What I have found over the past seven years testifying before our Maine citizen legislature on various “tax reform” proposals is that facts and math are disregarded by the vast majority.
It has become clear that fact-based, sound tax policy will probably never be possible in Maine because politics, money and ignorance of detailed tax law will always get in the way.
The governor’s faulty math has resulted in claims that Maine residents will get a $292 million tax cut in year 2019 under his tax plan. The recently issued Maine Revenue Services distribution analysis of the tax plan reports the tax changes by income level. The problem with the distribution analysis is that it contains various errors and inconsistencies with a prior study prepared by Maine Revenue Services.
A properly prepared analysis that I put together turns the $292 million tax cut into a net tax cut of only $2 million.
The distribution of the tax changes will be regressive as the bottom 90 percent of taxpayers will have a net $51 million tax increase and the top 10 percent will have a net tax cut of $53 million. The top 1 percent will have a net tax cut of about 35 million. When you include the $37 million estate tax cut, the total tax cut to very wealthy taxpayers will be $72 million.
My $290 million in corrections to the Maine Revenue Services analysis for the year 2019 are made up of four items as follows:
- The analysis ignores the $125 million property tax increase from elimination of revenue sharing to municipalities.
- The property tax fairness credit is overstated by $50 million.
- The sales tax increase to Mainers is understated by $50 million.
- The $65 million federal income tax increase is omitted.
Under current law, the budgeted revenue sharing in 2019 would be $167 million. The governor’s tax plan eliminates all revenue sharing. Most municipalities will need to increase their property taxes to cover the loss of this revenue. Even if the municipalities reduce costs instead of increasing taxes, this is still a tax shift. About 75 percent of the $167 million — or $125 million — will be paid directly and indirectly by Maine residents. To ignore this tax shift is irrational and just faulty math.
For years, Maine Revenue Services had estimated that the old property tax circuit breaker program should have reached about 200,000 taxpayers. Yet every year the actual number was about 90,000. It also significantly over-estimated the 2013 property tax fairness credit. Maine Revenue Services continues its faulty estimation of the revised property tax fairness credit assuming that the credit will be claimed by 130,000 taxpayers and that the credit will total $90 million. This estimate is illogical based on the fact that the property tax fairness credit benefit is significantly less than the old circuit breaker program that only generated a $55 million benefit. The reasonable estimate for the credit should be $40 million or $50 million less than the amount in the governor’s tax plan.
The governor’s tax plan is estimated to increase sales and use taxes by about $437 million in year 2019. Of this total, the Maine Revenue Services distribution analysis includes only $289 million being paid by Maine residents. Maine businesses will pay about $101 million, and non-residents will pay about $47 million. In its 2011 tax distribution study, Maine Revenue Services estimated that about 50 percent of sales taxes (use tax) paid by Maine businesses are passed on to Maine residents. Yet in its current analysis it ignores this fact. Accordingly, the 2019 tax distribution should include $50 million of additional sales tax paid indirectly by Maine residents passed on from Maine businesses.
The current tax distribution analysis ignores the “federal tax offset” from the deduction of state income and property taxes on federal income tax returns. The Maine Revenue Services 2011 study estimated this offset and included its impact on the effective overall taxes paid by Maine residents. Maine income and property taxes are deductible on federal income tax returns, but sales tax is rarely deducted. The net reduction in deductible income and property taxes will be $405 million (after adjustments for the increased property tax and reduced property tax fairness credit), and the federal income tax increase for Maine residents will be about $65 million.
A greater percentage of property tax and income tax are “exported” than sales tax (when you include the federal income tax offset), and sales tax is more regressive than both. The math illustrates that an increase in sales tax to pay for either income tax cuts or to fund revenue sharing increases the net taxes paid by Mainers and makes the tax structure more regressive.
In 2013, politics won over facts and math when the Legislature passed a “temporary” sales tax increase to fund municipal revenue sharing. This year a much larger sales tax increase will probably be passed because legislators don’t understand the math or because they know most Mainers don’t understand the math, and they can once again claim they passed a tax cut that actually is a tax increase for most Mainers.
Albert A. DiMillo Jr. of South Portland is a retired corporate tax director and CPA with over 30 years tax experience.
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