Tuesday, June 18, 2013
(Continued from page 1)
Gov. Paul LePage
HOW CHAINED PRICE INDEXING WORKS
Numerous government programs, including Social Security benefits and income tax brackets, are indexed for inflation. The idea is to offset wages that climb into higher tax brackets without any corresponding increase in purchasing power.
But inflation is measured in various ways.
The Consumer Price Index, the index used for Maine income tax rates, is a survey that calculates inflation by measuring the prices of goods and services in a “market basket.”
Critics say that doesn’t necessarily reflect what people are buying. For example, if the price of oranges rises, consumer price indexing makes the assumption that consumers will keep buying them and applies a corresponding cost-of-living index.
Chained consumer price indexing assumes that if the cost of oranges increases, consumers will buy cheaper fruits.
Chained consumer price indexing, proposed in Gov. LePage’s budget, rises slower so it can keep incomes in higher tax brackets slightly longer than traditional indexing.
The result is more tax revenue without higher tax rates and, some say, a more accurate measurement of inflation.
Allen said Monday that Maine Revenue Services has not yet done a full analysis of the indexing change to calculate its impact on the state's income tax brackets.
The change would likely reduce the tax cut that some Mainers would receive in the reduction package passed two years ago.
The package reduced the number of tax brackets from four to three and eliminated income taxes for about 70,000 Mainers. Allen said some of those people could end up paying taxes if the indexing plan is adopted, but it would be small amounts.
The impact would be greater on middle-income earners.
According to Maine Revenue Services data, 40 percent of Maine taxpayers earn less than $27,312 a year, while 40 percent earn more than $47,255.
The group in between will see an average tax cut of $119 this year, according to a recent analysis by the Portland Press Herald.
However, some of those people could see a reduced tax cut because of the proposed indexing.
Earners at the lower end of middle bracket could end up with less of a benefit than they will if the current indexing metric remains.
Allen said the anticipated revenues from chained consumer price indexing are modest, but immediate.
"The chained CPI is probably raising $1 million or $1.5 million in the first year," he said. "It's the cumulative effect down the road where it would generate really meaningful savings."
Allen echoed supporters' argument that chained consumer price indexing is probably a more accurate reflection of inflation and cost of living.
But opposition is mounting over what critics call a regressive tax scheme that allows politicians to increase tax revenue without the exposure of raising rates.
That narrative will become part of the debt negotiations at the federal level. In Maine, the indexing could become part of a larger budget debate over the tax cut package.
Steve Mistler can be contacted at 791-6345 or at:
This story has been corrected to note the estimated tax increase in the budget proposal.