July 18, 2019
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Under LePage’s budget, Mainers pay for their tax cuts first

Troy R. Bennett | BDN
Troy R. Bennett | BDN
Gov. Paul LePage renewed his pledge to veto the state budget at an Americans for Prosperity rally at the State House in Augusta in June 2013.

Gov. Paul LePage is selling his $6.6 billion, two-year state spending package as a plan that brings meaningful tax relief to Maine families and small businesses.

“In all, Maine families and small businesses can expect to see a reduction in their tax burden of more than $300 million,” a LePage administration summary introducing the governor’s budget reads. “We will achieve this significant reduction by transitioning our tax code from one dependent on taxing earnings to a more modern tax model based on consumption.”

But Maine residents will first be stuck with tax increases under the plan before they see relief.

LePage promised last week in his inaugural address to go after the state income tax, and he lives up to his word with his budget. But the first tax changes Maine residents would notice are the changes LePage has in store for the sales tax. Some of those would start immediately — on July 1.

— That’s the date, under current law, when Maine’s 5.5 percent sales tax is supposed to return to 5 percent. But LePage’s budget won’t let that happen. Instead, the sales tax would remain 5.5 percent through Dec. 31, 2015, then jump to 6.5 percent afterward. The lodging tax would remain 8 percent — also meant to be a temporary level — and the meals tax would drop to 6.5 percent on Jan. 1, 2016.

— Jan. 1 is also when, under LePage’s budget proposal, the scope of services subject to the sales tax would expand significantly. No longer would the services of a lawyer, accountant or financial planner be sales tax-exempt. Pest control, snow removal and landscaping no longer would be tax-free. Neither would haircuts, nail and skin care, or event planning. And tax would be added to the cost of movie tickets, ski and golf outings, and gymnastics, art and music lessons. Lawmakers have tried similar sales tax expansions before. In 2009, Republicans led a successful people’s veto effort to repeal changes passed by the Democratic Legislature. In 2013, LePage opposed the tax bill that would have expanded the scope of the sales tax.

— As it stands today, Maine’s 5.5 percent sales tax is low, and it’s narrowly applied. According to the Tax Foundation, the rate is 42nd highest among the 45 states, along with Washington, D.C., that levy a sales tax. And according to the Federation of Tax Administrators, Maine levies sales tax on 25 categories of services out of 168 possible categories. LePage’s budget would notch up that number significantly — and immediately.

— Another near-immediate tax change in the LePage budget is the elimination of the homestead exemption for homeowners younger than 65. The homestead exemption shields the first $10,000 of real estate value from Maine resident homeowners’ property tax bills. The budget doubles the exemption for seniors.

— LePage’s income tax changes would start to take effect Jan. 1, 2016: Fewer low-income people would pay any income tax at all, and Maine’s two marginal tax rates would drop to 5.75 percent and 6.95 percent from the current 6.5 percent and 7.95 percent levels. The highest rate wouldn’t kick in until a higher level of income. While the budget would only last through June 30, 2017, the changes it proposes would continue to lower the top income tax rates through 2019.

— Along with lower rates, though, the 31 percent of Maine taxpayers who itemize deductions on their tax returns largely would lose that ability. Under the plan, there would be no more state tax deduction for mortgage interest or charitable contributions. Many tax credits — such as the Earned Income Tax Credit for low-income residents — would disappear.

— In his budget materials, LePage touts the changes he has in store for the corporate income tax. But no change to the corporate tax rate, a drop to 8.33 percent from 8.93 percent for the top rate, takes effect until 2017. That’s only six months before the end of the two-year budget cycle.

— LePage similarly boasts of the beneficial tax effects on pension income from his budget. Those start to take effect in 2016 gradually by shielding $5,000 more in pension income each year from income taxes until the exemption reaches $35,000 in 2020.

As lawmakers start to dig into LePage’s budget this week, they should be prepared to look into the complexities of a spending plan advertised as tax relief that has complicated and far-reaching effects.

 

Correction: An earlier version incorrectly stated the effective date for an expansion of the scope of services subject to the sales tax.


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