PRO: DICK WOODBURY, SETH GOODALL and ROGER KATZ
Could this finally be the time for major tax reform in Maine? With Democratic majorities in the House and Senate, a Republican governor, a budget gap that defies easy solutions, and fatigue with stopgap measures and one-time fixes, the opportunity may never be better.
The opportunity for transformative change has been set up, possibly even deliberately, by a budget proposal from the governor that is unpalatable to large segments of both parties, local towns and members of the public. By suspending municipal revenue sharing, and terminating the homestead exemption and property tax refund programs for Maine residents under age 65, the governor’s budget can’t help but raise property taxes on Maine families.
Suppose there were an alternative that instead of raising property taxes on Maine homeowners reduced them by an average of over $500?
Suppose the alternative cut income taxes for Mainers to no more than 4 percent?
Suppose the alternative reduced or even eliminated the regressive burden of sales and property taxes on lower-income Maine families, sending reimbursement checks of $1,000 or more to families struggling to pay their sales and property taxes now?
And suppose that even in reducing these taxes on Mainers, the alternative still generated as much revenue for schools, health care and other government services as what we collect under our outdated tax policies?
These are the basic objectives that have guided a bipartisan group of 11 of us in shaping a tax modernization plan that we believe would transform Maine’s economy for the better.
If you are concerned about the regressive burden of sales and property taxes on Maine families, who continue to struggle in fragile economic times, then this plan should interest you.
If you are concerned that Maine’s 7.95 percent income tax holds back Maine’s economic growth prospects, and you think cutting that rate in half would help move Maine forward, then this plan should appeal to you, too.
As improbable as it may seem, accomplishing this set of objectives is mathematically and logistically feasible. The secret formula (or maybe not so secret) is to scale back the many tax advantages that we currently convey to nonresidents in Maine and reassign those advantages to Maine residents instead.
We have many nonresidents who spend time here in Maine. Some are short-term visitors who flock to Maine’s spectacular recreation sites. Some are owners of second homes, who visit Maine regularly and for extended periods, but whose primary homes and employment are in Massachusetts, Connecticut, New York or other states. Still others divide their time equally between Maine and another state, but choose the other state as their legal residence.
Nonresidents share all of the benefits of Maine’s communities, roads, hospitals, environment and quality of life while they are here. But they avoid taxes that are paid by residents only. Our aim is to draw a fairer share of government costs from everyone who spends time here.
We also want to incentivize more people to live and do business in Maine.
Our plan accomplishes its objectives by increasing revenues from sales and excise taxes, which are paid by both Maine residents and nonresidents in proportion to the time they spend here; and by collecting less from the income and homestead property taxes paid by Maine residents.
The property tax provisions of our plan are anchored by a $50,000 homestead exemption. Our preliminary analysis shows that Mainers will see an average property-tax reduction of more than $500 statewide.
In communities with very high tax rates, Lewiston for example, the savings are even larger — an estimated reduction of $825 on a $100,000 home.
The income-tax provisions are anchored by a maximum 4 percent tax rate, the elimination of nearly all special tax breaks, and the creation of two “fairness credits” that would offset sales and property tax burdens.
These credits phase-out at higher income levels, so that only single filers with incomes over $60,000 or joint filers with incomes over $120,000 pay the full 4 percent rate. Everyone else pays less.
Lower-income families pay no income tax, and receive a refund check that offsets, at least in part, their sales and property tax costs.
The sales tax provisions are the easiest to dislike, because the rates are higher, and because most routine consumer purchases become taxable.
The general sales tax rises to 6 percent, the meals tax to 8 percent, and the lodging tax to 10 percent. Many additional consumer purchases would become taxable, though the specifics still need to be defined.
To those critical of our plan, we ask — what’s the alternative? Sticking with the high property taxes we have now, and possibly raising property taxes even more? Sticking with a 7.95 percent income tax with an endless list of complicating special treatments for one purpose or another, but which discourages economic growth?
Rather than applying more duct tape to a failing tax system, we have put forward for discussion an alternative that we believe could be transformative for Maine’s economy, Maine business and Maine people.
That’s the plan of our “Gang of 11.” We hope you will join us.
Sen. Dick Woodbury is an independent from Yarmouth; Sen. Seth Goodall is a Democrat from Richmond; and Sen. Roger Katz is a Republican from Augusta.
CON: ALBERT DIMILLO
Mainers would be best served if tax changes are based on informed, sound tax policy. However, politics and the lack of understanding of tax laws by the vast majority of legislators, business leaders, economists and Maine voters have some praising a recent proposed “tax reform” plan.
In 2009, the Democratic-controlled Legislature passed a poorly designed “tax reform” plan that increased sales taxes and gave a large income-tax cut to the top 1 percent of Mainers. I worked with the Republicans and the Green Party to overturn the law with a June 2010 people’s veto, which 61 percent of Mainers voted for.
One of the major supporters of the vetoed plan was the current “independent” Sen. Dick Woodbury, who is the driving force behind the new “tax reform” plan. Those who claim this plan is different are correct; it is significantly worse tax policy.
The uninformed press has categorized Woodbury as a moderate, but his tax policies are extreme. He is a strong supporter of the voodoo economic theory that tax cuts for the rich and corporations, paid for by tax increases on low- and middle-income taxpayers, is good economic policy.
Maine’s tax structure is already significantly regressive and this plan will make it more regressive and unfair. Eliminating the estate tax and cutting the income tax in half results in a group of fewer than 5,000 taxpayers receiving a net tax cut of $45 million. The remaining taxpayers will have a net tax increase of $305 million.
The promoters of the plan estimate that the $700 million increase in consumption taxes (sales and excise taxes) will be offset with cuts to the property tax, income tax and estate tax, with a net Maine tax increase of $160 million.
What they don’t understand is that because Maine’s consumption taxes are not deductible on federal tax returns, but Maine income, property and estate taxes are deductible, the shift in Maine taxes will result in a net $100 million in increased federal taxes. Accordingly, to net a $160 million increase in revenue for the state, the net Maine and federal tax increase from “tax reform” is $260 million.
The “Gang of 11″ and their Ph.D. economist don’t seem to understand the interaction of the federal and Maine tax laws or simple math.
There are too many irrational tax policy provisions in the current plan to address in detail, but here are just a few:
• The plan gives millions in corporate tax cuts, the vast majority of which go to out of state corporations like Walmart. This policy is even more irrational considering that in 2006 Maine passed a very favorable tax law that greatly reduces Maine taxes on corporations that locate facilities and employees in Maine.
• The plan gives millions in estate- and income-tax cuts to a small group of millionaires under the myth that these tax cuts will keep Mainers from leaving Maine. The only credible studies done have shown that states that lower taxes to keep residents from migrating to lower-tax states resulted in significant decreases in net tax revenues.
• The plan talks about how the sales-tax increases will be partially paid by nonresidents, but fails to understand that a significant amount of income-tax and estate-tax cuts will benefit nonresidents.
• The plan includes taxing Social Security benefits, which are currently not taxed in Maine. For most retirees, taxing Social Security would more than offset the lowering of the income-tax rate.
• The plan eliminates itemized deductions, which will result in many elderly taxpayers with high medical deductions having an income-tax increase. The elimination of all itemized deductions will also cause many middle-income taxpayers to have an income-tax increase.
• The plan will cause significant consumption-tax increases for over 100,000 low-income taxpayers who don’t currently file an income-tax return. Maine Revenue Services has estimated in the past that at least 50 percent of these taxpayers will not file a return to get a refundable tax credit like under this plan.
• The 45 percent increase in consumption taxes will drive even more Mainers near the N.H. border to shop in that state.
This “tax reform” plan has been proposed in part to raise $160 million as an alternative to the governor’s budget that reduces revenue sharing to the cities and towns and will result in increased property taxes. Because consumption taxes are both more regressive than property taxes and not deductible, increasing them to lower property taxes is irrational.
The only rational alternative to the governor’s budget is to reverse a portion or all of the income- and estate-tax cuts passed in 2011 that take effect in 2013.
Albert DiMillo is a former accountant who lives in South Portland.