AUGUSTA — Business groups on Monday praised $200 million in tax breaks that are proposed in Gov. Paul LePage’s two-year budget.

“This $200 million stimulus package is going to have a positive impact,” said Christopher Hall, vice president of the Portland Regional Chamber. “It’s a very powerful tool.”

Hall represented one of many organizations that offered testimony before the Legislature’s Appropriations Committee on the first day of public hearings on the $6.1 billion budget proposal for the two years starting July 1.

The testimony focused on tax changes proposed by LePage. His proposal would lower the top income tax rate from 8.5 percent to 7.95 percent, raise Maine’s estate tax exclusion from $1 million to $2 million and conform the state’s tax code to federal guidelines regarding purchases of new business property.

To pay for the tax cuts, the budget proposes several changes to teachers’ and state workers’ pension benefits, said Sawin Millett, commissioner of the Department of Administrative and Financial Services.

“The pension savings in this budget allows for taxes to be cut by $203 million over the biennium,” Millett said.

Later this week, hundreds of state workers and teachers are expected to testify against the pension changes, which include:

• Freezing retirees’ cost-of-living increases for three years.

• Reducing the cap on retirees’ cost-of-living increases after that from 4 percent to 2 percent.

• Raising the retirement age from 62 to 65 for new state employees and those with fewer than five years of service.

• Increasing the amount that employees contribute to the retirement system, from 7.65 percent of salary to 9.65 percent.

The changes would save the state $413 million over the two years, Millett said, and would reduce the state’s long-term liability to the pension system by more than $6 billion.

The state has an unfunded obligation to the retirement system of $4.4 billion, which must be repaid by 2028. Under the current repayment schedule, meeting the obligation would require more than $11 billion in total payments over the next 17 years, according to actuarial calculations.

Millett said that while workers and retirees oppose the pension changes, they would benefit from the tax cuts in the budget.

While Millett and business groups gave the tax cuts high marks, the Maine Center for Economic Policy, a liberal think tank, said the cuts would benefit the rich much more than the poor.

“Where’s the sacrifice that’s being asked of Maine’s wealthiest residents?” said Garrett Martin, associate director of the center.

The Maine Center for Economic Policy estimates that the average income tax break for families that earn $28,139 to $48,050 a year would be $83 in 2013. It would be $874 for those that make more than $199,783, and $2,770 for those that earn more than $363,438, according to the center.

Other groups, such as the Maine Children’s Alliance and the Maine Women’s Lobby, also testified against the tax cuts.

“These tax cuts, which primarily benefit the wealthiest Maine families, reduce our ability to invest in Maine’s most vulnerable children,” said Dean Crocker, executive director of the children’s alliance.

When it comes to the estate tax, about 600 estates are taxed under current law every year, according to Maine Revenue Services. LePage’s proposal would lower that number to about 175, by excluding estates totaling less than $2 million.

It’s “naive” to think that the estate tax cut would help only the wealthy, said Carol Weston, state director of the free market advocacy group Americans for Prosperity and a Republican former lawmaker from Montville.

“Are the parents and children running a family-owned business or farm part of the super rich?” she said. “Their land and equipment may put the value of their assets at more than $1 million, but we all know that family works hard every day to keep the business running while earning enough to stay afloat.”

She said the budget proposes a “modest change,” considering that the federal estate tax exclusion is $5 million.

David Clough, state director of the National Federation of Independent Businesses, said he wanted to “express strong support for relieving tax burdens on small firms.”

He also said a $200 million package of tax reductions would have a psychological effect in the business community.

“It does send a signal to business owners that Maine gets the message,” he said.

Also Monday, Millett told lawmakers that the state will likely pay nearly $30 million to the federal government because of a ruling against the state on Friday.

A federal judge ruled that the state was too aggressive in applying for federal matching funds in the early 2000s and, as a result, the state must pay back the money, Millett said.

He’s proposing that the money be taken from the state’s rainy day and capital improvement funds, which now total $35 million. The committee asked him to find out more about a possible appeal or ways to pay back the money that would not require the state to nearly empty its reserves.

MaineToday Media State House Writer Susan Cover can be contacted at 620-7015 or at: scover@mainetoday.com