AUGUSTA, Maine — Democrats on the Legislature’s Appropriations Committee said Friday that tax cuts approved last year have inflated the size of the state’s structural budget gap, while Republicans defended the reductions as smart policy that reduces the tax burden on Maine residents and stimulates the economy.
The pre-election debate over the merits of tax cuts lawmakers approved last year as part of the state’s current two-year budget played itself out during a presentation of Maine’s latest structural gap analysis by the state’s budget bureau.
The structural gap analysis — which was released late last month and is required every two years by law — projects that state spending will exceed revenue by $756 million over the course of the next two-year budget cycle if spending essentially continues at current levels, the state meets all spending obligations required by law, and revenues match projections made in April.
During Friday’s presentation, Democratic Rep. David Webster of Freeport pressed Finance Commissioner Sawin Millett to say how large the structural gap would have been without the tax cuts passed as part of the budget. Millett said it wasn’t a matter of simple math to recalculate the structural gap.
“If we’re going to engage in partisan banter over whether higher-income or lower-income [residents] benefited from tax cuts that you voted for, then I don’t think it would be a productive discussion for me to continue with,” Millett said.
Democrats hoping to recapture control of one or both chambers of the state Legislature have been hitting the tax cut theme hard on the campaign trail this fall, accusing the Republicans in charge of approving a slate of tax cuts designed to benefit the state’s wealthiest residents.
Republicans are quick to point out that most Democrats voted in favor of the budget that included the tax cut package. They also point out that the structural gap was larger, $1.17 billion, two years ago.
“Just because we vote for something doesn’t mean we don’t necessarily have concerns about it,” said Webster, who isn’t running for re-election due to term limits. “The premise was that the cuts were going to stimulate the economy in a way that they would be paid for. I am not confident that’s a route we’re currently on.”
The tax cuts in the two-year budget lower the top income tax rate to 7.95 percent from 8.5 percent starting Jan. 1, 2013, and create two tax rates, down from the current four. The cuts also exempt some of the lowest income earners from paying state income tax, raising the amount of an individual’s post-deduction income exempt from tax to $5,000 from zero.
Millett said last month that the state will forego about $342 million in individual income tax collections during the two years covered by the next budget as a result of the tax cuts. But “to paint this as an unfunded loss of revenue never to be returned, I think, is disingenuous,” Millett said.
Millett has said the primary drivers behind the $756 million structural gap are the fact that the gap reflects an assumption that the state will meet its requirement to pay 55 percent of public education costs, a measure required by a 2004 ballot initiative that has never been realized. If education funding continues at current levels, a document explaining the structural gap notes that the gap falls to about $503 million.
The structural gap figure also assumes continued growth in Medicaid costs and that the state will restore the portion of revenue it shares with municipalities to the legally required 5 percent of sales and income tax collections, another unlikely scenario.
“To say the structural gap is being caused primarily by education and health and human services and not by a tax cut from the Legislature is unfair to the people of Maine,” said Rep. Peggy Rotundo of Lewiston, the Appropriations Committee’s ranking Democrat. “There are choices that have increased the structural gap this time around.”
But Republicans said the tax cuts were needed to stimulate economic growth.
“It’s difficult to have an Appropriations Committee meeting 17 days before an election day,” said Sen. Roger Katz, R-Augusta. “A tax cut that removes the 70,000 lowest wage earners from any responsibility to pay taxes is not a tax cut for the wealthy.”
Millett said the true effect of the tax cuts on Maine’s economy and state budget won’t be known for a few years.
“It’s really a debate that could be ongoing,” he said.