Is 2013 the year for tax reform in Maine?

Posted May 10, 2013, at 12:42 p.m.
Last modified May 10, 2013, at 5:45 p.m.

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Bernie Littlefield, center, talks about the rules of debate between then-Reps. Mike Thibodeau, R-Winterport, and John Piotti, D-Unity, at Grant Civic Center in Winterport in May 2010. The lawmakers were discussing a tax reform package that was repealed by voters the next month.
Bernie Littlefield, center, talks about the rules of debate between then-Reps. Mike Thibodeau, R-Winterport, and John Piotti, D-Unity, at Grant Civic Center in Winterport in May 2010. The lawmakers were discussing a tax reform package that was repealed by voters the next month. Buy Photo

A plan to overhaul Maine’s tax code introduced earlier this month by a bipartisan group of 11 lawmakers relies on the same broad principles that have defined at least five other tax reform attempts in the state: extend the sales tax to more goods and services to fund income and, often, property tax reductions.

Those tax reform proposals have another characteristic in common: They were ultimately unsuccessful.

“For all of the calls for tax reform, the truth is, there’s a huge status quo bias, which is essentially, people might hate the system they have now, but they’re even more uncomfortable with changing it,” said Charles Colgan, a professor of public policy and management at the University of Southern Maine’s Muskie School of Public Service and a former state economist.

The five Democrats, five Republicans and one independent pitching the latest tax reform proposal hope the odds are different this year as lawmakers search for alternatives to Gov. Paul LePage’s unpopular budget, which proposes to eliminate municipal revenue sharing and scale back property tax relief programs.

But they’re aware of the obstacles ahead.

“This is truly a compromise. We’ve got strong Democratic principles, strong Republican principles embedded in the bill,” said Rep. Gary Knight, R-Livermore Falls, who’s sponsoring the reform legislation. “There’s something in there for everybody to dislike. There’s something in the overall picture to like.”

Tax reform 2013

The proposal from the so-called Gang of 11, LD 1496, would raise Maine’s 5 percent sales tax to 6 percent and eliminate almost all of its nearly 200 exemptions. That would extend the tax to a number of goods and services that haven’t traditionally been subject to it, including groceries, heating oil, 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 annually for the state.

The plan devotes the additional revenue to slicing the individual income tax rate to a flat 4 percent, eliminating the estate tax and lowering Maine’s 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 — up from the current $10,000 level — 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 through income tax filings that offset higher sales taxes and property taxes.

The plan also proposes boosting Maine’s $2 cigarette tax to $3.50, raising beer and wine excise taxes, pushing up the the state’s lodging and auto rental taxes, and allowing towns and cities to tax traditionally tax-exempt properties for their value beyond $250,000.

Reaction from both sides of the aisle so far has been lukewarm at best. The legislators who developed the reform package have garnered praise for their bipartisan effort. But their colleagues have been slow to embrace a dramatic sales tax expansion. Gov. Paul LePage on Wednesday called it a “bad deal,” and Democratic leaders have said they won’t support tax reforms that don’t distribute the tax burden more equitably among low- and high-income residents.

Trying for tax reform

The 2013 tax reform plan is at least the sixth in recent Maine memory that relies on an expansion of the sales tax to fund relief from another tax. The plan builds on unsuccessful proposals in 1987, 1997, 2003, 2007 and 2009 that varied in their specifics and encountered differing levels of success.

In 1987, Republican Gov. John McKernan proposed extending the sales tax to more goods and services as lawmakers weighed changes to the income tax following major federal reforms in 1986.

Maine’s sales tax base has long been among the narrowest in the United States. A 2007 survey by the Federation of Tax Administrators found Maine taxed 25 categories of goods and services compared with a median of 55. The reliance on a narrow base means Maine’s tax collection stream is especially sensitive to economic swings. Auto and construction goods sales alone — two of the most recession-sensitive sectors — account for about 30 percent of Maine’s sales tax base, according to Maine Revenue Services.

The 1987 proposal, like its successors, encountered opposition from much of the state’s business community, especially service-oriented businesses and the Maine State Chamber of Commerce, said Colgan, who helped to write the McKernan legislation.

“The service industries have a huge incentive to fight that,” he said. “The incentive for the hardware store [where nearly all goods are already taxed] to come in and say, ‘This is good overall policy,’ is less than the incentive for the movie theater to come in and say, ‘This is horrible.’”

A decade later, in 1997, the Maine Municipal Association pushed an unsuccessful plan to expand the sales tax base and use the increased revenue to provide property tax relief through an expanded homestead exemption.

In 2003, a tax reform committee appointed by then-House Speaker Mike Saxl devised a proposal aimed at stabilizing state revenues and decreasing reliance on the property tax. According to the Federation of Tax Administrators, 41 percent of Maine’s taxes in 2010 came from the property tax, compared with 29 percent from sales and 25 percent from income.

The result was a report that recommended more property tax relief funds, a lower top income tax rate, a broader sales tax and higher lodging and auto rental taxes that would be absorbed largely by visitors. That report inspired a number of unsuccessful legislative proposals, according to a 2009 paper by Richard Woodbury, then a visiting scholar with the Federal Reserve Bank of Boston and now an independent senator from Yarmouth who is the chief architect of the 2013 tax reform plan.

Tax reform plans in 2007 and 2009 followed similar outlines, and each inched closer to success. The 2007 reform proposal passed the House in June 2007 before failing in the Senate. The failed Senate vote came the same month business opposition — spearheaded by the Maine State Chamber of Commerce — solidified against the plan.

The 2009 reform made it further than any other, passing the Democratically controlled Legislature with just one Republican vote despite stiff opposition from businesses — including contractors, auto dealers and real estate agents — whose services would be subject to new or increased taxes. In fact, the final plan that passed the Legislature carved out last-minute exemptions for ski tickets, golf and other recreational services. The final version also nixed an increase in the real estate transfer tax.

The tax reform plan inspired a Republican-driven repeal campaign, and voters overturned it decisively in June 2010. Many Republicans capitalized on the plan’s unpopularity and ran against it five months later, when their party won control of both legislative chambers and the governor’s office.

Relief, stability, exportability, health

The reform plan before the Legislature this spring incorporates elements from each of the four unsuccessful proposals and goes further. The income tax rate cut is steeper; nearly all exemptions and deductions are eliminated; the sales tax is extended to more goods and services; and the sales and use tax rates are pushed higher.

In his 2009 paper, Woodbury lays out the rationale for these policy changes. Maine’s high income tax in comparison to other states and a noncompetitive estate tax, he writes, contribute to a tax structure that makes it more appealing not to be a full-time Maine resident.

Expanding the sales tax, Woodbury writes, can help Maine accomplish four major goals: fund relief for residents from income and property taxes, stabilize the state’s revenue stream through economic upturns and downturns, export more of the state’s tax burden to visitors and part-time residents, and promote public health through higher taxes on tobacco and alcohol.

As lawmakers consider the 2013 tax overhaul plan, some will see 2009 all over again.

“There’s a whole bunch of us that are in our second term, that ran on LD 1495, that ran against it, fought to have it repealed,” said Rep. Jeffrey Timberlake, R-Turner, referring to the 2009 overhaul bill. “This is the same bill, except on steroids.”

Others, however, are encouraged by a bill that seeks to bring a guiding philosophy to Maine’s tax code that lawmakers can use as a basis for evaluating future tax changes.

“The idea of looking at the state’s tax code in a comprehensive manner and addressing what we consider to be some flaws with it comprehensively is a very strong step in the right direction from the municipal perspective,” said Geoff Herman, director of state and federal relations for the Maine Municipal Association, “almost regardless of the details of the plan.”

Matthew Stone is a reporter in the BDN’s State House bureau.

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