AUGUSTA, Maine — For the first time since its creation, state dollars are being funneled into a new income tax reduction program, thanks to a roughly $58 million surplus in the recently concluded fiscal year.
The money, about $4 million, is allocated to the “Tax Relief Fund for Maine Residents” created by the Republican-controlled 125th Legislature — with the support of Republican Gov. Paul LePage — in 2012. A portion of any surplus state revenue will be added to the nonlapsing fund until there’s enough to reduce income tax rates by 0.2 percent.
The earliest taxes could be reduced is in 2015. Maine Revenue Services has estimated that about $41.7 million would be needed by July 2014 to trigger the initial reduction.
The initial reduction will be paid for with money in the fund, but the income tax rate will remain at the lower level even if that fund becomes depleted, essentially leaving the tax cut unfunded, according to a fiscal note attached to the bill that created the fund.
This first deposit into the tax relief fund has reopened a two-year-old wound for the Maine Municipal Association, which represents city and town governments, and Democratic lawmakers, who fiercely opposed the program’s creation and the potential for unfunded, automatic tax cuts, which they say could create problems in crafting future budgets.
In a memo to municipal officials, Geoff Herman, MMA’s director of state and federal relations, said the Legislature has embarked on a mission to shift the burden of taxation from income, a progressive tax, to property, which he said is felt more acutely by middle- and working-class Mainers.
Herman cites this year’s efforts by the LePage administration to raid municipal revenue sharing — a form of property tax relief that directs state money to local coffers, thereby reducing the need to raise local revenue through property taxes — and cut the so-called “circuit breaker” program, which offers income-based tax relief to renters and property taxpayers, as evidence of shifting priorities in the State House.
The 126th Legislature, with Democratic majorities, restored about 65 percent of the $400 million that LePage proposed cutting from municipal revenue sharing for the two-year budget that took effect July 1, but the revenue-sharing cuts that were implemented — during the same calendar year that state income tax rate decreases approved by the previous Legislature took effect — troubled Herman.
“It seems like the Legislature’s history over the past decades is to be very cognizant of the regressive nature of the property tax,” he said Monday. “That cognizance seems to be going away.”
In the memo, Herman also urged local leaders to keep on the issue, saying municipal officials “may want to discuss with their legislators this phenomenon of effectively cutting municipal revenue sharing and other property tax relief programs in order to, at least in part, fund further reductions to the state’s income tax rate.”
House Minority Leader Ken Fredette, R-Newport, said his support for income tax reduction results from what he perceives to be simple logic. He said Maine taxpayers, not elected or appointed government officials, should decide what to do when government takes in more revenue than was budgeted.
“First and foremost, taxpayer money is taxpayer money,” he said. “If there is an excess of taxpayer money, a surplus, that money ought to go back to the working people of Maine. They’re the ones that paid it in, they’re the ones that should get it back.”
Fredette said whether tax relief should be applied to property or income is a legitimate policy question, but that the answer should be clear: “The income tax better focuses the money on the people who are paying the state’s bills.”
Individual income tax accounted for nearly $1.5 billion in revenue for the fiscal year that ended June 30, according to a preliminary report from the state Office of Fiscal and Program Review. According to Maine Municipal Association, annual property taxes, which are raised at the local level and fund a portion of education and local services, including police and fire departments, total more than $2 billion.
House Majority Leader Seth Berry, D-Bowdoinham, said Monday that emphasizing income tax reform is unfair to many Mainers. That’s because it’s the wealthy, not the poor or middle class, who benefit most from income tax reform.
“The property tax is much more regressive [than the income tax],” he said. “Where do middle class people put our value? We put it in our homes. The property tax for that reason is very regressive. If you are fortunate enough to make millions or billions per year, then property is not where you’re putting your money.
“Income tax is the only tax we have that reflects our ability to pay,” he said. “By ratcheting it down over time, which is what this program does, you’re leaving less and less for state revenue sharing, for aid to local roads, for aid to schools.”
Of course, not even this law is set in stone. Berry said that Democrats would try to repeal the law that created the downward ratchet in income tax, but that repeal would be unlikely while LePage, who supported the measure and has shown no reluctance with his veto pen, is in office.
Follow Mario Moretto on Twitter at @riocarmine.