February 21, 2018
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Legislature on brink of budget deal with income tax cuts, sales tax hikes

Ashley L. Conti | BDN | BDN
Ashley L. Conti | BDN | BDN
Gov. Paul LePage addresses the chamber during the 2015 State of the State address Tuesday at the State House in Augusta.
By Mario Moretto, BDN Staff
Updated:

AUGUSTA, Maine — Top legislators are working feverishly behind closed doors on a budget deal that would include broad income tax cuts and an expansion and increase in the sales tax.

A document obtained by the Bangor Daily News on Tuesday outlined several pieces of a tax reform plan being considered by leadership in the House and Senate as of Monday night. As of Tuesday evening, the deal was not made final, as negotiations continued, but leaders from both parties confirmed the document laid out the proposals under consideration.

“All of these are things we’re talking about,” House Minority Leader Ken Fredette, R-Newport, said. But, he continued, “there are lots of moving parts and pieces of these that every day we’re looking at moving around.”

The document is the best glimpse so far at what might be included in a final budget bill. Party leaders have been meeting frequently since Saturday to hammer out a deal that can win the requisite two-thirds support needed in both chambers to pass a state spending plan.

The current budget is set to expire at the end of June. If a new plan isn’t in place by then, state government will shut down.

Tax reform has been one of the main sticking points in budget negotiations that have at times seemed destined for failure. Gov. Paul LePage, Democrats and Republicans each have proposed plans, but none has been able to win the support of a supermajority of lawmakers needed to pass a budget bill. The same goes for two competing budget proposals released by the budget-writing Appropriations Committee last weekend.

That left legislative leadership to work through the sticking points that remain.

House Speaker Mark Eves, D-North Berwick, said talks are moving quickly, now that each caucus is at the table together. Democrats have said negotiations stalled because Republicans in the House and Senate were operating independently and, sometimes, at odds.

“We are all in one room now. That was our insistence. I wasn’t going to continue without that,” Eves said. “There’s a lot of discussions and negotiations to go.”

The document shows that each side is considering major concessions.

According to the document, leaders are considering a reduction in the state’s top marginal income tax rate, from 7.95 percent to 6.75 percent. Where the current rate applies to all income above $20,900, the new rate would apply to all income above $30,000. Income from $5,300 to $30,000 would be taxed at 5.7 percent, a reduction in the state’s lower tax rate, currently set at 6.5 percent. Income up to $5,300 would be tax exempt.

The state’s corporate income tax rate would remain unchanged under the tentative deal, while estate tax exemptions would increase to the federal level of $5.5 million, up from the state’s current $2 million exemption.

Those tax cuts would represent a coup for Republicans, particularly the House GOP, which threatened to block any budget bill that didn’t include cuts.

While the exact percentages and rates may change, it seems all but certain that income tax cuts will be included in whatever deal lawmakers float in the coming days. A proposed constitutional amendment to require two-thirds approval in the Legislature for any future income tax increases — part of a previous deal struck by Democrats and Senate Republicans — is off the table.

Sales tax changes

Tax analysts and lawmakers have for years said the state income tax rate should be reduced but that the cut should be offset by an expansion of the sales tax.

The deal being crafted by legislative leaders does just that. The plan would see several consumption taxes increase and some “recreation and amusement services” taxed for the first time.

Current law would have the general sales tax rate of 5.5 percent cut to 5 percent in July, but the deal being crafted by legislative leaders would keep it at the higher rate. The meals tax would stay at 8 percent, instead of decreasing as scheduled to 7 percent in July. The lodging tax would increase to 9 percent from the current rate of 8 percent.

Admission to facilities and events such as movie theaters, amusement parks, race tracks, sporting events, concerts and museums would be taxed for the first time. So would fees paid for golf, skiing, tennis and bowling, and sightseeing excursions. Dance, music, acting and martial arts lessons would be taxed, as would the services of bands, orchestras, disc jockeys, comedians, jugglers and ventriloquists.

Exempt from the new tax on recreation and amusement services are admission to agricultural fairs and casinos.

Concessions all around

Gov. Paul LePage had proposed similar changes to the sales tax in his comprehensive reform package. Democrats were willing to accept the plan if necessary to strike a deal, but it was opposed by Senate Republicans, many of whom campaigned against sales tax increases in 2010.

It’s unclear whether those Republicans have had a change of heart, but Senate Majority Leader Garrett Mason, R-Lisbon, said Tuesday that no one should be surprised if the eventual deal includes provisions that had been anathema to both parties.

“There have to be,” he said. “We’re in divided government. There’s going to have to be some give and take.”

The tentative plan also includes a provision to increase the homestead property tax exemption from $10,000 to $15,000. That provision has been demanded by Democrats, who say property tax relief is critical to middle-class and low-income Maine families.

Senate Minority Leader Justin Alfond, D-Portland, said the plan also includes the maintenance of current spending on state aid for municipalities through the Municipal Revenue Sharing program, which LePage long has eyed for elimination but Democrats and local governments have said is crucial in preventing property tax spikes.

Democrats, Alfond said, are fighting to include a “sales tax fairness credit” similar to one proposed by LePage, which would be designed to offset the regressive nature of a sales tax increase for low-income Mainers.

Alfond said he’ll be comfortable pitching the final tax reform deal to his caucus — hopefully sometime this week — because the totality of the plan will represent a tax cut for most Mainers.

“You’re going to see that what is on the table has Democratic values in terms of being progressive, in that it’s fairly distributed,” he said. “It’s paid for, so we’re not going to have huge deficits in the out-years. We wanted to make sure the middle class had a good tax cut, and you’re going to see that.”

Leaders also are discussing a provision to replace the current system of itemized deductions with a new tax credit system. Instead of claiming individual deductions, a credit would be determined from a calculation based on the amount of total Maine deductions.

However, the details of the new credit system still are being determined.

Follow Mario Moretto on Twitter at @riocarmine.


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