Politics

February 6, 2013

LePage's budget has 'subtle' tax hike

Analysts also criticize his plan to suspend municipal revenue sharing for two years.

By Steve Mistler smistler@pressherald.com
State House Bureau

AUGUSTA — A conservative think tank says Gov. Paul LePage's two-year budget contains a "subtle tax increase" that could be "detrimental to Maine's taxpayers."

click image to enlarge

Gov. Paul LePage, right, chats with Maine Speaker of the House Mark Eves, left, before the governor gives the State of the State address on Tuesday February 5, 2013 in the State House in Augusta. A conservative think tank says Gov. Paul LePage’s two-year budget contains a “subtle tax increase," despite LePage's pledge to not raise taxes.

Staff photo by Joe Phelan

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PDF: Tax Foundation analysis of LePage budget

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.

 

The analysis by the Washington, D.C.-based Tax Foundation focuses on the governor's plan to change the state's income tax indexing to what's called chained consumer price indexing. The proposed change, which would follow a two-year suspension of all indexing, would essentially leave people in higher tax brackets for a longer period of time, thus enabling the state to collect more income taxes.

In January, the Portland Press Herald reported that the change would raise the tax bill of the average Mainer by $39 over the next two years.

The Tax Foundation analysis, headlined "Maine Governor sneaks subtle income tax hike into budget; suspends funding to local governments," was released Wednesday. It said suspending indexing for the next two years would bump some taxpayers into a higher tax bracket "even if their income is merely keeping pace with inflation."

Tax Foundation economist Elizabeth Malm wrote that the lack of inflation adjustment could also push some taxpayers into the highest tax bracket.

"This is problematic because incomes haven't risen in real terms -- only nominally," Malm wrote.

The analysis said the suspension of indexing could mean an individual earning $40,000 a year would see a 3.6 percent increase on his total state income tax liability, even if the cost of living, as measured by the consumer price index, rises by only 2 percent.

The report said that the rates would increase even more when the "chained CPI" indexing goes into effect.

Michael Allen, LePage's associate commissioner of tax policy, told the Press Herald in January that the chained CPI was a more accurate measurement of inflation than the cost of living index.

That contention has been echoed in Washington by debt reduction hawks who champion chained consumer price indexing as a way of reducing the national deficit. It has been heralded as a deficit reduction tool by the conservative Heritage Foundation, the Simpson-Bowles deficit commission and the Committee for a Responsible Federal Budget.

Opponents argue that chained CPI is a regressive tax scheme that allows politicians to increase tax revenue without the exposure of raising rates.

Allen, with the state's tax policy division, said the national talks about the indexing prompted the LePage administration to include it.

The organization was also critical of the governor's plan to suspend municipal revenue sharing for two years. Citing U.S. Census statistics, the Tax Foundation said that towns rely on the revenue stream for nearly a third of their spending.

During his State of the State address on Tuesday, the governor acknowledged that he was not fond of his budget, but that the only other way to balance the state ledger would be to cut education and social services programs.

Adrienne Bennett, LePage's spokeswoman, said in a statement Wednesday that it was a false assumption that suspending municipal aid would lead to property tax increases. The governor has previously said that it's a local choice whether or not to raise taxes or find efficiencies.

Bennett did not specifically address the indexing proposal or the Tax Foundation's assessment of it.

David Sorenson, spokesman for the Republicans in the Maine House of Representatives, said the suspension of indexing would be revenue-neutral because incomes have been flat since the recession.

Steve Mistler can be contacted at 620-7016 or at:

smistler@pressherald.com

On Twitter: @stevemistler

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