AUGUSTA, Maine — During an ambitious 1st regular session, the Republican-controlled Legislature and Gov. Paul LePage took a bite at tax reform in the $6.1 billion biennial budget by reducing the top income tax rate from 8.5 percent to 7.95 percent.
It was the biggest tax reduction in Maine’s history but, as the session wrapped up, legislative leaders and the governor warned that the tax reform debate was far from over.
Although the next legislative session is still a few months away, members of the Taxation Committee have been working throughout the summer to come up with a new tax reform plan.
Last week, a subcommittee led by Sen. Richard Woodbury, I-Yarmouth, met with a wide range of business leaders and others to kick around ideas. That subcommittee, and the Taxation Committee as a whole, plans to keep meeting between now and the end of the year to see if a tax reform package is possible when the Legislature resumes in January.
“I have a fair bit of skepticism that — in the current environment — something comprehensive is feasible,” Woodbury said. “But it’s a conversation that needs to continue because the system we have now is not the right system.”
Democrats and Republicans do agree the system needs fixing. Where they differ is on how to fix it. Woodbury, an economist and one of the few independent voices in the Legislature, said a solution needs buy-in from both parties.
Senate Majority Leader Jonathan Courtney of Springvale said he’s hopeful and optimistic that the Legislature will get something passed next session.
“We took a good first step this last session, but [tax reform] is a major priority of this Legislature,” he said.
Rep. Donald Pilon, D-Saco, a member of the Taxation Committee, said the most important things Mainers want from the tax code are simplicity, fairness and predictability.
“But if we don’t have a clear goal, it may not be ready,” he said.
Even if the 125h Legislature comes up with a bipartisan package, the next legislature is not bound to it. And if history is any indication, lawmakers from both sides will continue to tackle tax reform in small and big ways.
Only two years ago, it was the Democratic-controlled Legislature that had its turn at tax reform.
With strong majorities in the House and Senate and Gov. John Baldacci finishing his second four-year term, Democrats advanced their tax reform package, which reduced Maine’s top income tax from 8.5 percent to 6.5 percent for all residents earning less than $250,000 a year. In some cases, the rate dropped even lower.
To offset lost revenue, the bill sought to broaden the state’s sales tax to more categories of goods and services and raised the meals and lodging tax from 7 percent to 8.5 percent.
The plan was approved by the House and Senate and signed into law by Baldacci in June 2009. Although the effort contained a number of elements Republicans liked — the conservative editorial board of the Wall Street Journal called the plan a “miracle” — the bill received no GOP support in the House and only one Republican senator, Peter Mills, voted in favor.
Republicans, with help from some in the business sector, vowed to fight, arguing that the proposed changes were too complicated and did little to relieve the tax burden on Mainers. The GOP launched a people’s veto effort and gathered enough signatures to let the people of Maine decide if this was the tax reform they wanted.
With more than 60 percent of the vote, Mainers rejected the Democrats’ plan in June 2010.
Five months later, Republicans overtook the House and Senate and LePage was elected as governor. Now, it is the Republicans’ turn to try and succeed where the Democrats failed.
At the moment, Republicans and Democrats seem to agree on addressing tax credits and loopholes that exempt certain businesses or groups from paying the same level of taxes as others. The breadth and quantity of those exemptions has further muddied the waters of Maine’s tax code.
But if changes are suggested, Pilon said that he’s not sure the Legislature should be doing it because of the potential influence of special interest groups and lobbyists.
“It should be an independent group because when we do it, it becomes a political football,” he said.
Woodbury said income tax is the biggest piece of reform because high income taxes deter job creators. Many lawmakers want to get Maine’s rate down to 5 percent or even 4 percent.
Pilon, however, said to do that means making up at least some of the difference somewhere else, likely in sales taxes since Maine’s sales tax of 5 percent is among the lowest in the country.
He said the state needs to again consider raising taxes on meals and lodging, an idea that undoubtedly would face opposition from the restaurant and hospitality lobbies. One way to do that is to create a local-option tax that individual communities would have to approve. Tourist-heavy cities across the country have used local-option sales taxes for years.
Courtney said Republicans are unlikely to support any increases in sales taxes.
“With our fragile economy, it would be foolish to expand our sales tax base,” he said. “You need to tie tax relief to spending reduction in state government, not creating new burdens.”
There are carry-over bills from the 1st session related to tax reform, the most notable being LD 849, sponsored by Sen. David Trahan, R-Waldoboro, that seeks to use any general fund surpluses to reduce income taxes.
Taxation Committee members likely would take the framework of that bill to create something more comprehensive for January, according to Courtney.
Gov. LePage has his own thoughts on tax reform and they may or may not mirror what’s being discussed by the Taxation Committee.
Adrienne Bennett, LePage’s spokeswoman, said a tax reform plan would be included in the governor’s supplemental budget that will be presented to the Legislature during the 2nd session.
She said a centerpiece of that plan will be eliminating income tax on pensions, an idea the governor has been talking about publicly for several weeks.
Eliminating taxes from pensions is designed to help elderly residents on fixed incomes but also to entice more wealthy retirees back to Maine. Early estimates suggest that the idea would reduce taxes for about 75,000 Mainers but would create a $93 million hole in an already porous budget.
Courtney, who served on the Taxation Committee for four years before taking a leadership role, said there is always an urgency to do something on tax reform.
“But the Taxation Committee only has one side of the equation,” he said. “The spending side is just as important and that’s something we’re starting to look at more closely than we have in a long time.”