AUGUSTA – Gov. Paul LePage wants Mainers to call their lawmakers to encourage them to eliminate the income tax on pensions, to help low-income elderly residents and to lure back wealthy retirees who spend just over six months out of state to avoid Maine taxes.
The proposal, which LePage touted recently at a town hall meeting, comes at a time when he is asking state agencies to propose $100 million in budget cuts. Depending on which types of pensions would become tax-exempt, the state would lose $11 million to $93 million in revenue in the fiscal year that starts July 1, 2012, according to Maine Revenue Services.
The idea is not new, lawmakers said, and Republicans and Democrats are expressing a willingness to reconsider it. But they cautioned that it’s important to temper expectations because of ongoing budget concerns.
“The reality check comes in the price tag,” said House Minority Leader Emily Cain, D-Orono. “Democrats could certainly be in favor of this if there’s a way to fund this that’s reasonable, thoughtful and doesn’t cause harm in other places.”
LePage told an audience in Dover-Foxcroft last month that he wants lawmakers to continue to lower taxes. Earlier this year, LePage and lawmakers included tax cuts in the state budget while freezing and capping cost-of-living increases in pensions for retired state workers and teachers.
The $150 million tax package lowers income taxes, gives tax breaks to fishermen and redemption center owners, creates tax credits for businesses and increases the estate tax exemption from $1 million to $2 million.
LePage wants lawmakers to consider more ways to lower taxes when they return to the State House in January.
“One of the things we’re going to try to do is pass a law so there’s no longer an income tax on pensions,” he told the crowd, which burst into applause. “There are two basic reasons for that. No. 1, retirees living in this state are living on a fixed income. So we need to make it easier for them to put more money in their pocket.”
Also, he wants to encourage wealthier retirees who “stay in Maine six months, less a day,” to make Maine their official residence.
“They are residents of Nevada, Arizona or Florida, where there is no income tax,” he said. “They move their wealth away from Maine, but they come back and spend summers here. We need to stop that. We need the capital they have to help invest. They are the least costly of all the citizens. They don’t have kids in school, they’re generally not on welfare.”
It’s difficult to estimate how many retirees leave Maine to avoid taxes, said Michael Allen, director of economic research for Maine Revenue Services.
In the late 1990s, his office looked at the number of people who filed tax returns in Maine one year but not the next. It found that the state was attracting as many retirees as it was losing, he said.
Four or five years ago, Maine Revenue Services looked at the issue again and found that the state “seemed to be losing more people than it was attracting.”
He believes the elimination of the federal estate-tax credit in 2001 drove more Mainers out of state, particularly since Florida kept the credit but Maine did not.
“It wasn’t just an income-tax issue anymore, it was an estate-tax issue,” he said, cautioning that “a lot of it is anecdotal.”
Allen’s estimates show it would cost the state:
• $14 million to eliminate the tax on state employees’ and teachers’ pensions.
• $13 million to eliminate the tax for federal civilian employees.
• $11 million to exempt military pensions.
• $55 million to exempt private-sector pension income.
If the tax were eliminated on all of the sectors, it would cost $93 million and reduce taxes for 75,000 people, Allen said.
LePage’s spokeswoman Adrienne Bennett said in a prepared statement that the administration considers the issue “a top priority” as it looks to prepare a supplemental budget for consideration by lawmakers. The administration is still working out the details of what the proposal would entail.
“The bottom line is, we don’t want people leaving our state,” she said in the statement.
Independent Sen. Richard Woodbury of Yarmouth, a member of the Legislature’s Taxation Committee, said the state already exempts various groups, which drives up taxes for everyone else.
However, he does consider it to be a problem that some retired Mainers claim residency in other states.
“My instinct on how to address that would be to bring our overall tax rate down across the board,” he said.
Earlier this year, the Legislature voted to lower the top income-tax rate from 8 percent to 7.95 percent. Woodbury said the state could spend $93 million to lower the rate again by another percentage point, and make a bigger impact on the economy.
Richard Rosen, R-Bucksport, Senate chairman of the Appropriations Committee, said he wants to keep the focus on job creation. He said he needs more information on how eliminating the income tax on pensions would help to achieve that goal.
State Treasurer Bruce Poliquin said a multiplier effect would spur the economy if retirees stayed here longer and spent more money in Maine on groceries, homes and cars.
“One of the things we’ve got to dig up data on is what kind of an impact will we get by keeping that capital here in Maine,” he said.
At the town hall, LePage said that if lawmakers eliminate the tax on pensions, it will help state workers by offsetting reductions to their cost-of-living increases.
“But the only way we’re ever going to get rid of the tax on pensions,” he said, “is for the people in this room, and throughout our state, to call their representatives and senators and demand it.”
MaineToday Media State House Writer Susan Cover can be contacted at 620-7015 or at: