April 24, 2018
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Forecasters assume Congress will act on taxes

By Mal Leary, Maine Public

AUGUSTA, Maine — The state’s revenue-forecasting committee has decided to assume the U.S. Congress will extend expiring tax cuts, breaks and credits in the next few weeks. The committee was told Tuesday that the cumulative effect of all the rate changes, credits and deductions, as well as the Alternative Minimum Tax, not being addressed would exceed a $1 billion increase in federal taxes on Maine taxpayers.
“At this stage, we’re not certain, they’re not certain what they are going to do with the Bush tax cuts,” said Jerome Gerard, acting state tax assessor and chairman of the panel. “I think that we don’t have any alternative but to use the footnote approach and do the forecast based on assumptions.”
Grant Pennoyer, director of the Office of Fiscal and Program Review, a member of the forecasting group, said the panel could make the assumption but provide a footnote that would say any action by Congress could have a major effect on the forecast.
“If they [Congress] do not do anything, we will have to revisit our projections, and we can put that in a footnote like we have for other assumptions we have made in the past,” he said.
Pennoyer is concerned Congress may act on some of the expiring tax issues and not others, which will have an effect on state revenues as lawmakers in the new session try to craft a two-year state budget.
The scope of the potential impact was discussed by Mike Allen, research director for Maine Revenue Services. He pushed for the panel to decide whether to accept the assumption that Congress will act because of the magnitude the impact would have on the state’s economy, especially on the sales tax.
If taxpayers are paying more federal income tax, they will not have as much money to spend in the retail sector, he said.
Allen said that of the several federal tax provisions expiring at the end of the year, the most discussed are the tax reductions passed in 2001 and 2003 at the initiative of President Bush. He said his office has estimated the tax increases from that set of tax rates alone is at least $550 million.
“If you include a fix to the AMT [alternative minimum tax], that takes it up to $750 million,” he said.
In addition, Allen said, there are a number of tax credits, deductions and breaks passed as part of the stimulus legislation initiated by President Obama that also expire at the end of the year.
“We had estimated they are somewhere between $350 [million] to $400 million,” he said. “Come January 1st, at the moment, we are looking at a potential tax increase on Maine residents of [more than] a billion dollars.”
The panel discussed probable taxpayer reaction to such an increase. There was consensus it could affect state revenues in several ways, the most significant being reduced sales taxes because the big tax increase would significantly reduce disposable income for most Mainers.
“The tax increases would be about $200 a month for a family of four in higher withholding taxes,” Allen said.
The big question mark is what Congress will do. U.S. Sen. Susan Collins, R-Maine, is proposing that all of the expiring tax cuts be extended for two years, that the AMT be indexed for a year and that lawmakers pass some level of an estate tax. She said there should be some level of taxes levied on large estates to help reduce the federal budget deficit. There has not been an estate tax since 2009.
U.S. Rep. Mike Michaud, D-Maine, said there will be great pressure on Congress to act because of the huge numbers of taxpayers that will be affected if Congress does not extend the tax cuts in some form. He has supported President Obama’s plan, which would only allow tax increases for those 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.
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 first were passed, she believes they all should be extended as the recession continues.
U.S. Rep. Chellie Pingree, D-Maine, has supported the president’s position on continuing the tax breaks, but only for people who make less than $250,000 a year, which she points out, is about 98 percent of taxpayers.
On Tuesday, leaders from both parties in Congress vowed to spare the more than 21 million taxpayers from significant tax increases when they file their returns next spring by adjusting the alternative minimum tax before the end of the year.
The tax was first enacted in 1969 to make sure higher-income taxpayers could not use deductions and credits to avoid paying any federal income tax. The income limits, however, were not indexed for inflation, so Congress routinely fixes the AMT each year to spare millions of middle-income taxpayers from tax increases that would average about $3,900.
Congress hasn’t made the change for 2010. In a letter to the IRS, Democratic and Republican leaders of the tax-writing congressional committees said they would address the issue after Congress returns next week in a lame-duck session.
Patching the alternative minimum tax for one year would cost about $70 billion, according to congressional estimates.
On Tuesday, the IRS issued a statement saying the lawmakers’ assurances “will be very helpful.”
In 2009, the alternative minimum tax affected individuals making more than $46,700 and married couples making more than $70,950. The four lawmakers said they will write legislation that essentially updates the income levels for 2010 to account for inflation.
Without a fix, taxes would go up for individuals making as little as $33,750, and married couples making as little as $45,000. The tax increases would average about $3,900, but they would vary greatly, depending on income, filing status and deductions.
For example, a married couple making $85,000 a year with two college-age children would see a $4,500 tax increase if the AMT is not patched, according to an analysis by The Tax Institute at H&R Block.
A married couple making $100,000 a year with two young children would see a tax increase of more than $6,100, according to the analysis.
The Associated Press contributed to this report.

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