taxes during the middle of a recession,” Sen. Susan Collins, R-Maine, said in an interview. She said any tax increases would hurt job creation when jobs are sorely needed.

Reps. Mike Michaud and Chellie Pingree, both D-Maine, are supporting continuing the tax breaks, but only for those that make less than $250,000 a year, which is about 98 percent of taxpayers.

“Now is not the time to raise taxes on working Americans,” Pingree said in an interview.

In Maine, Allen said state revenues would also be affected, depending on what Congress does.

“We are meeting in November to project state revenues for the next budget cycle, and we hope Congress will have acted by then,” he said.

Rep. Emily Cain, D-Orono, the co-chairwoman of the Appropriations Committee, said she knew the impact of failure to continue the lower tax rates would be significant, but was not aware of the Maine Revenue Service estimate. She said it increases the uncertainty that the new governor and Legislature will have to deal with in January.

“The crystal ball for what is going to happen in Washington is definitely broken,” she said. “We don’t know what Congress will do and when they will do it, but we know it could have a huge impact on the state and on state government.”

Cain said the committee will have to be conservative in its assumptions until Congress does act. Rep. Sawin Millett, R-Waterford, the GOP lead on the committee, agrees.

“The magnitude of this question and how it is resolved is huge,” he said. “Tax conformity is always an issue, but it could be even more of an issue depending on what Congress does do, and we may not know that until well into the process of developing the new budget.”

Millett, a former state finance commissioner, said the new governor and Legislature will be faced with some major decisions in their first weeks in office. He said any changes in the federal tax code will have both good and bad effects on state revenues, and he hopes Congress acts soon to end the uncertainty.

With Congress facing a wide range of major issues in the next few weeks, members of the delegation believe the major tax issues such as extending the tax cuts will not be considered until after the November elections.

House Speaker Nancy Pelosi, D-Calif., wouldn’t commit to vote on any tax proposals before the election. However, she did pledge to address them by the end of the year.

“The only thing I can tell you is that the tax cuts for the middle class will be extended this Congress,” Pelosi told reporters Thursday.

More than half the country backs raising taxes on the richest Americans, according to a new Associated Press-GfK Poll. The survey showed that by 54 percent to 44 percent, most people support raising taxes on the highest earners.

In a breakdown of the numbers, 39 percent agree with Obama, while 15 percent favor raising taxes on everyone by allowing the cuts to expire at year’s end. Still, 44 percent say the existing tax cuts should remain in place for everyone, including the wealthy.

Stephen Ohlemacher and Laurie Kellman of the Associated Press contributed to this report.

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