August 20, 2019
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What can Maine taxpayers expect from LePage’s tax reform plan?

Troy R. Bennett | BDN
Troy R. Bennett | BDN
Gov. Paul LePage

PORTLAND, Maine — The two-year budget proposal Gov. Paul LePage unveiled Friday aims to divert state government’s chief revenue stream from income taxes on people and businesses to sales tax. The governor’s proposal would eliminate many exemptions and add sales taxes on a range of services, from a magician performing at a child’s birthday party to hiring a real estate agent.

In the first year, that’s a shift of about $176 million away from individual income taxes, which the governor says will be compensated for by $219 million in sales and use taxes.

It’s hard to forecast how LePage’s tax reform proposal would affect Maine’s overall economy — partly because we don’t know what the rest of the economy will be like in 2016 when most of the changes would take effect. And partly because there are widely different views on just what effects tax policy has on the decisions of people managing their lives or managing businesses.

In analyzing past years of tax data, the Bangor Daily News found last year that property tax and sales tax increases hit low-income Mainers the hardest, making up a greater percentage of their total income than it does for people in higher tax brackets.

The budget also includes credits to offset that effect for low-income Mainers, but some have doubts about whether people will fill out that paperwork for the benefit, or pay a tax professional (plus a new tax) to do it.

Albert DiMillo, a South Portland accountant and retired corporate tax director for companies including Bath Iron Works and Raytheon, said from his independent analysis of the budget that he estimates it would mean a sales tax increase of about $500 million in the first two years.

But that estimate includes some uncertainties that could pose a challenge for state planners, too. That is, they’re based on estimates of how much the state will get from taxing items it doesn’t tax now and hasn’t taxed before.

Known revenues will be traded for some guesswork. For income taxes, the state has on hand a mass of tax returns that it uses to quickly analyze proposed changes to tax brackets or rates.

The governor has targeted income tax reductions as a benefit for business, too, as many companies are taxed not as corporations but “pass-through entities” that tax the individuals who profit from the company.

The changes would start phasing in by Dec. 31, which the governor’s office estimates would drop individual income tax collections and raise sales and use tax collections.

Mike Allen, associate commissioner for tax policy at Maine Revenue Services, said those projections are based on a tax model updated every five years, which gives budget planners an estimate of all the possible revenue forgone by existing sales tax exemptions and not taxing services.

DiMillo said that poses a challenge.

“At best, they’re just educated guesses,” DiMillo said. “Until they have one year of actual collections, it’s a guess, and it’s a little risky.”

From a forecasting standpoint, it’s trading a revenue stream the state is better at predicting for one rife with unknowns, including how successful it will be at capturing revenue from a new range of service providers — sleight-of-hand magicians included.

How does the plan affect federal tax returns? DiMillo, who recently wrote a BDN commentary about the governor’s tax plan, said the income tax reduction stands to raise the amount Mainers will pay in federal taxes. That’s because state income taxes can be deducted from federal tax.

“They’re trading a deductible tax for a nondeductible tax,” DiMillo said of LePage’s proposal to lower income tax rates while raising the sales tax and broadening its base.

The plan also would eliminate itemized tax deductions such as the state-level earned income tax credit for low-income workers, which DiMillo said factors into whether individual taxpayers will save money under the proposals.

The state earned income credit is worth about 5 percent of the federal credit, which the left-leaning Maine Center for Economic Policy estimated from state figures was an average of about $52 to about 18,000 low- and moderate-income taxpayers in 2014.

I heard taxpayers will save $300 million. The governor’s office has projected that by 2019, the year after LePage completes his second term, taxpayers will have saved $300 million from all of the income tax cuts and effects from the plan.

Allen said that’s the full net tax reduction Maine residents can expect by calendar year 2019.

But that estimate amplifies the possible error in estimates of how much revenue sales and service tax will generate to make up for the income tax cuts, which are well known. And it also does not contemplate whether the state budget will be able to sustain about $6.5 billion in spending every two years after the changes take full effect in 2018 and 2019.

A 2013 analysis by the Institute on Taxation & Economic Policy broke down who pays Maine taxes by earning categories, finding that the lowest 20 percent of earners pay about 9.6 percent of their family income to state and local taxes while the top 1 percent pays about 6.9 percent of earnings.

Within that, the survey found people making less than $19,000 per year pay the highest share of their annual income in sales taxes, at 6.2 percent.

Those estimates don’t include elderly Maine homeowners, who stand to reap some specific benefit in the proposal, by striking a property tax break for people under 65 in order to double it for people 65 and older.

Who’s making heads or tails of the plan. The right-leaning Washington, D.C.-based Tax Foundation has given the plan a thumbs up and promised it would boost Maine’s position in its annual rankings of the states’ “business tax climate.” It bases its outlook on the idea that “ lower, simpler taxes are more conducive to sustained economic growth,” as authors Jared Walczak and Scott Drenkard write in their analysis of the LePage proposal, posted Friday, just before the governor’s unveiling of the proposal.

The Institute on Taxation & Economic Policy, which advocates for a more progressive tax code, has its analysis of Maine’s plan in the works as well, but executive director Matt Gardner said Monday the plan was still thin on certain details.

“The real big question is five years down the road when the income tax cuts are phased in and the sales tax cuts are fully in play, what is the net impact on state revenues?” Gardner said. “If we’ve learned one thing from Kansas in implementing similar changes, it’s [that] sometimes the numbers just don’t add up the way they were forecast.”

Behind that is a battle of economic theories. Kansas’ cuts are a state-level first experiment for the theories of economist Arthur Laffer, who argued lower taxes would eventually attract more businesses and economic activity and raise tax revenues in other areas.

Gardner’s organization has challenged those ideas, saying Laffer’s research does not adequately prove tax changes are a cause for certain positive changes in the economy.

And teasing out the real economic impacts of LePage’s wide-ranging reform proposals will likely raise new questions for municipalities, nonprofits, a range of businesses, lawmakers and citizens in the months to come.



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