AUGUSTA, Maine — Maine’s budget problems could become $81 million more difficult during the next two-year budget cycle if the state chooses to conform fully with changes made to the federal tax code as part of the start-of-the-year deal reached in Congress to avoid the fiscal cliff.
The American Taxpayer Relief Act passed by Congress at the beginning of the year introduced an array of changes to the U.S. tax code. It increased the standard deduction amount for married couples filing joint tax returns, extended deductions teachers can claim for paying classroom expenses out of their pockets, made more interest paid on student loans tax-deductible and allowed businesses to continue depreciating the value of certain property for tax purposes.
Now Gov. Paul LePage’s administration and Maine lawmakers have to decide whether to align Maine’s tax code with those federal changes, Mike Allen, Maine’s associate commissioner for tax policy, told lawmakers on the budget-writing Appropriations Committee on Tuesday.
Reconciling the state and federal tax codes this year would cost state coffers $81.3 million in lost tax revenue over the next two budget years, according to a Maine Revenue Services analysis.
“Conformity will result in a tax cut but at a cost of reduction in revenue of approximately $81 million,” said Rep. Peggy Rotundo, D-Lewiston, the House chairwoman of the appropriations panel. “That would be $81 million the state would not have for things like schools, revenue sharing, whatever.”
Lawmakers already face a dim revenue picture as they start to consider LePage’s two-year budget proposal in the coming days. The state’s revenue forecasting committee in late November revised revenue projections downward from previous estimates by $126.6 million for the two-year budget period that starts July 1.
LePage’s budget has met with objections from Democrats, some Republicans and municipal officials across the state for its proposal to suspend revenue sharing with municipalities in an effort to save about $200 million at the state level. The budget also proposes a number of other measures that municipal officials have said will either result in property tax hikes or major cuts at the local level.
The LePage administration is preparing to submit legislation that would conform the state tax code with federal tax code changes. But Finance Commissioner Sawin Millett said the administration will likely only propose to conform with provisions that won’t have a major impact on the state’s bottom line and add to the state’s budget troubles.
“It’s a huge challenge to look at $81 million,” Millett told Appropriations Committee members. “In the best of all worlds, we’d like to conform to everything. In this go-around, it’s likely beyond the bounds of expectation.”
Maine taxpayers are filing tax returns that have been prepared with an assumption that the state will reconcile its tax code with the recent federal changes, Allen said, though the bulk of federal tax code changes would affect taxpayers when they prepare next year’s tax returns. If Maine lawmakers opt not to conform the state tax code to federal changes, a limited number of taxpayers might have to amend their tax returns this year, he said.
Maine residents would see a tax cut and would have an easier time preparing their taxes if lawmakers conformed Maine’s tax code with recent changes to the federal code, said Rep. Dennis Keschl, R-Belgrade.
“Any deviation enhances the complexity for the taxpayer who’s filling out their forms,” he said. “The simpler you can make it, the better off everybody is.”