May 26, 2019
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What does tax fairness look like for Maine?

Bridget Brown | BDN
Bridget Brown | BDN
Opponents of a bill to modernize Maine tax laws wait for a chance to speak as Albert DiMillo Jr. (right) speaks against it at the State House in Augusta in April 2009.

AUGUSTA, Maine — Democrats in the Maine Legislature resurrected a familiar theme during debate Thursday on a $153 million plan to balance the state budget through June 30: tax fairness.

Many campaigned on it last year, accusing Republican lawmakers and Gov. Paul LePage of pushing through income tax cuts in 2011 that they said favored the wealthy. And Democrats have blamed the tax cuts — which lowered the top income tax rate to 7.95 percent from 8.5 percent while removing about 70,000 low-income people from the tax rolls — for contributing in a big way to the budget hole LePage and lawmakers need to fill in a new two-year state budget.

But Democratic leaders aren’t focusing this legislative session on rolling back those income tax cuts. Instead, the focus is on a fairer tax system. In the coming weeks, House Democratic Leader Seth Berry of Bowdoinham will introduce “An Act To Provide Tax Fairness for Maine’s Middle Class and Working Families.”

Berry isn’t releasing details yet, but he said he wants to correct an imbalance that leaves low-income Maine residents paying a greater share of their income in state and local taxes than those at the upper end of the income spectrum.

“This bill will look to create a more level playing field between the highest income, the lowest income and the middle class and make sure that our working families, our middle class, are treated fairly with our tax code,” he said.

Maine’s tax mix

Much of the discussion on tax fairness in Augusta has centered on the state income tax. But data on tax collections in Maine suggest the property tax would be the prime target of any proposal to ease lower-income residents’ tax burden.

“Property tax is the biggest tax in the state of Maine,” said Albert DiMillo, a South Portland accountant and retired corporate tax director for companies including Bath Iron Works and Raytheon. “The bottom 95 percent basically pay substantially more in property tax than they pay in income or sales tax.”

Forty-three percent of all taxes collected in Maine in 2009 were property taxes, both residential and commercial, according to Maine Revenue Services data. Income and consumption taxes accounted for 28 percent each of total tax collections. Maine ranked sixth in the nation in 2007 for the percentage of income residents paid in property taxes (4.85 percent) and 17th for the percentage of income paid in income taxes (3.21 percent), according to Maine Revenue Services.

Of the different types of taxes, the property tax hit lower-income residents hardest, Maine Revenue Services data show.

The average property tax bill in 2009 for homeowners earning $12,167 or less — the bottom 20 percent — was $2,006, or 30.6 percent of income. The top 10 percent of homeowners — those earning $108,724 or more — paid a larger average property tax bill, $5,258, but it accounted for just 2.5 percent of income.

“The unfairness of property taxes is fairly astonishing when you look at it on an income basis,” Berry said.

Sales and use taxes also hit the lowest income earners hardest, but not to the same extent as property taxes. Maine residents in the lowest income range — $12,167 or less — paid the greatest percentage of their income in sales and use taxes in 2009, 3.7 percent. The top 10 percent paid 1.3 percent of their income in sales and use taxes.

The individual income tax was the most progressive. The bottom 20 percent of income earners paid an effective income tax rate of 0.1 percent — $5 on average — compared with 4.8 percent for the top 10 percent, who shouldered 58.1 percent of the income tax burden.

“Maine has a fairly steeply progressive income tax,” said Charles Colgan, a professor of public policy and management at the University of Southern Maine’s Muskie School of Public Service and a former Maine state economist.

It has become slightly less progressive in recent decades, he said, as the state’s income tax brackets haven’t kept pace with inflation. And comparable data aren’t yet available measuring the effects of the 2011 income tax cuts, which kicked in at the start of 2013.

“Overall, Maine’s tax structure is regressive,” said DiMillo. “The income tax is the only progressive tax that we have.”

A fair and balanced tax system

So how can a piece of legislation make Maine residents’ overall tax burden more progressive?

For DiMillo, an expansion of the state’s two primary property tax relief programs, the homestead exemption and the circuit breaker, would be the first component.

Under the homestead exemption, anyone who has owned a home for at least a year doesn’t pay property tax on the first $10,000 of property value, and the homeowner’s hometown receives a reimbursement from the state to make up for the lost tax revenue.

The Democratically controlled 124th Legislature scaled back that program in 2009 — reducing the exemption to $10,000 from $13,000 — to balance the state budget. Now the LePage administration is proposing to limit the program to elderly homeowners — while raising the exemption to $20,000 — to save the state $9.1 million in the next two-year budget cycle.

The circuit breaker offers about 200,000 low-income homeowners and renters a maximum property tax or rent refund of $1,600. That program also has been scaled back in recent years. In 2007, Maine’s $2,000 benefit was the highest in the nation, according to the Center on Budget and Policy Priorities. LePage’s budget proposal recommends limiting circuit breaker relief to elderly residents, saving the state $73.4 million over the next two years.

“It’s a very large tax increase for all low- and very low-income people,” DiMillo said of the LePage budget proposal. “The bottom 60 percent will have a substantial increase when you put those two together.”

Berry said he’s not only seeking a more progressive tax system but a more balanced one. “We need a healthy balance between the three legs of the stool: property, sales and income tax,” he said. “We shouldn’t be leaning too heavily on either one.”

The Democratic-led 124th Legislature in 2009 passed a tax reform package that supporters said could achieve more balance by lowering the top income tax rate to 6.5 percent from 8.5 percent and applying the sales tax to a broader range of goods and services, from haircuts to auto repairs. But voters overturned the legislation a year later at the polls after a Republican-led campaign to reverse it.

DiMillo, a lifelong Democrat, opposed the Democrats’ tax reform package and aided the Republican effort to overturn it. It did nothing to make the tax code more progressive, he said.

“It increased sales tax to cut income tax. It makes no sense,” DiMillo said.

There is some value in spreading the sales tax to more goods and services, said Colgan. It makes the tax system less volatile, another issue tax legislation could address. In 2009, according to Maine Revenue Services, 29 percent of Maine’s sales taxes came from auto and building supply sales, two sectors that are most sensitive to economic swings.

“We have a very cyclically unstable tax system that gives us a lot of money when things are booming but collapses utterly when the recession comes, just when we need to expand Medicaid and other programs,” he said. “I think Maine’s system fails the revenue adequacy test by a long shot.”

Matthew Stone is a reporter in the BDN’s State House bureau.

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