AUGUSTA, Maine — If Congress does not act to extend current federal income tax rates set to expire Dec. 31, Mainers will see a huge tax increase of $1.4 billion in 2013 that will result in lost state revenues and will hurt the state’s economy. Members of the state’s congressional delegation say it’s unlikely the issue will be resolved until after the elections, maybe not until just before the deadline.
“If we don’t act, all the states will feel the impact,” said Sen. Olympia Snowe, R-Maine. “We should not wait until the lame-duck session to deal with this very important issue.”
She said the best way to handle the various tax rates, credits and deductions is by an overhaul of the entire tax system and not simply extending the existing tax provisions. Snowe said the Senate Finance Committee on which she serves has done considerable work in drafting a simpler and fairer tax code and she hopes reform can move forward, but she supports an extension if reform cannot be achieved.
“Now is not the time to be having a massive tax increase,” she said.
A preliminary study by Maine Revenue Services estimates Mainers will pay $1.4 billion in additional federal taxes if the existing provisions are allowed to lapse. The biggest change would be in tax rates, with elimination of the lowest rate of 10 percent. The lowest bracket would be increased to 15 percent. The top tax rate would go from 35 percent to 39.6 percent.
“We know there would be a significant impact on state revenues,” said Finance Commissioner Sawin Millett. “We also know there would be an impact on the economy.”
Millett said the state has not estimated what the impact would be on the economy to have more than a billion dollars taken through increased taxes. He said Congress may make changes that would affect any estimate, such as President Obama’s proposal to extend the tax rates and other provisions only for those married with less than $250,000 a year in taxable income.
“I do think the president is right,” said Rep. Chellie Pingree, D-Maine. “We have given the wealthiest in this country a break for a very long time and I think we have to go back to asking people to give their fair share.”
Pingree said while she supports the president’s proposal, she understands the political reality is that what gets passed likely will be a compromise after the election, with the huge tax increases just weeks away.
“I don’t have a crystal ball, but I do think some of these tax cuts will be extended,” Pingree said. She believes the political consequences of such a large tax increase will force a compromise to be worked out.
Sen. Susan Collins, R-Maine, supports extending the current tax policies until a comprehensive tax overhaul can be passed by Congress. She said it appears the partisan conflicts in Congress are preventing consideration of a lot of important issues, including tax policy.
“The economy is still fragile,” she said, “but we should not wait on comprehensive tax reform because of the impact delay has on the engine of job growth, small business.”
Collins said she also is worried that extending the tax policies, or tax reform itself, will be entangled with the budget cuts that also are under consideration. She said the across-the-board cuts through the sequestration process could add to the impact on the economy from the failure to extend tax policies or pass a tax reform package.
“If those cuts go through, some economists have said it could add a full percentage point to the unemployment rate,” she said.
Collins said even though floor speeches have started, history would indicate the problems probably will not be solved until after the elections.
Rep. Mike Michaud, D-Maine, said there will be considerable pressure on Congress to extend current tax rates and policies because of the impact on individuals, as well as the states. He also supports the president’s plan to only extend tax breaks to those making less than $250,000 a year.
Michaud said even if gridlock prevents a lame-duck session from passing legislation, he expects it will be quickly addressed by the new Congress in January.
“If they all do expire, I feel confident that with the new Congress we will be able to move forward and reinstate the middle class tax cuts,” he said.
Millett and his counterparts around the country are closely watching. What Congress does or does not do could lead to major budget changes for the states.