May 23, 2019
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Economist proposes 9 changes to LePage’s tax reform plan

Evan Belanger | BDN
Evan Belanger | BDN
Dick Woodbury, an economist and former Maine senator, gives his analysis about Gov. Paul LePage's tax reform proposal during a Bangor Area Chamber of Commerce meeting Wednesday in Brewer.

BREWER, Maine — Former state Sen. Dick Woodbury of Yarmouth is no stranger to Maine’s tax reform efforts.

A Harvard-educated economist, he was the policy architect of a bipartisan tax overhaul plan put forth in 2013 by the “gang of 11” lawmakers. That attempt eventually failed.

After more than a decade of work to reform the state’s tax system, he said the philosophy has always been to get more tax money from nonresident homeowners who don’t pay income tax and create “a positive re-weighting.”

Addressing the Bangor Area Chamber of Commerce on Wednesday, Woodbury called the tax reforms contained in Gov. Paul LePage’s budget proposal “a really workable package.”

He noted its similarities with prior attempts, including a reduction in income tax and an attempt to raise more money from sales tax by increasing the rate and imposing the sales tax on more goods and services that aren’t currently taxed.

In comments directed at the governor, he said “I hope you pull this off,” but he also said that “some of this stuff is not going to be palatable” to the Legislature.

Thus, in analyzing the governor’s plan, Woodbury proposed the following changes he said would increase its chances of success.

Forget about taxing nonprofits.

According to Woodbury, there are just too many kinds of nonprofits with too many kinds of balance sheets to ensure all can pay the proposed taxes, making it a political detriment to the rest of the tax reform plan.

“Just take it out,” he said.

Don’t eliminate revenue sharing with municipalities.

“One, you’re pissing off everybody,” Woodbury said, “but also, there are communities that really do depend more heavily on this.”

Instead of eliminating revenue sharing, he proposed reforms that would focus revenue sharing dollars on communities that really need them.

He suggested new formulas that could target the money toward municipalities with mill rates above the state average or target it based on tax burden per capita.

Double homestead exemption to $20,000 for all.

If tax reform is designed to ensure that nonresident homeowners pay their fair share of the taxes, the homestead exemption “does a pretty darn good job at concentrating relief at residents relative to nonresidents,” Woodbury said.

“Find $25 million in this thing,” he said. “Instead of eliminating the homestead exemption, double the darn thing and you’ll be a hero.”

The governor’s proposal would double the homestead exemption for those over 65 and get rid of it for everyone else.

The homestead program provides $10,000 of property tax relief for certain individuals who have owned property in Maine for at least 12 months and occupy the property as their permanent residence on April 1 of each year.

Eliminate the taxes on professional services.

“It’s not that I don’t necessarily believe in a tax on professional services,” he said. “It’s just really hard to administer.”

According to Woodbury, the fact that many in professional services in Maine do business for people out of state and people in the state hire professional services from out of state complicate the issue.

“I think it’s too big a thing to crack in the short term, so I’d like to take that out,” he said.

Don’t reduce the corporate tax rate so much.

Woodbury admits that his first four changes cost the state money, creating a budget hole that must be filled. Reducing the proposed tax cut for corporations is one way to do that, he said.

The corporate income tax is mostly paid by large multinational and multi-state corporations such as Home Depot and Wal-Mart, he said.

“I think it’s a big economic disincentive, so moderate that, reduce that down,” he advised. “You want to have a reduction in the package but not as much as what you’ve proposed.”

Limit the income tax exemption for seniors.

According to Woodbury, it’s not the potential loss of revenue sharing in the governor’s proposal that threatens to drive property taxes up the most.

“It’s that nonseniors are all losers and seniors are all winners,” he said. “That’s a far bigger price.”

Under the governor’s proposal, he said, a senior-aged couple would have $40,000 of income automatically exempt by the time the plan is fully phased in, then each spouse would be able to exempt another $35,000 of their pensions.

That means a senior couple would be able to exempt up to $110,000 in income while a working family of four making $50,000 would be paying taxes, according to Woodbury.

“It’s just overly weighted in that direction, so that’s another place where I think savings can be found,” he said.

Stop talking about eliminating the income tax.

If eliminating the income tax entirely is integrated into the plan, “the sense of broad buy-in just blows up,” Woodbury said.

LePage’s budget proposal doesn’t actually call for eliminating the income tax, which currently tops out at 7.95 percent for the highest earners. Instead, it proposes exempting the first $9,700 of income by 2019 and taxing income between $9,701 and $50,000 at a rate of 5.75 percent.

Income between $50,000 and $175,000 would be taxed at 6.5 percent and income beyond that would be taxed at 5.75 percent under the plan.

“As important as anything, governor, you’ve got to stop talking about eliminating the income tax,” Woodbury said, adding that he is not totally averse to eliminating the income tax, but he wants to see what that budget looks like first.

In his State of the State Address, LePage called for a constitutional amendment that would eliminate the income tax.

Other suggestions from Woodbury included eliminating the proposal to let municipalities collect and keep the telecommunications tax currently collected by the state. That would provide $12 million for the budget, he said, and eliminate the complication of municipalities collecting the money.

He also proposed keeping the meals tax at 8 percent rather than dropping it to 6.5 percent as the budget proposes and the auto rental tax at 10 percent rather than dropping it to 8 percent in order to balance the budget in keeping with his suggested changes.

“We don’t need to be reducing sales taxes,” he said. “We’re trying to draw more out of the sales tax.”

Among other items, LePage’s tax reform plan would eliminate itemized income tax deductions in favor of a broader tax base and a lower tax rate.

It also would repeal the estate tax and expand the zero bracket for the individual income tax so a family of four would not pay taxes for the first $48,000 of income and single filers would not pay taxes for the first $20,000.

It would raise the sales tax to 6.5 percent and impose the sales tax on a greater range of services. The sales tax has been temporarily raised to 5.5 percent, though it will revert to 5 percent on July 1 without legislative action.

Woodbury, an independent, served in the Maine Senate from 2010 to 2014 and the Maine House from 2002 to 2008.

Writing frequently on tax reform in Maine, he also has served for the Federal Reserve Bank of Boston and as an advisor to the Maine State Chamber of Commerce on the governor’s tax reform proposal.

With a doctorate in economics from Harvard University, he serves as an economist for the National Bureau of Economic Research.

Follow Evan Belanger on Twitter at @evanbelanger.

 



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