Some lawmakers fear dramatic tax reform proposal is repeat of doomed 2009 overhaul

Posted May 02, 2013, at 8:46 p.m.
Sen. Doug Thomas, R-Ripley
Sen. Doug Thomas, R-Ripley

AUGUSTA, Maine — Lawmakers from both parties Thursday raised concerns about a newly unveiled tax reform proposal, with some suggesting the package introduced this week is largely a repeat of 2009, when a tax reform package passed the Legislature only to be later rejected resoundingly by voters.

“This is 2009 on steroids,” said Sen. Doug Thomas of Ripley, a Republican member of the Legislature’s Taxation Committee. “Last time, they wanted to give us a haircut and charge us sales tax. This time, it looks to me like they’re trying to scalp us.”

Proposals in the new package to tax staples like groceries and heating oil rankled members of both parties. Republicans said they were skeptical of measures that would eliminate nearly all exemptions, credits and deductions written into the tax code. And Democrats said they wanted to make sure the package doesn’t make the state’s tax code more regressive so lower-income residents end up shouldering a larger portion of the tax burden.

“We gave huge tax breaks last session,” said Rep. Jeff McCabe of Skowhegan, the assistant House Democratic leader. “We’re trying to make that up through another revenue. To continue to give the top 1 percent more tax benefits is probably not a solution in my mind.”

A group of 11 lawmakers — five Democrats, five Republicans and an independent — introduced the tax reform package at an event Wednesday. It proposes a dramatic expansion of the sales tax in order to fund income and property tax relief.

The bill raises Maine’s 5 percent sales tax to 6 percent, eliminates almost all of the nearly 200 exemptions to the tax and broadens it to apply to a number of goods and services that haven’t traditionally been taxed. Those include funeral services, plumbing and electrical work, vending machine purchases, haircuts and dry-cleaning.

The higher and broader sales tax would generate $700 million more in revenue for the state. Those additional revenues, however, allow the plan to slice the individual income tax rate to a flat 4 percent and the corporate rate to 7.5 percent from 8.93 percent. The plan also proposes property tax relief through an expanded homestead exemption that would shield $50,000 of residents’ property value from property taxes and through a modified revenue sharing program that disburses 1.5 percent of state sales and income tax collections to towns and cities with higher-than-average property tax rates.

Lower-income residents would qualify for refundable “fairness” credits that offset higher sales taxes and property taxes.

The 2009 tax reform also relied on an expanded sales tax in order to lower income tax rates. Like the current proposal on the table, it included higher taxes for hotel stays and car rentals. And it provided for a “household credit” to offset increased sales taxes paid by lower-income families.

But the 2009 package did little to address property taxes, said Rep. Gary Knight, the current bill’s primary sponsor.

“This bill addresses all three taxes,” said Knight, R-Livermore Falls. “It’s much more comprehensive. It’s much more total in bringing fairness and equity to the three legs of the stool.”

Proponents of this year’s tax code overhaul proposal are hoping they can avoid the 2009 reform bill’s fate and avoid writing tax exemptions and carve-outs into the final version of the bill.

“If you had a lobbying presence in the hall, you were exempted,” Knight said. “If you weren’t, they went after you. Our current bill has no carve-outs.”

“If they begin to carve this up or expand this, we’re out,” said Rep. Lance Harvell, R-Farmington, one of the bill’s 10 cosponsors. “There’s some room for negotiation there. [But] if you start to carve it up, and one side starts to try to gain leverage against the other and all that, we’re done.”

Despite the difficult path ahead, there seems to be wide agreement that Maine’s tax code needs some form of overhaul.

“The concept is laudable,” said House Majority Leader Seth Berry, D-Bowdoinham. “The question is, will this package as a whole make our tax code fairer or even less fair than it is now?”

Officials at Maine Revenue Services are just at the start of calculating the revenue impact of the tax reform proposal, said Michael Allen, associate commissioner for tax policy. Gov. Paul LePage hasn’t yet taken a position.

The 11 lawmakers’ proposal comes as the Legislature is at work on LePage’s proposal for a new two-year budget, which eliminates revenue sharing with municipalities and cuts back on property tax relief programs.

The reform is designed to offset some of the predicted impact on property taxes from LePage’s budget proposal through its property tax relief measures. However, it’s not designed to fill a budget gap that’s grown larger as Democrats have rejected some of LePage’s proposed cuts and revenue collections have fallen short of earlier projections.

“The governor introduced the revenue discussion in the budget,” said McCabe. “I think it’s good to see the Republicans are coming along with revenues, but to have a proposal that’s revenue-neutral doesn’t really solve problems for our communities.”

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