AUGUSTA, Maine — When Congress returns next week, it will have six weeks to decide whether to allow tax rates to go up significantly in 2011. Maine tax officials estimate the cost to state taxpayers will be more than a half-billion dollars in higher federal taxes.
“We must act, or taxes will go up,” said Republican U.S. Sen. Susan Collins. “We talk about the tax cuts expiring but it really means … taxes will go up.”
Under President George W. Bush in 2001 and 2003 tax rates were lowered, and under President Barack Obama others were lowered as well to spur economic growth in the recession. All of those lower rates were “temporary” and expire Dec. 31 unless Congress acts to extend all or some of them.
Collins said she had visited 33 Maine communities in the last three weeks before the election campaigning for GOP candidates and heard from business owners that the uncertainties of federal tax policy has meant many have delayed investment and expansion decisions.
“It’s causing them to hold back on investments, on hiring people and on making any sort of plans to expand, “ she said.
Collins is proposing that all of the expiring tax cuts be extended for two years, that the alternative minimum tax, or AMT, be indexed for a year and that lawmakers pass some level of estate tax.
“There has not been any estate tax at all this year,” she said. If the tax were to continue at 2009 levels, it would bring in an estimated $26 billion.
The AMT was passed originally to make sure the very wealthy pay some federal income tax. But it has not been indexed so every year it affects more taxpayers. One study indicates it will start affecting some families with as little as $36,000 a year in income. It will cost $66 billion to index for the 2011 tax year.
The AMT operates like a parallel tax system, but with many different rules. For example, the standard deductions and personal exemption are eliminated under the AMT.
“I would like a permanent fix for the AMT,” said U.S. Rep. Mike Michaud, D-Maine. “But I am not sure we can get that done in the lame duck [session]. We should at least provide a one-year fix.”
He said there would be great pressure on Congress to act because of the huge numbers of taxpayers who will be affected if they do not extend the tax cuts in some form. He has supported President Obama’s plan that would allow tax increases only for families making more than $250,000 a year and said extending the tax breaks to all will mean borrowing more to pay for the cost of the tax break.
“I don’t believe there will be the votes to extend all of these tax cuts,” he said, “We will have to work out a compromise to get the votes needed to pass a tax package.”
U.S. 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.
U.S. Rep. Chellie Pingree, D-Maine, supports continuing the tax breaks for those who make less than $250,000 a year, which she points out is about 98 percent of taxpayers.
The scope of the tax breaks is sweeping, as is the impact if they are allowed to expire. For example, the bottom income tax rate would jump from 10 percent to 15 percent, and the top rate would jump from 35 percent to 39.6 percent.
The taxes on capital gains and dividends would go up, and popular tax credits would be reduced. For example, the child care credit would go from $1,000 to $500 if Congress does not act.
What Congress does, and when it acts, will have a huge impact on state lawmakers. The state Consensus Economic Forecasting Commission assumed the tax cuts would be continued at least for 2011.
“If they are not, our forecast is going to be way off and we would have to meet to make changes,” said University of Southern Maine economist Charles Colgan, chairman of the panel. “It would really be bad.”
He said such a huge tax increase would hurt the national economy and Maine would not escape the impact. It also likely would mean a major reduction in state revenues with many of the state tax law provisions “piggybacking” on federal law.
Collins hopes the extension of the tax provisions will be the top priority when Congress returns to work next week.