By Michael Shepherd
State House Bureau
AUGUSTA — A bipartisan plan to overhaul Maine's tax structure got a lukewarm response Wednesday from top politicians and criticism from interest groups that would be affected by the changes to income and sales taxes.
The proposal by the so-called Gang of 11, introduced at a State House press conference, calls for a flat income tax rate of 4 percent, to replace rates that now peak at 7.95 percent. It would raise the sales tax from 5 percent to 6 percent and eliminate most of the 87 current sales tax exemptions -- leaving only those related to health care and education.
The new system would bring $160 million more in state revenue than is proposed in Gov. Paul LePage's budget for the next two years, supporters say.
"This is huge," said Rep. L. Gary Knight, R-Livermore Falls, who will be the chief sponsor of the bill that contains the plan. "Polarization and gridlock have hampered Washington, but not us and not this time."
But the response from legislative leaders was tepid.
Senate President Justin Alfond, D-Portland, said he hasn't seen the plan.
House Minority Leader Kenneth Fredette, R-Newport, said the plan is an amplified version of a tax reform package that voters overturned in 2010, and it won't get widespread support in his caucus.
Richard Rosen, director of Gov. Paul LePage's policy office, said LePage is "withholding judgment" on the plan until he sees more concrete details.
The lawmakers who crafted the proposal come from across the political spectrum and are led by Sen. Richard Woodbury, an independent from Yarmouth who is a Harvard University-trained economist.
Republicans in the group include Assistant Senate Majority Leader Roger Katz of Augusta, who said he expects interest groups will be out in force to pick away at the plan.
"If this kind of reform were easy, it would have happened years ago," Katz said.
The conservative National Federation of Independent Business called the plan "encouraging but incomplete." The group praised the proposed income tax cuts but said the sales tax increase would offset the benefit.
Liberals will take issue with the proposal's corporate income-tax cut -- from nearly 9 percent to 7.5 percent -- and its elimination of Maine's estate tax.
Senate Majority Leader Seth Goodall, D-Richmond, said he doesn't particularly like those two parts of the plan. Fredette called the sales tax increase regressive, hitting the poor hardest.
However, supporters said the proposal would significantly reduce Maine's reliance on property taxes. According to the Tax Foundation, property taxes made up nearly 41 percent of Maine's state and local tax revenue in 2010, up from just over 36 percent in 2008.
"You've got to look at everything as an entire picture," Goodall said. "This sets Maine on a path for greater stability for our budget process. It also provides relief for property tax, which is long overdue."
One major provision would increase Maine's homestead property-tax exemption from $10,000 to $50,000, meaning that amount would be shielded from property-tax assessments. The group said most Maine residents who pay property taxes would see reductions of more than $500.
"If that's not an economic stimulus package for our state, I don't know what is," Katz said.
But Fredette, the Republican House leader, said, "We are generally, I think, opposed to the idea of taxing everything including food, raising the lodging tax and the meals tax in a bill that, frankly, raises revenues for the state.
"We'll let this thing play itself out," he said, "but as a Republican leader, it's not something we'd generally look favorably on."
The previous tax reform package was passed by the Legislature in 2009. A year later, it was defeated at the polls, after a campaign led by interest groups and supported by Republicans.
The package broadened the sales tax but didn't raise the rate. The meals and lodging tax rate would have moved from 7 percent to 8.5 percent. The current plan would raise the meals tax to 8 percent, and increase the lodging tax to 10 percent.
The previous package didn't tax groceries, and it would have established a flat, 6.5 percent income-tax rate, higher than the 4 percent proposed in the new plan.
Rep. Lance Harvell, R-Farmington, one of the Gang of 11, said he supports the plan because it would create a simpler tax code that wouldn't exempt anyone, as the current code does.
"That has led to a convoluted tax system that no one can understand and Joe Six-Pack certainly doesn't have a shot at," Harvell said.
Curtis Picard, executive director of the Retail Association of Maine, said his members would be concerned about the timing of sales tax changes. If they are made by July 1, the beginning of the next fiscal year, they could put a large burden on small businesses to change computer systems quickly, he said.
Picard said he is also troubled by the proposal's similarity to the 2010 plan, and he questioned whether the Legislature could protect it from special interests that would seek sales tax exemptions.
"Are they really going to have Girl Scouts collect sales tax on cookie sales? Are you really going to tax home heating oil? That's in there," he said. "These groups come in and say, 'Here's why we're exempted,' and some have legitimate reasons."
Michael Shepherd can be contacted at 370-7652 or at: