January 19, 2018
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What’s really behind State House fight over tax conformity

By Michael Shepherd, BDN Staff
Troy R. Bennett | BDN | BDN
Troy R. Bennett | BDN | BDN
The State House in Augusta as seen Jan. 6, 2016,

AUGUSTA, Maine — Conforming Maine tax laws to federal changes — a routine activity in the State House — has become a vehicle for larger debates about taxes and education funding.

It’s all about a federal tax relief package passed by Congress in December. States typically conform to many of the changes made by Congress in the name of providing consistency for households and businesses who pay taxes.

But over the years, Maine has been in different stages of compliance with the federal code around bonus depreciation, which allows upfront tax breaks for business equipment.

Gov. Paul LePage and his fellow Republicans want the state’s version of bonus depreciation — a controversial policy enacted federally in 2008 to stimulate the economy during a recession — to continue through 2019, while Democrats instead want to give $23 million to Maine schools.

The Democratic-led House and Republican-led Senate initially passed different versions of the tax conformity measure and are mulling over a way forward.

It’s led to a loud, protracted fight for public support: LePage blasted Democrats in news releases on four different days last week for holding conformity “ransom” while the progressive Maine People’s Alliance has framed the Republicans’ proposal as a “corporate tax giveaway.”

Here’s what you need to know about this election-year squabbling:

Republicans want to extend a questionable tax credit, while Democrats want to link an increase in education funding to the proposal.

The full conformity plan proposed by Republicans would cost $38 million, according to the Legislature’s budget office.

It would fund conformity for two years, including the $23 million Maine Capital Investment Credit, which is Maine’s version of bonus depreciation enacted in 2011, allowing upfront tax breaks on property that will lessen in value over time, such as buildings, machinery and furniture.

At the federal level, bonus depreciation is controversial. A 2014 report from the nonpartisan Congressional Research Service called it “not very effective.” It’s maligned by progressive economists, but the more conservative Tax Foundation has called it a good stimulus.

In Maine, the progressive Maine Center for Economic Policy has said if it’s “ineffective at the federal level, it’s even more ineffective at the state level” because corporate tax payments are much lower there. But the Maine State Chamber of Commerce has defended it, saying it helps 4,000 Maine businesses, most of which are small.

Democrats’ proposal would phase out the credit after this year while giving $23 million more to — nearly all of it from Maine’s rainy day fund — to tamp down the effects of recently announced, projected cuts in state aid to schools.

These are new fronts in the election-year war between House Democrats and LePage.

The rhetoric around the issue is hot.

LePage said in a statement last week that Democrats were “holding tax conformity for ransom” by linking it to education, saying they’re endorsing a tax hike. His office sent out four news releases blasting Democrats during the week, which is a lot, even by the aggressive governor’s standard.

But House Speaker Mark Eves, D-North Berwick, said “we refuse to have our families pay for ineffective and costly tax breaks while simultaneously neglecting our students and schools.”

For a few reasons, all of that doesn’t quite match the substance of the debate.

Without the tax credit, businesses wouldn’t get an upfront tax deduction, but they’d still be able to deduct expenses on a normal depreciation schedule. Also, Democrats’ extra money for schools won’t fix the state funding formula that dictated the cuts.

What’s more, as Democrats attach the issue to tax conformity, LePage has tried to drive a wedge between Democrats and teachers by saying tax credits for tuition expenses and supplies teachers buy for work won’t be available at the state level if conformity doesn’t pass. That’s true, but both proposals include those credits.

So, why the posturing? It’s an election year. Republicans want to cast Democrats as tax-raisers and Democrats want to rally their base by seizing on school funding. It could become a talking point in the legislative campaigns this year.

 


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