Maine Senate approves income tax shift

Posted June 05, 2009, at 11:24 a.m.

AUGUSTA, Maine — Lawmakers voted largely along party lines on Friday to pass a bill that reduces Maine’s income tax rate but expands the sales tax in an effort to diversify and stabilize the state’s revenue stream.

The measure’s fate remains uncertain, however. A spokesman for Gov. John Baldacci, who has expressed strong concerns about aspects of the bill, planned to meet with the Legislature’s Democratic leadership Friday evening before taking any action on the bill.

Sponsors claim the bill, LD 1088, will reduce by $55 million the overall tax burden on Mainers by collecting more revenue from tourists and out-of-staters. The average savings for most Mainers would be about $167 annually, according to supporters.

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The bill seeks to accomplish this by lowering Maine’s top income tax rate from 8.5 percent to 6.5 percent while broadening the sales tax to apply to more goods and services. The top tax bracket in Maine now kicks in before a person has earned $20,000.

At the same time, supporters claim overhauling Maine’s tax code will help avoid the boom-or-bust cycles that leave the state flush with money during good times but in deep financial trouble during economic downturns. It also will begin chipping away at the high-tax reputation that scares away prospective businesses, bill sponsors said.

“I think passage of this is an indication on the part of the majority of the Legislature that now is the time, that we really need to start doing things differently,” said Rep. John Piotti, D-Unity, the bill’s lead sponsor and House majority leader. “We cannot afford to collect our tax revenues the way we have in the past.”

But opponents countered that the proposed tax scheme is too unpredictable and that poor and elderly Mainers could end up paying more to the state. While praising attempts to reduce income taxes, critics said broadening the sales tax and increasing the meals and lodging tax could have dire consequences for small businesses struggling to stay afloat.

“I think this bill, at a different time, might have some really good policy implications but not at a time when our economy is on the verge of collapse,” Sen. David Trahan, R-Waldoboro, said during debate on the Senate floor.

The Senate voted 19-15 in support of the bill. The measure passed the House 84-54.

Advocates for tax reform and financial experts say Maine’s current tax code is too reliant on income taxes and state collections from big-ticket purchases, such as cars. As a result, Maine’s General Fund takes an even harder hit when the stock market crashes — resulting in fewer capital gains taxes — and people begin buying less.

LD 1088 aims to fix that problem by expanding the 5 percent sales tax to apply to goods and services that are considered discretionary or are “exportable,” meaning popular with tourists and other out-of-state visitors.

Items that would now be subject to the sales tax under LD 1088 include recreational activities, such as whitewater rafting, skiing or tickets on a whale-watching boat, movie tickets and candy. Auto mechanics, as will some other service providers, would also have to collect taxes on labor charges.

The measure would also increase Maine’s meals and lodging tax from 7 percent to 8.5 percent.

“When this is done we will still have one of the most narrow sales tax bases in the country,” said Sen. Joe Perry, a Bangor Democrat who co-chairs the Legislature’s Taxation Committee.

But bill supporters were unable to convince most Republicans as well as some Democrats that the new tax plan wouldn’t increase taxes on many Mainers or put another burden on businesses. Most expressed concerns about harming Maine’s critically important tourism industry.

“I do hope it works. I do,” said Rep. Josh Tardy, a Newport Republican and House minority leader. “But I do think it makes revenue assumptions that are not correct. It’s a very dangerous time to be doing tax surgery.”

Only one Republican — Sen. Peter Mills of Skowhegan, a longtime advocate for tax reform — cast a vote in favor of the legislation, even though several Republicans had co-sponsored the original bill.

The partisan nature of the vote disappointed Piotti. He suggested that Republican leaders had not fully briefed their members about the bill based on what he said were erroneous statements from some opponents during floor speeches.

Baldacci, a Democrat, could take the partisanship of the issue into account as he weighs whether to sign, veto the bill or allow it to take effect without his signature.

David Farmer, a Baldacci spokesman, said the governor supports lowering the income tax burden but wants to see tough spending caps put in place for state and local governments. The governor, who was expected to return to Maine from Washington, D.C., late Friday afternoon, also has expressed concerns about applying the sales tax to some of the proposed areas.

“This is significant policy,” Farmer said. “It fundamentally changes the sales and income tax.”

In other tax news, the Senate voted overwhelmingly Friday to kill a proposal to impose a 5-cents-a-gallon surcharge on gas to pay for road repairs. The proposal emerged from the Transportation Committee, which is struggling to figure out how to address the growing list of infrastructure needs with shrinking tax revenues from fuel.

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