AUGUSTA, Maine — The Tax Foundation on Wednesday accused Gov. Paul LePage of slipping a “stealth tax increase” into his proposed 2014-15 biennial budget. The foundation’s analysis found that the governor’s proposal to forgo adjusting income tax rates to inflation in 2014 and 2015 will raise average tax rates “in all cases.”
If LePage’s proposal to suspend indexing tax brackets to inflation remains in the budget, Mainers will pay state income tax in 2014 and 2015 based on this year’s income brackets. That would harm taxpayers, wrote the report’s authors, Elizabeth Malm and Stephen Entin.
“Higher income can bump a taxpayer into the next tax bracket, even if that higher income is merely keeping pace with inflation,” the report states.
As an example, the Tax Foundation analysis states that an individual earning $40,000 annually whose income rises by 2 percent, the anticipated rate of inflation, would pay 3.6 percent more in state income taxes.
The report labels that scenario “bracket creep.” It also warns that a failure to index income tax brackets to inflation would push more Maine income taxpayers into higher brackets.
“This is problematic because incomes haven’t risen in real terms — only nominally,” Malm, an economist, said Wednesday in a release from the Tax Foundation, which is based in Washington, D.C. The group calls itself non-partisan, but it has ties to conservative groups and is considered pro-business.
The Tax Foundation analysis also suggests that LePage’s proposal to switch in 2016 to a practice called “chained consumer price indexing” would adversely affect taxpayers. Although the change, which the federal government has considered to calculate Social Security cost-of-living adjustments, would provide a “more accurate picture of cost-of-living changes and the way in which households substitute between goods when prices change,” Malm and Entin argue that it would cause taxes to increase faster than under the method currently used.
The LePage administration projects that the proposed suspension of indexing income tax brackets for inflation would save approximately $8.5 million in 2014-15.
“Despite pressures to make up revenues elsewhere, changes to the way in which the state indexes for inflation should not to be used as a quick tool to fill a budget gap,” the report states. “Indexing is intended to ensure that taxpayers’ taxes do not grow faster than their real incomes.”
Adrienne Bennett, LePage’s press secretary, did not address the indexing question directly when asked for a comment on the Tax Foundation analysis. Instead, she repeated the administration’s argument that the tax cuts save an average Maine working family $300 per year.
“It’s a stretch to call this a tax increase, because it assumes income growth that’s not happening,” said David Sorensen, communications director for the House Republicans. “We’ve had a couple of good quarters, but overall we’re seeing a generally stagnant income level since the recession.”
The analysis also mentions LePage’s proposal to suspend municipal revenue sharing for two years, but Malm and Entin offer no projections on how that change would affect taxpayers. They do conclude that temporary measures such as those included in LePage’s 2014-15 budget make it more difficult for taxpayers and local governments to formulate long-term plans.
When he was mayor of Waterville, LePage “found efficiencies and implemented changes that enabled the city to restructure its expenses so that taxes could be cut,” Bennett said. “It is a false assumption that any Maine city or town needs to raise taxes due to a change in state funding.”
LePage, who championed tax cuts during his 2010 gubernatorial campaign, has made tax reduction a centerpiece of his administration. During his State of the State address Tuesday, he urged the Legislature, which is now led by Democrats, not to roll back tax cuts enacted by the previous Legislature, in which Republicans held majorities of both chambers.
Income tax rate cuts enacted by the previous Legislature took effect Jan. 1. Democrats have regularly cited the $342 million in forgone revenue anticipated to result from those cuts as a reason for state government’s current fiscal dilemma.
In response to a reporter’s question Wednesday about LePage’s entreaty to legislators not to roll back the income tax rate reductions, Senate President Justin Alfond, D-Portland, said the governor’s proposals to suspend municipal revenue sharing and inflation indexing would raise taxes on Maine residents.