AUGUSTA – A Maine family of four earning $50,000 a year would save about $647 on state income taxes under a sweeping tax reform proposal to be heard Friday by the Legislature’s Taxation Committee.

That same family would pay hundreds of dollars more in sales taxes, which would be raised and expanded to goods and services that are now exempt, including heating oil, groceries and amusement park tickets.

The trade-off — higher sales taxes in exchange for lower income and property taxes — is where the bipartisan tax reform plan detailed in L.D. 1496 draws opposition.

The long list of opponents, from affected industry groups and both major political parties, was expected.

“No state has pulled this off, not in this comprehensive way,” said Meg Gray Wiehe, state tax policy director for the Washington D.C.-based Institute on Taxation and Economic Policy.

Nonetheless, the architect of the plan, independent Sen. Dick Woodbury, a Harvard-trained economist from Yarmouth, says it can work.

Woodbury has calculated the plan’s effects: Property owners would see an average $500 drop in property taxes, and the decrease would be as much as $1,000 in communities with high property tax rates.

He says a significant tax credit for low- and middle-income individuals and families would moderate, if not erase, the regressive impact of higher sales taxes.

More than wealthy Mainers would get tax cuts, Woodbury said. Everybody would.

He said his preliminary calculations are being analyzed by Maine Revenue Services. The plan isn’t a finished product, but Woodbury is confident.

“The underlying philosophical rationale for this plan is powerful,” he said. “This should work.”

But will it?

Industry groups that would be affected by changes to Maine’s sales and excise taxes are opposing the plan. Some Democrats don’t like paying for an income tax cut by broadening the sales tax, particularly when the result — a significant tax cut for the wealthy — is antithetical to the campaign rhetoric that helped the party gain control of the Legislature.

Republicans like the idea of cutting Maine’s top income tax rate of 8 percent and replacing the tiered system with a 4 percent flat rate. But some would rather pay for it with reduced government, not sales tax increases. Conservative groups have called the plan a “Trojan horse” for future tax increases.

Woodbury and the so-called Gang of 11 legislators say that swapping lower income taxes for higher consumption taxes is necessary to overhaul a tax system that now puts too heavy a burden on residents and property taxpayers. They say their plan will spread more of the burden to non-residents while encouraging business growth through reduced income and corporate taxes.

The coalition will make the same argument when it presents the proposal to the Taxation Committee. Sen. Roger Katz, R-Augusta, one of the bill’s co-sponsors, has acknowledged the obstacles.

“Would you rather have what we have now?” he said last week.

IS THE REFORM PLAN REGRESSIVE?

Wiehe, with the Institute on Taxation and Economic Policy, generally believes that broadening the sales tax base to pay for a large income tax cut is bad policy.

Her group has published critiques of tax overhaul proposals in Louisiana, North Carolina and Ohio. She said the Maine plan is different.

“It has more potential than anything I’ve seen to truly offset the impact of the sales tax changes on low- and middle-income households,” Wiehe said.

Tax experts say higher sales taxes hit low-income residents harder because those people devote a larger portion of their paychecks to buying taxed goods. A report by the Institute on Taxation and Economic Policy said Mainers with an average annual salary of $11,800 devote 6.2 percent of their earnings to sales and excise taxes, while individuals earning $25,100 pay 5.1 percent. Those earning $328,000 or more pay an average of 0.7 percent in sales taxes.

The new bill attempts to offset that impact with a “tax fairness credit,” providing as much as $1,000 for individuals and $2,000 for joint filers, plus $500 per dependent and $500 for each household member older than 65.

According to Woodbury’s calculations, some low-income Mainers who don’t pay income taxes in the current tiered system will receive rebate checks under his plan.

Woodbury’s analysis showed that a single taxpayer earning $40,000 a year — about the median income — using the standard deduction would save $478 on income taxes, 27 percent.

A four-person family earning $23,550 — the federal poverty level — and now paying no state income taxes would receive a $1,200 rebate check.

About 70,000 Mainers don’t pay state income taxes, under changes enacted by the Legislature in 2011. Maine has an earned income tax credit, but it’s non-refundable so it doesn’t yield cash. And those who don’t pay income taxes can’t qualify for the program.

The coalition plan would allow residents with no income tax liability to qualify for the fairness credit.

“People who have no income tax liability or very little would still get the full benefit,” Wiehe said.

MAKING UP LOST TAX REVENUE

Opposition to the plan is focused on the coalition’s proposal to raise about $700 million in additional sales and excise tax revenues to pay for the income and corporate tax cuts.

According to Maine Revenue Services, raising the state’s sales tax rate from 5 percent to 6 percent would generate $155 million next year. The state’s sales tax rate was last changed on July 1, 2000. The rate ranks Maine No. 31 in the country.

Another $400 million would be raised by eliminating about 87 sales tax exemptions, some of which have existed since Maine adopted its sales tax in 1951.

Such exemptions include amusement park tickets, movies and sporting events. According to a report this year by Maine Revenue Services, the amusement exemption would cost the state $48.6 million in lost revenue in the two fiscal years beginning July 1.

The exemption on groceries is one of the most expensive. Maine Revenue Services estimated the exemption will cost more than $165 million over the next biennium.

Eliminating the exemption may prove controversial. Maine is one of 31 states with sales taxes that totally exempt groceries, according to the Federation of Tax Administrators. Seven states that tax groceries do so at a lower rate than the general sales tax.

Woodbury identified other exemptions that the coalition may want to lift, including heating fuels ($36.4 million in projected revenue next year); barber shop and personal care services ($6 million); funeral services ($3.8 million); dry cleaning services ($2.8 million); and other personal and professional services.

He said the group hasn’t targeted all of the exemptions, but it plans to “look at everything.”

“Real care needs to be exercised to make sure it’s administratively feasible and that it’s not anti-competitive,” he said.

A 2007 report by the Federation of Tax Administrators showed that only 11 states taxed fewer services than Maine.

Michael Allen, the governor’s associate commissioner of tax policy, said some of the exemptions exist to make the state more competitive for certain businesses.

The exemptions, however, have come under scrutiny. A report last year by The New York Times showed that Maine and other states were surrendering a combined $80 billion each year to companies through tax exemptions and incentives. The report said Maine allocated nearly one-fifth of its spending to such incentives. The Times used Maine’s annual report on tax exemptions as the basis for its analysis.

Allen disputed some of the findings, saying the state doesn’t have many economic development incentives in its tax exemptions.

Wiehe said some tax experts support taxing services as a way to increase revenue.

“All of our sales taxes were created back in a time when a lot of this stuff never existed,” she said. “Pet grooming did not exist in 1930. It’s a historical accident that these were left out of the sales tax base.”

EXCISE TAXES SHOOT HIGHER

Increasing sales taxes and removing exemptions is just one part of the coalition’s plan. It also hopes to increase excise taxes on lodging from 7 percent to 10 percent.

According to Maine Revenue Services, an increase of 1 percentage point would generate $6.8 million in the next fiscal year. The rate was increased to 7 percent on July 16, 1986.

The plan also would increase the cigarette tax from $2 to $3.50 per pack, generating an estimated $58.6 million in the next fiscal year. The rate was last increased, from $2 to $3 per pack, in 2005.

Another $8 million would be generated from taxing other tobacco products at the same rate as cigarettes. About $3 million in revenue would come from increasing sales taxes on short-term auto rentals, from 10 percent to 15 percent.

All of the proposals have generated opposition from industry groups.

Scott Drenkard, economist for the Tax Foundation, said increasing excise taxes goes against free-market ideals.

“I see excise taxes as taxes that are designed to distort choices of people,” he said. “I don’t support the idea that we should tax certain products because they’re politically expedient or they’re better for us.”

There’s also a sustainability issue, said Wiehe.

She said the cigarette tax hike can curb consumption, and that’s why health advocates lobby for increased tobacco taxes. Fewer smokers mean less excise tax revenue.

“You can raise a massive chunk of money through a massive cigarette tax hike, but that amount could erode over time,” she said. “Banking a reform plan on an excise tax can be problematic.”

DARING IDEAS, BUT TREPIDATION

The response to the coalition’s concept tax reform bill has been tepid at best.

“They have some daring ideas,” David Clough of the National Federation of Independent Business said in a recent statement. “High taxes dampen growth and jobs, and they seem to realize that small business is the engine of growth in Maine.”

So far, the most common description of the plan is “bold.”

But with boldness comes anxiety.

“You can’t have a comprehensive plan without having winners and losers,” Wiehe said.

And there are deep ideological divisions over whether cutting income taxes is an effective pro-growth approach.

Drenkard and conservative groups like the Tax Foundation say it is. The Institute on Taxation and Economic Policy, Wiehe’s group, says it isn’t.

Wiehe said she really likes many elements of the Maine plan, but she’s not quite sold.

“Unlike other tax swaps, it doesn’t appear to be a huge tax cut for the wealthy and a huge tax hike for most everyone else,” she said. “But I don’t necessarily think that this plan helps to balance the three pegs of the revenue stream stool. I think it could throw it off balance.”

Woodbury and the coalition hope to make a different argument Friday.

“This plan basically balances,” he said. “It’s going to need some tweaking, but it balances with a 4 percent income tax and a $50,000 homestead exemption.

“Do we want to do that? Maybe not, but let’s talk about it,” he said. 

Steve Mistler can be contacted at 620-7016 or at:

smistler@pressherald.com

Twitter: @stevemistler