LePage’s proposal to eliminate pension taxes slows reform work

Posted Oct. 13, 2011, at 5:22 p.m.
Maine Gov. Paul LePage makes remarks prior to signing a bill authorizing charter schools, at the State House in Augusta, Maine on Wednesday, June 29, 2011.
Pat Wellenbach | AP
Maine Gov. Paul LePage makes remarks prior to signing a bill authorizing charter schools, at the State House in Augusta, Maine on Wednesday, June 29, 2011.

AUGUSTA, Maine — At nearly every public event in the last two weeks, Gov. Paul LePage has touted his proposal to exempt retirees’ pensions from state income taxes but has offered few details about how he plans to do it.

Members of the Legislature’s Taxation Committee, who have been working all summer on a tax reform package, are anxiously awaiting the details of that estimated $93 million proposal.

“We really have yet to see a plan or a way to pay for it, so I don’t think there is a lot to respond to at this point,” said Rep. Seth Berry of Bowdoinham, the committee’s ranking Democrat. “With any tax reform measure, it has to be paid for.”

Lawmakers also are increasingly skeptical that they will be able to introduce anything comprehensive on tax reform anytime soon now that the governor’s pension proposal is on the table.

“It’s clear that the governor’s priority is to address the pension issue. I think that’s a prudent thing to do because we’re encouraging retirees to go elsewhere now,” said Rep. Gary Knight, R-Livermore Falls, the House chair of the Taxation Committee. “Does that delay or preempt other tax reform initiatives? It certainly puts a damper on things.”

The governor’s proposal is not new. In past legislatures, several bills have been introduced to adjust taxes on pensions. Some have sought to exempt military pensions. Some have sought to increase the current exemption. Maine’s tax code already exempts the first $6,000 of pension income from state taxes.

Few of those bills have been successful, in part because any change results in less tax revenue for the state.

Michael Allen, a researcher with Maine Revenue Services, has projected that eliminating income taxes on pensions would cost the state approximately $93 million a year. Allen said that estimate likely would be revised sometime after Dec. 1 when the new state revenue forecasts are due.

“I wouldn’t expect it to change all that much,” he said.

Republicans and Democrats are supportive of the pension tax exemption in theory, but are unsure of where the governor can find $93 million on top of the tens of millions in state budget cuts that already have been targeted.

Adrienne Bennett, the governor’s spokeswoman, said the pension tax proposal is not in bill form yet but likely will be part of LePage’s supplemental budget.

“Our opponents have said it can’t be paid for,” she said Thursday. “Is it possible? We’re not sure yet. Is it a challenge? Absolutely, but it’s one of our priorities.”

Knight agreed.

“I think it’s an extreme challenge in this period we’re in,” Knight said. “Maybe we can get there incrementally, I don’t know.”

The main reason the governor has supported an exemption on pension taxes is to help keep retired Mainers from moving out of state and to encourage other retirees to relocate to Maine.

A recent study conducted by the liberal-leaning Center for Budget and Policy Priorities,

however, rejects the notion that states that don’t offer new tax cuts risk driving residents to move to other states.

The study suggests that the effects of tax increases on migration are small. Between 2001 and 2010, only 1.7 percent of U.S. residents moved from one state to another per year, according to Census data.

Those that do migrate to another state often do so for a new job, cheaper housing or a better climate, the study concluded.

Florida, for instance, is often cited as a state that attracts out-of-state residents (including many Mainers) because it has no income tax. However, census data shows that the influx of U.S. migrants into Florida has slowed in the last several years. The tax policies did not change in that time period, but housing prices increased dramatically until the recent economic downturn.

The center’s study also said there is a trade-off to lowering taxes because less revenue prevents a state from maintaining the kinds of high-quality public services that potential migrants value.

Berry said the governor still has not addressed the $400 million hole in the state’s budget that was created when LePage reduced income taxes as part of his 2012-13 budget that passed during the Legislature’s first session.

“One thing I want to make sure does not happen is that we go into the next biennium without a way to pay for our policy initiatives,” Berry said.

Nevertheless, Maine lawmakers from both sides of the political aisle believe pensions need to be looked at. Gov. LePage’s proposal is not the only bill that addresses pension taxes.

Rep. Meagan Maloney, D-Augusta, has introduced a bill for the second session titled An Act to Limit Taxes on Pensions. Rep. Ryan Harmon, R-Palmero, has a bill titled An Act to Reduce Taxes for Retired People that presumably looks at pension taxes.

As for the the Taxation Committee, its members plan to meet one more time in November to decide whether to advance a tax reform package in the Legislature’s second session.

Even if members come up with something, passing it could be near impossible. Knight said in

the last two decades there have been at least 50 proposals to rewrite Maine’s tax laws. All have failed.

If Knight had his way, he would try to lower Maine’s income and property taxes, which he said are too high and increase its consumption, or sales, taxes, which he believes are too low. He also believes in a progressive system where those who have more pay more.

“These are always attacked from a political perspective, not an economic perspective,” he said. “I’d like to see us take it out of that [political] arena.”

Berry agreed with his counterpart.

“We need a rich conversation,” he said. “We have to listen to business leaders and economists — the people who really understand the tax code.”

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