AUGUSTA — Gov. Paul LePage and Republican leaders in the Legislature ramped up their push Tuesday for a constitutional amendment to eliminate Maine’s income tax by 2020.
The effort occurred while the fate of the governor’s budget plan to significantly reduce the income tax in the meantime – and pay for that by raising the sales tax and broadening the list of taxable goods and services – remains uncertain in the divided Legislature. The proposal has met resistance from Democrats and Republicans, raising speculation that lawmakers will scuttle it as they negotiate a two-year budget.
The proposal for a constitutional amendment does not spell out how the state would replace an estimated $1.8 billion in annual tax revenue – roughly half of the yearly revenue in LePage’s current two-year budget proposal – that would be lost by eliminating the income tax.
At the public hearing on that proposal Tuesday before the Legislature’s Taxation Committee, LePage officials and Republican lawmakers said Democrats are using “scare tactics” by claiming that eliminating the income tax would lead to drastic cuts in education spending or to property tax increases.
“I would expect that if the Legislature were to pass this bill and the people were to vote for the elimination of the income tax, the governor would prepare a budget that would carefully balance tax policy and the obligations of state government,” Michael Allen, the governor’s tax policy adviser, told the Taxation Committee.
Democrats have described the plan as reckless.
“This is more of a political sound bite than a serious proposal,” said Democratic Sen. Nate Libby of Lewiston.
Officials from the administration said the governor envisions a gradual drawdown of the income tax rate, starting in the two-year budget proposal before the Legislature. However, the political viability of the plan is questionable because of the failure, so far, to reach a compromise on short-term tax reform.
Republican leaders haven’t endorsed LePage’s budget proposal to reduce the income tax and raise other taxes to pay for it. Democrats have proposed an alternative income tax reduction. Meanwhile, negotiations by the Legislature’s budget-writing committee seeking a bipartisan compromise appear stalled.
Republican leaders have been unwilling to address speculation that the party has been unable to unite behind a compromise, but a release Tuesday from the Maine State Chamber of Commerce continued to feed speculation that a deal remains elusive.
Chamber President Dana Connors urged both sides to reach a compromise. “As politically difficult as tax reform can be, as we have seen over the last 20 years when this has been attempted before, this current proposal is our best and maybe last opportunity to do something enormously important to Maine’s future economic vibrancy that is long overdue,” he said.
LOST REVENUE, IMPACT ON SERVICES
With the short-term tax reform languishing, Republicans and LePage have shifted their attention to the constitutional amendment.
Even though the proposal faces long odds in the Legislature, Republican support could help the party in the 2016 elections even if the proposal fails to make it on the ballot.
The proposal for a constitutional amendment, L.D. 1367, requires two-thirds support of the House and Senate, and ultimately, ratification by Maine voters. Democrats, who control the House, support a small reduction in the income tax, and argue that eliminating it would devastate state services.
Democratic members of the Taxation Committee noted that previous reductions in the income tax have been paid for by cutting state aid to municipalities and by other reductions in state services.
Rep. Adam Goode, D-Bangor, questioned why the short-term tax overhaul in the governor’s budget proposal has specific provisions to pay for the revenue loss, but the proposal to eliminate the income tax does not. Rep. Diane Russell, D-Portland, asked how future legislatures will “cut the pork when I’m pretty sure we’re chewing on bone right now.”
John Kosinski, representing the Maine Education Association, said the perceived threat to public education funding is not fantasy. State spending for public schools is now $944 million, about 30 percent of the state budget.
“You could zero-out education funding, every penny, and it still would only solve half of the (revenue) problem” if the income tax is eliminated, Kosinski said.
Nonetheless, LePage and Republican leaders voiced support for the constitutional change. The governor, who is convinced that voters would support the amendment in a statewide referendum, has made several public appeals for “citizen co-sponsors” and asked them to pressure their legislators.
“Eliminating the income tax is the largest wage increase that Mainers could get,” LePage said in a prepared statement released Monday.
In the same release, LePage said his plan to eliminate the income tax is “cautious,” noting that his administration first reduced the top rate from 8.5 percent to 7.95 percent in 2011. His current budget proposal would reduce the rate from 7.95 percent to 5.75 percent by 2019. If the constitutional amendment passed, the income tax rate would fall to zero the next year.
“Let the people decide how they want to be taxed,” said Rep. Kenneth Fredette, R-Newport, the House minority leader.
DEMOCRATS’ PLAN QUITE DIFFERENT
Republicans have balked at the tax overhaul plan in the governor’s budget because it includes a hefty increase in the sales tax and a broad inclusion of goods and services that are now exempt. The plan is similar in concept to the 2009 tax reform bill enacted by the Democrat-controlled Legislature. The reform law was eventually overturned by voters through a Republican-led ballot initiative highlighting the broadening of the sales tax base that LePage is now advocating in his budget.
Nonetheless, the governor’s plan has prompted Democrats to offer a counterproposal. It would lower income tax rates for Mainers earning between $20,900 and $150,000 a year while doubling the Homestead Exemption property tax benefit to $20,000 for all homeowners. The plan also would maintain the state sales tax at 5.5 percent, compared with the 1 percentage point increase sought by LePage.
Democrats also want to increase municipal revenue sharing – compared with LePage’s plan to phase out the program – and rejected the governor’s proposal to collect property taxes on large nonprofits.
Overall, the Democratic plan would provide $120 million in income tax relief to Mainers by fiscal year 2017, compared with the nearly $450 million envisioned in LePage’s plan. The reason for that large discrepancy is Democrats do not offer any tax relief to residents earning more than $150,000 a year, and propose smaller tax reductions than the governor for most other tax brackets.
Democrats are claiming that their plan is geared more toward middle-income Mainers. An analysis by the Maine Center for Economic Policy, a left-leaning policy group, and the Institute on Taxation and Economic Policy, a Washington, D.C., nonprofit, found that the Democratic plan would reduce taxes for the bottom 95 percent of Maine taxpayers. It also would reduce taxes more than the governor’s plan, on average, for the bottom 80 percent of Maine families.
For example, according to the groups’ analysis, the tax for those earning $36,000 to $57,000 a year would decrease an average of $24 under LePage’s plan and $191 under the Democrats’ plan; the tax for those earning $57,001 to $89,000 would decrease by $93 under LePage’s plan and $169 under the Democrats’ plan; and the tax for those earning $167,000 to $371,000 would decrease by $1,275 under LePage’s plan and $1,065 under the Democrats’ plan.