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

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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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The new bill attempts to offset that impact with a "tax fairness credit," providing as much as $1,000 for individuals and $2,000 for joint filers, plus $500 per dependent and $500 for each household member older than 65.

According to Woodbury's calculations, some low-income Mainers who don't pay income taxes in the current tiered system will receive rebate checks under his plan.

Woodbury's analysis showed that a single taxpayer earning $40,000 a year -- about the median income -- using the standard deduction would save $478 on income taxes, 27 percent.

A four-person family earning $23,550 -- the federal poverty level -- and now paying no state income taxes would receive a $1,200 rebate check.

About 70,000 Mainers don't pay state income taxes, under changes enacted by the Legislature in 2011. Maine has an earned income tax credit, but it's non-refundable so it doesn't yield cash. And those who don't pay income taxes can't qualify for the program.

The coalition plan would allow residents with no income tax liability to qualify for the fairness credit.

"People who have no income tax liability or very little would still get the full benefit," Wiehe said.


Opposition to the plan is focused on the coalition's proposal to raise about $700 million in additional sales and excise tax revenues to pay for the income and corporate tax cuts.

According to Maine Revenue Services, raising the state's sales tax rate from 5 percent to 6 percent would generate $155 million next year. The state's sales tax rate was last changed on July 1, 2000. The rate ranks Maine No. 31 in the country.

Another $400 million would be raised by eliminating about 87 sales tax exemptions, some of which have existed since Maine adopted its sales tax in 1951.

Such exemptions include amusement park tickets, movies and sporting events. According to a report this year by Maine Revenue Services, the amusement exemption would cost the state $48.6 million in lost revenue in the two fiscal years beginning July 1.

The exemption on groceries is one of the most expensive. Maine Revenue Services estimated the exemption will cost more than $165 million over the next biennium.

Eliminating the exemption may prove controversial. Maine is one of 31 states with sales taxes that totally exempt groceries, according to the Federation of Tax Administrators. Seven states that tax groceries do so at a lower rate than the general sales tax.

Woodbury identified other exemptions that the coalition may want to lift, including heating fuels ($36.4 million in projected revenue next year); barber shop and personal care services ($6 million); funeral services ($3.8 million); dry cleaning services ($2.8 million); and other personal and professional services.

He said the group hasn't targeted all of the exemptions, but it plans to "look at everything."

"Real care needs to be exercised to make sure it's administratively feasible and that it's not anti-competitive," he said.

A 2007 report by the Federation of Tax Administrators showed that only 11 states taxed fewer services than Maine.

Michael Allen, the governor's associate commissioner of tax policy, said some of the exemptions exist to make the state more competitive for certain businesses.

The exemptions, however, have come under scrutiny. A report last year by The New York Times showed that Maine and other states were surrendering a combined $80 billion each year to companies through tax exemptions and incentives. The report said Maine allocated nearly one-fifth of its spending to such incentives. The Times used Maine's annual report on tax exemptions as the basis for its analysis.

Allen disputed some of the findings, saying the state doesn't have many economic development incentives in its tax exemptions.

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