AUGUSTA, Maine — A conservative columnist in Forbes hailed it as the “ most ambitious” proposal of the year, but here in Maine, when Gov. Paul LePage unveiled the comprehensive tax reform plan that is the cornerstone of his budget, many were left feeling a sense of deja vu.
The pillars of the plan — a reduction in the state’s top marginal income tax rate and an increase in the sales tax and expansion of the goods and services on which it’s levied — are echoes of tax reform proposals that have been made again and again since the late 1980s. But each time, those efforts failed — killed by lawmakers or by tax-wary voters.
According to three experts — two economists, plus the governor’s associate commissioner for tax policy — there’s good reason LePage’s plan looks so familiar. The problems in Maine’s tax code, and the basic sketch of a solution, have been known for years.
“It’s no secret: The state has had numerous reports going back into the ’80s, looking at the state tax system,” said Michael Allen, a longtime official at Maine Revenue Services and the governor’s current tax policy guru. “They all come to the same conclusion. We have a very narrow sales tax base but the economy has changed and it needs to be broadened. At the same time, we have a relatively high income tax rate, and it kicks in too low.”
While LePage’s view of taxes is often characterized as a simple, cut-at-all-costs conservative one, the governor has made clear in the past that greater reliance on sales tax revenue is what reform should look like in Maine.
In 2013, a bipartisan group of lawmakers known as the Gang of 11 proposed decreasing Maine’s income tax to a flat rate of 4 percent and raising sales taxes across the board. At the time, LePage said the plan “could have been a good deal” if it had not proposed expanding the sales tax to groceries, one of the many current exemptions to the tax, and if it had resulted in a net reduction in tax revenue for the state.
LePage’s plan is similar to the Gang of 11’s, but meets the criteria he outlined in 2013: It reduces state tax revenue overall and, while it does expand the scope of the state’s sales tax, groceries, medical expenses, auto services, heating fuel and other “life necessities” remain tax-exempt.
Laurie Lachance worked as the state economist under three governors — Republican Jock McKernan, independent Angus King and Democrat John Baldacci. She said that each of them, like LePage, understood that “working around the edges” would do little to fix the structural problems.
The proposals “always have these common elements because these are the ones that could potentially affect economic investments in our state and stabilize revenues for the government,” she said.
Lachance said the problem is that the state’s reliance on the income tax, which is hypersensitive to changes in the economy, creates a volatile revenue stream. But the sales tax — if it’s broadened to include a wider variety of goods and services — is more resistant to big economic swings.
The plan by LePage makes the state much less reliant on the income tax. By the end of 2019, the reduction in the income tax will cost the state $1.2 billion per biennium, while the expansion and increase rate of the sales tax will bring in $831 million more than the current setup.
But while the governor has touted the plan’s savings and the benefits of the systemic shift it contains, his pitch to Maine people is simpler. At its center is the argument that it’s more fair to tax money coming out of someone’s wallet than money going into it.
During his State of the State address this week, LePage put his philosophy bluntly: “It’s your money. You should keep it.”
A week earlier, during an appearance on MPBN’s MaineCalling, the governor explained in more detail. “What’s the one tax you have absolutely nothing to say about?” he said. “It’s the income tax. You don’t even see it. You get your check every week and that money is gone.”
While the governor’s plan follows the basic formula established over the decades, it will also represent a $300 million reduction in total annual state revenue by calendar year 2019. That distinguishes it from previous attempts at reform, all of which were either revenue-neutral or netted the state more money in the long run.
The plan also continues the work of LePage’s first budget, which established a “zero-bracket,” shielding Mainers’ first $5,200 of income from taxation, and increased the standard deduction and personal exemption to federal levels. That budget effectively shielded an individual worker’s first $15,000 from income tax.
This year, LePage’s budget nearly doubles the size of the zero-bracket, resulting in a 33 percent increase in the amount of money that won’t be taxed. Long story short: Workers’ first $20,000 of earnings won’t be subject to Maine income tax at all.
Double that for a married couple filing their taxes jointly and add additional exemptions for children, and suddenly a family of four in Maine is paying no income tax at all on its first $48,000 of income.
“He’s lopped off a fairly substantial number of low- and even middle-income households who are not going to owe any income tax whatsoever,” said former independent Maine Sen. Dick Woodbury of Yarmouth, a Harvard-educated economist and member of the Gang of 11.
LePage’s plan also has laser-targeted relief for Maine seniors, exempting up to $35,000 of pension income. Plus, property tax relief programs are being expanded for seniors while remaining flat or even shrinking for the sub-65 set.
Woodbury, who was a staunch supporter of tax reform during his time in the Legislature, said that given the needs of Maine’s tax structure and the governor’s long-stated policy goals of phasing out the income tax and providing assistance to Maine’s older residents, no one should be surprised by the governor’s budget proposal.
“It’s remarkably consistent with the policy priorities that this governor has been very straightforward about throughout his service,” he said.
What the governor’s proposal lacks in novelty, it makes up for in boldness. That’s the assessment by Lachance, the former state economist. Previous attempts have languished in legislative gridlock or been turned back by voters.
“How many times has it failed?” she said. “To put this out there, and put his name on, that takes a degree of political courage.”
That’s especially true considering it wasn’t that long ago that members of LePage’s party — many of them still serving in the Legislature — won elections by campaigning hard against the 2009 tax reform plan pushed by Democrats.
But LePage’s conservative bona fides are largely beyond reproach. He’s the governor who passed the largest tax cut in Maine history in 2011, and spent much of his first term demanding the state pay down its debt to Maine hospitals — a battle he ultimately won. It’s possible that in the same way that only Richard Nixon, a staunch anti-communist, could reopen U.S. diplomatic relations with Mao’s China, only LePage can get Republicans to support a tax reform plan that includes an increase in the sales tax.
“The fact that he is the leader of the Republican Party in Maine right now, and he’s the one advancing this reform, is politically powerful,” Woodbury said. “He can credibly make the case that this isn’t the same thing they’ve seen before, because it’s a tax cut as well.”
That’s not to say it’s only Republicans he’ll need to convince. Democrats still control the House and the majority of the Appropriations Committee, and they’ve bristled at proposals in LePage’s budget to eliminate state aid to municipalities, which they say will result in increased property taxes and cuts to municipal services such as education and road maintenance.
They also will question the elimination of the estate tax and the reduction of the corporate income tax, which together will cost the state $120 million in the 2018-2019 budget.
While LePage is pushing tax reform, Democrats are pursuing an agenda of workforce development and job creation, and have been skeptical that LePage’s budget would improve the lives of low- and middle-income Mainers. They point to other states, such as Kansas, where cuts to income tax rates have resulted in unpredicted budget shortfalls.
But LePage is bullish on his prospects. He recently told reporters that Mainers were clearly on his side in the last election, so if Democrats don’t follow his lead, “2016 will take care of the problem.”
Follow Mario Moretto on Twitter at @riocarmine.