Economic forecasters predicted Monday that Maine’s revenue picture should improve by $164 million over the next two years fueled largely by increases in income among the state’s wealthiest citizens.

In revising its forecast upward, the state’s Revenue Forecasting Committee essentially makes available money the Legislature can spend when it comes back into session in January.

The big revenue lines include a $112 million boost in income tax revenue attributed largely to continued strong capital gains by the state’s wealthiest residents; a $92 million increase in corporate income tax, attributed to better business profits by the state’s larger companies; and, a $39 million increase in estate taxes, including a $17 million windfall from one sale in October. The bad news in the numbers is sales taxes are expected to continue to lag behind budget, and the forecast there was taken down by $47 million. Predictions on lottery sales and revenue from slots machines – because a full-blown gambling parlor is not yet in operation in Bangor – also were lowered.

Mike Allen, the chief economist for the Maine Revenue Service, said while regular wage earners were doing all right, with their incomes growing about 4.5 percent, those in the highest income brackets were driving the improved forecast. It is estimated that between 30,000 and 40,000 high-income people in Maine can have a dramatic effect on the income tax line.

Grant Pennoyer, director of the state’s Office of Fiscal and Program Review, worried about the volatility of capital gains, remembering back to 2002 when forecasters thought incomes would be stronger than they were despite the terrorist attack of Sept. 11.

“It really shocked us in 2002…when that evaporated,” Pennoyer said of the rosier economic forecast that failed to come true when income tax returns were filed in April.

The problem in this biennium will be if the Legislature spends the anticipated revenue only to have it fall short of the mark.

Under the spending cap enacted earlier this year by the Legislature, the state could spend an additional $85 million in fiscal year 2006, which ends in July, and another $151 million in fiscal year 2007.

The state would be closer to the cap if it had not taken the Business Equipment Tax Reimbursement program or BETR out of the mix. BETR, which reimburses business for personal property taxes they pay on equipment, costs the state about $70 to $75 million annually, but it is no longer listed as an expenditure and therefore does not go against the spending cap. It is instead categorized as a loss of income tax revenue.

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