ANALYSIS

LePage’s budget proposal sets up tax fight in Augusta

Posted Jan. 16, 2013, at 3:54 p.m.
Last modified Jan. 16, 2013, at 5:26 p.m.
Gov. Paul LePage
Gov. Paul LePage Buy Photo

AUGUSTA, Maine — Republican Gov. Paul LePage’s proposal to suspend municipal revenue sharing during the next two years sets up a battle with Democrats in the Legislature over whose approach to taxation best serves Maine’s middle class.

Democrats hold majorities in the Maine House and Senate, but their advantage is not great enough to override vetoes or pass emergency legislation without votes from Republican legislators. That dynamic makes the State House a place where policy can’t be separated from politics.

LePage won the governor’s race in 2010 with a campaign that focused on shrinking “bloated” state government to benefit working people. Democrats in 2012 regained legislative majorities they lost to Republicans in 2010 by presenting LePage’s and the GOP’s policies, such as changes to state health insurance rules and cuts to social programs, as being harmful to the middle class.

That struggle to win middle-class voters frames an already strained relationship between LePage and Democratic legislative leaders as they strive to pass a new biennial budget and position themselves for the 2014 gubernatorial and legislative elections.

That struggle intensified Wednesday, with Senate President Justin Alfond, D-Portland, labeling income tax cuts passed by LePage and the GOP-led 125th Legislature a “gimmick,” and House Minority Leader Kenneth Fredette, R-Newport, firing back with a statement that defines sustainable government as “controlling spending and paying our bills, not implementing new taxes that Democrats hope Mainers won’t notice in order to feed their appetite for spending.”

The governor’s 2014-15 budget, which Finance Commissioner Sawin Millett and other Cabinet members unveiled Friday, proposes a complete suspension of municipal revenue sharing for both years. LePage characterizes the move, which would save the state almost $99 million per year, as an unwelcome but necessary response to a state government economic crisis fueled in large part by dwindling federal reimbursements for health and welfare programs.

Democrats call it a “shocking cost shift to communities and property taxpayers,” according to House Majority Leader Rep. Seth Berry, D-Bowdoinham. They argue that the 125th Legislature failed to fund income tax cuts that began to take effect Jan. 1 of this year and that LePage’s proposed 2014-15 budget, which also calls for significant limitations on the homestead exemption and circuit breaker property tax relief programs, leaves middle-class property taxpayers holding the bill for income tax cuts that disproportionately benefit wealthier Mainers.

As they lambaste LePage’s call to suspend revenue sharing, Democrats remain coy about offering alternatives that could be construed by opponents as tax increases. Berry, who during the previous Legislature served as lead Democrat on the Taxation Committee, called the governor’s plan to suspend revenue sharing unacceptable but said it’s “entirely premature” to talk about alternatives.

LePage already has. In a Jan. 3 video touting the tax cuts, the governor said he “could not support taking money out of the pockets of hardworking Mainers” in response to a question about Democrats’ “push to increase the tax rates to the higher rates of the past” from his press secretary, Adrienne Bennett, who said Democrats created the perception that they would do so during the 2012 campaign.

Berry said Tuesday that Democrats will look at “spending and revenue,” but that he wants to let the budget-writing Appropriations Committee hear from the public before offering specific alternatives to LePage’s proposals. He said expanding the sales tax base by extending the tax to many items that are now exempt, as legislative Democrats proposed in the mid-2000s, would not be his preferred method of raising revenue.

Democrats continue to link the cuts proposed in LePage’s budget to the state revenue decrease associated with the new state income tax cuts. Eventually, filling what Democrats describe as a $350 million revenue hole caused by those tax cuts will put them in a position to either propose a repeal or delay of the tax rate reductions — or suggest some other way to raise revenue needed to balance the budget.

While some GOP lawmakers, including Assistant Senate Minority Leader Roger Katz of Augusta, voiced concern about a two-year elimination of state aid to towns and cities, Republican legislative leaders continue to hold firm in opposition to any suggestion that state tax cuts enacted by the previous Legislature should be delayed or rolled back. They have been quick to argue that any new state taxes would exacerbate the impact on working Mainers of federal payroll tax reductions that lapsed at the start of 2013.

Observers from both sides of the political spectrum worry that a “tax cut versus tax shift” impasse could lead to the type of ideological gridlock that has produced serial crises in Washington, D.C., such as the recently concluded fiscal cliff cliffhanger and the impending return of a federal debt ceiling showdown.

“I expect gridlock,” said Jon Reisman, a conservative public policy professor at the University of Maine at Machias. “I don’t believe we’re likely to see bipartisan two-thirds agreement on a budget.”

Reisman equates the current political situation in Augusta to 1991, when a conflict between Republican Gov. John McKernan and Democratic legislative leaders resulted in a 16-day state government shutdown.

“In 1991, both sides preferred a shutdown to violating their principles,” Reisman said.

The increased influence of outside political groups elevates the potential for gridlock now, according to Ronald Schmidt, a political science professor at the University of Southern Maine. National political groups could motivate LePage and Democrats seeking an advantage in 2014 to reject the type of compromises that will be required to avoid a budget stalemate that damages both parties politically.

“If the message they get from constituents, including fundraisers and donors, is not to change, we get gridlock,” Schmidt said.

Conversely, the lesson of 1991 is that voters punished both parties for the shutdown.

“The GOP got pummeled in the next legislative election,” Reisman said, and voters shunned both parties to elect independent Angus King as governor in 1994.

While Democratic and Republican legislative leaders remain content to let the Appropriations Committee deal with the revenue-sharing question, advocates have begun lining up their arguments.

Scott Moody of the conservative Maine Heritage Policy Center argues that “the suspension of municipal revenue sharing is good for government transparency. Localities that have looked at state funding to pay for their pet projects will now have to re-examine them in light of their true costs to local taxpayers.”

Reisman, a former selectman in Cooper, adds that “revenue sharing is one option that does not cut services directly. Towns can decide what level of services to fund,” he said.

Garrett Martin, executive director of the liberal Maine Center for Economic Policy, disagrees with the premise that state tax increases should not be considered.

“Property tax is a much more significant share of a middle-class household’s tax pie than for upper income households,” Martin said. “If you consider the impact of [cuts to revenue sharing, the circuit breaker and homestead exemption], the amount of taxes that low- and middle-income families is going to pay is greater than the benefits they will receive under the income tax cuts. Anyone who would claim that they are better off fundamentally doesn’t understand how our overall tax system works.”

One key group that hasn’t been heard from is Maine’s middle class, but Martin expects that to change as property taxpayers better understand the implications of the changes LePage proposes.

“When the public connects the dots, then policy makers will talk realistically about how they can fix this problem,” he said.

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