AUGUSTA — Members of a legislative committee agreed Tuesday that Mainers deserve an income tax break. They were divided, however, on how deeply to cut and how to distribute the tax breaks.

In a report to the Legislature’s budget-writing committee, the Taxation Committee – composed of six Republicans, six Democrats and one independent – endorsed some of the tax overhaul proposals contained in Gov. Paul LePage’s two-year budget, but rejected others.

As expected, lawmakers opposed LePage’s proposals to eliminate municipal revenue sharing and to collect taxes on larger nonprofits. But the bipartisan committee’s recommendation to the Appropriations and Financial Affairs Committee supported LePage’s plan to stop taxing military pensions and to apply the sales tax to more goods and services.

Yet the committee’s failure to reach consensus on two key items – income tax cuts and sales tax increases – underscores the challenges facing lawmakers as they craft a $6.5 billion budget that can pass muster with both chambers of the Legislature and LePage.

Republicans are proposing a 1 percentage point increase in Maine’s sales tax to pay for deeper cuts in the income tax, coupled with sales tax credits to help low-income residents. The proposals are similar to the roughly $900 million in income tax cuts sought by LePage.

“Making Maine more competitive involves reducing the income tax rate, because we are an outlier with other states, and taking care of retirees,” said Sen. Earle McCormick, R-West Gardiner, Senate co-chair of the Taxation Committee.

The committee’s Democrats, meanwhile, want to maintain the current sales tax rate of 5.5 percent, while offering smaller but more evenly distributed income tax cuts. They also are opposing additional income tax cuts sought by LePage for subsequent years that they insist could create budget problems down the road.

“We are going to have an income tax cut that we pay for,” said Rep. Adam Goode, D-Bangor, the committee’s House co-chair. “We are going to support policy that makes sure that everyone benefits at a similar dollar amount. We are not going to give a $10,000 tax cut to people making over $400,000 a year while giving everyone else $150.”

Consistent with his re-election campaign pledge, LePage introduced a two-year budget plan in January that seeks dramatic changes to Maine’s tax code.

The plan proposes cutting the top income tax rate from 7.95 percent to 5.75 percent by 2019, as well as eliminating the estate tax and income taxes on military pensions. To offset those revenue losses, LePage proposed increasing the sales tax rate to 6.5 percent from 5.5 percent and applying sales and use taxes to hundreds more goods and services.

Democrats, Republicans and the one independent on the Taxation Committee unanimously supported broadening the sales tax base to apply to more goods and services, with some tweaks to the LePage plan. For instance, the committee proposed continuing to exempt “professional services” – such as those provided by lawyers and accountants – from taxation as well as haircuts and museum entrance fees.

The committee also endorsed increasing Maine’s lodging tax from 8 percent to 9 percent, and maintaining the meals tax at 8 percent despite a planned decrease to 7 percent.

In 2013, lawmakers had approved a temporary increase in Maine’s general sales tax from 5 percent to 5.5 percent. It now appears the rate will remain at 5.5 percent, or be raised, by the time lawmakers complete work on the budget this June.

There appears to be broad, bipartisan support in the Legislature to lower Maine’s income tax rates. However, Tuesday’s Taxation Committee report shows that the parties remain at odds over how much to cut.

Maine now has three tax brackets. Those who earn less than $5,200 a year pay no income taxes. Those who earn $5,200 to $20,899 pay 5.5 percent, and everyone else pays 7.95 percent.

Republican committee members recommended a four-tiered system that would lower the top income tax rate from 7.95 percent to 6.95 percent while raising the threshold for triggering that rate to $50,000 for individuals. Mainers earning up to $9,699 would be exempt from the income tax.

To help pay for those cuts, Republicans supported LePage’s proposal to increase the sales tax rate from 5.5 percent to 6.5 percent.

“That’s a difficult thing to do, but it’s a consumption tax,” said Rep. H. Stedman Seavey, R-Kennebunkport. “And our philosophy is to lower the income tax.”

Democrats and the one independent offered a less detailed income tax proposal to the Appropriations Committee. Like Republicans, they would exempt Mainers earning up to $9,699 a year. But Democrats want a five-tiered income tax bracket with a “progressive tax structure” that would include a top bracket higher than the Republicans’ $50,000 threshold, although they did not specify a dollar figure Tuesday. Democrats would pay for their income tax cuts, which would be smaller than those proposed by Republicans, by broadening the sales tax base and ending some exemptions.

“Our goal was to aim for a more progressive structure where the dollar amount … would be, if not equal, at least more equitable,” said Rep. Denise Tepler, D-Topsham.

The Taxation Committee also split on whether to eliminate the estate tax and whether to reduce Maine’s corporate income tax.

Republicans supported LePage’s proposal to increase the exemption for the estate tax from $2 million to $5.5 million in 2016 and to eliminate the tax in 2017. Six of the 13 committee members supported either maintaining current law or lowering the exemption from $2 million to $1 million.

The Appropriations Committee will now spend the next several months reworking LePage’s proposed budget based on recommendations from the other policy committees.

Although Rep. Diane Russell said she disagreed with some of LePage’s tax reform proposals, the Portland Democrat said the governor should be commended for attempting to fix a tax system that all sides agree needs a major overhaul.

“Putting forth a comprehensive tax reform package, like has been proposed, was really helpful in moving us along,” Russell said.

Kevin Miller can be contacted at 791-6312 or at:

kmiller@pressherald.com

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