May 10, 2013

Bold Maine tax reforms would affect many

Mainers would see a drop in property taxes – and tax credits would help low- and middle-class residents – but the bipartisan plan faces stiff opposition.

By Steve Mistler smistler@pressherald.com
State House Bureau

AUGUSTA – A Maine family of four earning $50,000 a year would save about $647 on state income taxes under a sweeping tax reform proposal to be heard Friday by the Legislature's Taxation Committee.

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Independent state Sen. Dick Woodbury, a Harvard-trained economist from Yarmouth, is the architect of the tax overhaul plan now before the Maine Legislature.

2005 Press Herald file

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That same family would pay hundreds of dollars more in sales taxes, which would be raised and expanded to goods and services that are now exempt, including heating oil, groceries and amusement park tickets.

The trade-off -- higher sales taxes in exchange for lower income and property taxes -- is where the bipartisan tax reform plan detailed in L.D. 1496 draws opposition.

The long list of opponents, from affected industry groups and both major political parties, was expected.

"No state has pulled this off, not in this comprehensive way," said Meg Gray Wiehe, state tax policy director for the Washington D.C.-based Institute on Taxation and Economic Policy.

Nonetheless, the architect of the plan, independent Sen. Dick Woodbury, a Harvard-trained economist from Yarmouth, says it can work.

Woodbury has calculated the plan's effects: Property owners would see an average $500 drop in property taxes, and the decrease would be as much as $1,000 in communities with high property tax rates.

He says a significant tax credit for low- and middle-income individuals and families would moderate, if not erase, the regressive impact of higher sales taxes.

More than wealthy Mainers would get tax cuts, Woodbury said. Everybody would.

He said his preliminary calculations are being analyzed by Maine Revenue Services. The plan isn't a finished product, but Woodbury is confident.

"The underlying philosophical rationale for this plan is powerful," he said. "This should work."

But will it?

Industry groups that would be affected by changes to Maine's sales and excise taxes are opposing the plan. Some Democrats don't like paying for an income tax cut by broadening the sales tax, particularly when the result -- a significant tax cut for the wealthy -- is antithetical to the campaign rhetoric that helped the party gain control of the Legislature.

Republicans like the idea of cutting Maine's top income tax rate of 8 percent and replacing the tiered system with a 4 percent flat rate. But some would rather pay for it with reduced government, not sales tax increases. Conservative groups have called the plan a "Trojan horse" for future tax increases.

Woodbury and the so-called Gang of 11 legislators say that swapping lower income taxes for higher consumption taxes is necessary to overhaul a tax system that now puts too heavy a burden on residents and property taxpayers. They say their plan will spread more of the burden to non-residents while encouraging business growth through reduced income and corporate taxes.

The coalition will make the same argument when it presents the proposal to the Taxation Committee. Sen. Roger Katz, R-Augusta, one of the bill's co-sponsors, has acknowledged the obstacles.

"Would you rather have what we have now?" he said last week.


Wiehe, with the Institute on Taxation and Economic Policy, generally believes that broadening the sales tax base to pay for a large income tax cut is bad policy.

Her group has published critiques of tax overhaul proposals in Louisiana, North Carolina and Ohio. She said the Maine plan is different.

"It has more potential than anything I've seen to truly offset the impact of the sales tax changes on low- and middle-income households," Wiehe said.

Tax experts say higher sales taxes hit low-income residents harder because those people devote a larger portion of their paychecks to buying taxed goods. A report by the Institute on Taxation and Economic Policy said Mainers with an average annual salary of $11,800 devote 6.2 percent of their earnings to sales and excise taxes, while individuals earning $25,100 pay 5.1 percent. Those earning $328,000 or more pay an average of 0.7 percent in sales taxes.

(Continued on page 2)

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