LePage budget plans huge change in tax system, $300 million in savings

Posted Jan. 09, 2015, at 5:06 p.m.
Last modified Jan. 09, 2015, at 7:55 p.m.

AUGUSTA, Maine — Gov. Paul LePage on Friday released his two-year budget proposal, which is poised to be the largest source of debate and political maneuvering for the new Legislature.

The $6.3 billion plan advocates for a monumental shift in tax policy, reducing the income tax while expanding the sales tax to affect goods and services that are currently exempt.

The budget flat-funds state aid to local governments for one year before eliminating that assistance entirely in the second year. It proposes new investments in nursing homes and services for elderly and disabled Mainers.

LePage said his budget will save taxpayers $300 million annually by 2019. Much of that savings would come from a tax reform package spearheaded by a gradual reduction in Maine’s income tax structure.

The income tax “is becoming an obsolete form of taxation,” LePage said before news reporters in a packed Cabinet room. “[Maine is] not only not competitive nationally and internationally, we are not competitive in New England.”

Neighboring New Hampshire has no income tax, but other New England states do.

This budget proposal is the second in which LePage has targeted the state income tax for cuts. In 2011, the governor’s budget was passed into law largely intact, including an income tax cut of about $150 million, made up by eliminating the tax entirely for those individuals who earn less than $5,200 annually and decreasing the top tax rate from 8.5 percent to 7.95 percent.

LePage’s plan holds the line on the current income tax structure in 2015, but starting in 2016, the budget extends the lowest income tax bracket to protect all individual income up to $9,700 per year from being taxed at all — up from $5,200. That’s means a greater segment of Maine’s poorest residents will not have to pay any income tax.

From there, it gets a bit tricky. Everyone will see their taxes go down each year, but a new tax bracket is created that results in the highest incomes being taxed at a lower rate than those in the middle.

By 2019, income below $9,700 will not be taxed, while income from that amount to $50,000 will be assessed a reduced rate of 5.75 percent. Anything between $50,000 and $175,000 will be taxed at a still-reduced rate of 6.5 percent while income over that level will be taxed at an even lower 5.75 percent rate.

While taxing the middle tax bracket a higher percent than the top tax bracket seems to subvert the historically progressive nature of the income tax, a conservative think tank in Washington, D.C., which released its analysis of the LePage budget before it was made public says the strategy is intended to counterweight the benefits of the tax-exempt bracket.

“The higher rate for this bracket is intended to phase out the benefit of the zero bracket for taxpayers with income above $50,000,” states a report on LePage’s budget conducted by The Tax Foundation. The report apparently was set to bolster LePage’s budget proposal on the day of its release, and was cited in news releases from the governor’s office.

The top corporate income tax also would decrease under LePage’s plan, from 8.93 percent to 6.75 percent.

Individual income tax revenue accounts for a little less than half of the current two-year budget. In 2015, revenue from the individual income tax — which includes taxes on individual earnings as well as those from small businesses — is expected to add up to about $1.45 billion.

Under LePage’s proposal, the income tax decrease would be paid for in part by an an increase in the general sales tax and an expansion of the goods and services subject to it.

LePage said that sales tax exemptions on many services and goods don’t make any sense and that it was more equitable to tax voluntary purchases than to tax income before it even lands in Mainers’ pockets.

“Everybody’s got to pay their fair share,” he said. “We’re going to a consumption-based tax structure, so you pay as you go, rather than every Friday taking money out of your paycheck and sending it to the government.”

The expansion of the sales tax would include the “amusement tax” on movie tickets, golf course fees, admission to historical sites and the like. Sales taxes also would be expanded to include personal services such as haircuts and movers, and household and professional services such as landscaping and legal consultations.

LePage stressed that “life necessities” such as groceries and automobile services still will be exempt from the sales tax.

The general sales tax was scheduled to decrease from 5.5 percent to 5 percent this summer, after the Legislature temporarily increased it in 2013. Similarly, meals and lodging taxes were scheduled to decrease from 8 percent to 7 percent.

Instead, LePage’s budget would increase the general sales tax to 6.5 percent while decreasing the meals tax to the same level. The plan holds the lodging tax at 8 percent.

Additionally, the governor’s budget eliminates taxes on military pensions and eliminates the estate tax after 2017.

Prior attempts to expand the sales tax base have gone nowhere, including a 2009 effort passed by Democrats in the Legislature but overturned by a citizens’ initiative at the ballot. LePage said his plan is different because it would create savings for taxpayers, while previous attempts were revenue neutral.

While the tax reform plan is sure to generate debate, the fight over municipal revenue sharing — a program by which the state sends money to cities and towns to help pay for local services and keep property tax rates down — could dominate the session as it did in the past two years.

Local government officials and lawmakers from both parties bristled at LePage’s plan to eliminate the program in 2013, saying it would fuel a continued increase in local property taxes.

The fight spilled over both sessions of the last Legislature, ending with revenue sharing greatly diminished and municipal leaders crying foul. This year, LePage’s budget plan would flat-fund revenue sharing at its current, depleted level, then eliminate the program entirely in 2017.

LePage said his proposal allows municipalities to make up for the difference by assessing property tax on nonprofit groups with valuations above $500,000. Chief among those are hospitals, which currently pay no property tax.

When asked how rural communities — or larger ones without hospitals — would make up for lost state revenue, LePage said they could make up the difference with savings from coordination of services with neighboring communities.

The proposal also includes $112 million in new spending by the Department of Health and Human Services for elderly and disabled care programs, nursing homes, mental health services and an extension of heightened Medicaid reimbursements to primary care providers.

The governor’s office said the new spending would be paid for by reduced Medicaid reimbursements for nonemergency visits to the emergency room, cuts to General Assistance and the tightening of eligibility requirements for Medicare Savings Plans and the Low Cost Drugs for the Elderly and Disabled Program.

Follow Mario Moretto on Twitter at @riocarmine.

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