With the exception of some elderly residents, Mainers of all income levels would see an immediate reduction in their annual tax burden under Gov. Paul LePage’s proposed revisions to the state tax structure, according to an analysis by the Maine Sunday Telegram.

Even so, critics of LePage’s plan, which would reduce the state income tax while increasing sales and use taxes on most goods and services, said it would result in major revenue cuts to municipalities, which would be forced to pare essential public services, raise property taxes, or both.

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Gov. Paul LePage

If Maine cities and towns did raise property taxes, those increases would at least partly offset the savings from lower income taxes. LePage’s plan seeks to reduce the need for property tax increases by giving cities and towns the authority to tax large nonprofit organizations that are now tax-exempt. However, analysts said many of the state’s smaller cities and towns do not have nonprofits large enough to tax.

Supporters of LePage’s plan, and even some who are taking a neutral stance, say the changes to Maine’s tax structure would improve the economic environment for businesses and shift more of the tax burden onto seasonal residents and out-of-state visitors. The only point on which they disagree is whether the proposed changes would cut too deeply into state revenue.

“What I’ve always liked about the plans we have developed in the past is that they lowered taxes on most Mainers without decreasing the amount of services government can provide,” said Dick Woodbury, an economist and former state senator who played a key role in crafting tax policy proposals during his service in the Legislature. “It was like the best of both worlds.”

Regardless of the indirect consequences of LePage’s proposed cuts, their direct impact would be to put more than $100 million back into the pockets of Maine taxpayers each year.

WHAT’S PROPOSED

LePage’s proposal to overhaul Maine’s tax code would:

• Increase the minimum amount of personal income exempt from taxation annually from the first $10,000 to the first $20,000 per individual. (The first $9,700 of income would be tax-exempt, plus each taxpayer would receive a standard deduction of $6,300 and a personal exemption of $4,000.)

• Reduce marginal income tax rates across the board. Under the state’s existing income tax code, residents earning $5,300 or less pay no income tax, those earning $5,301 to $21,200 pay a 6.5 percent tax, and those earning $21,201 or more pay 7.95 percent. LePage’s plan would lower the income tax rate by 2019 to 5.75 percent on income of $9,701 to $50,000 a year, to 6.5 percent on income of $50,001 to $175,000 a year, and to 5.75 percent on income of more than $175,000 a year. Taxing the middle-income bracket at the highest rate is known as creating a “bubble bracket.”

• Reduce the top corporate tax rate from 8.93 percent to 6.75 percent by 2021.

• Increase the state sales tax from 5 percent to 6 percent on services, and from 5.5 percent to 6.5 percent on sales and use taxes while reducing the tax on prepared meals from 8 percent to 6.5 percent. The tax on lodging would remain at 8 percent, and the auto rental tax would be reduced from 10 percent to 8 percent. The proposed changes would nullify a state sales tax reduction to 5 percent scheduled to occur on July 1, along with some other scheduled tax cuts.

• Eliminate existing sales and use tax exemptions on roughly 200 goods and services.

• Eliminate the estate tax.

• Double the homestead tax exemption from $10,000 to $20,000 for homeowners 65 and over, and eliminate the exemption for homeowners under 65.

• Create a refundable sales tax credit of up to $500 a year for low-income Mainers.

• Increase the top income level for which Maine residents would qualify for the property tax fairness credit.

• Increase the pension revenue tax exemption from $10,000 to $35,000 per individual.

According to the Telegram’s analysis, the net result of such changes would be a total tax reduction of 0.9 percent to 2.3 percent of annual income for most Mainers. Only low- and middle-income retirees, for whom most income already is tax-exempt, would fail to see a significant benefit from the income tax reductions, the analysis found.

Still, LePage’s plan would increase the amount of potentially exempt annual retiree income from $20,000 to $55,000 per individual, excluding Social Security income, which already is exempt from Maine income taxes.

“These reforms raise quite significantly the amount of money anyone can earn before it is taxed at all,” Woodbury said.

REGRESSIVE, PROGRESSIVE, OR FLAT?

Jared Walczak, policy analyst at the right-leaning Tax Foundation, based in Washington, D.C., said the majority of debate over LePage’s proposal is likely to center on whether its tax structure is too regressive.

A regressive tax is one that places a greater burden on lower-income taxpayers as a percentage of total income than it does on those earning higher incomes. Regressive taxes include those for which the tax rate decreases as the amount taxed increases, taxes with a cap beyond which everyone pays the same amount, and taxes on essentials such as food and gasoline. State and local taxes tend to be regressive.

A progressive tax is one that places a greater burden on the rich as a percentage of total income than it does on the poor. The best-known progressive tax is the federal personal income tax, for which the tax rate increases with income. Estate taxes, property taxes and taxes on the sale of luxury goods also are considered progressive. Federal taxes tend to be progressive.

There is a third category known as proportional taxes, for which rich and poor pay an equal percentage of total income. They often are referred to as “flat” taxes.

But Walczak said there are other factors lawmakers should consider when evaluating LePage’s plan. One important issue is whether the changes would make Maine more competitive with other states economically, he said, something that would benefit all residents.

“The best tax system improves the economic climate for everyone,” Walczak said. “I think that this proposal moves Maine in the right direction.”

The bubble bracket, which forces middle-income taxpayers to pay a higher rate than the wealthiest earners, might seem like a gift to the rich, but Walczak said it is merely a way to offset the $9,700 in exempt income that middle- and upper-income residents would receive, while keeping the exemption intact for lower-income workers.

“If you are earning $50,000, you are only paying taxes on $40,000,” he said.

Another benefit of the LePage plan is its simplicity, Walczak said, which is attractive to businesses because it improves their ability to make long-term planning decisions.

A tax structure based on simplicity and stability is more likely to attract the kind of employers, jobs and economic development that would benefit everyone in the state, he said.

“Focusing on economic growth is important in any state, but especially in Maine,” Walczak said.

THE NONPROFIT FACTOR

Economist Joel Johnson of the left-leaning Maine Center for Economic Policy said that despite its tax credits for the poor and income tax reductions for all, the net effect of LePage’s plan would be regressive.

Because the tax plan involves the elimination of state revenue sharing with municipalities, local governments would have to enact measures to either raise more revenue through property tax increases, cut spending on public services such as education, or both, he said.

The pressure to raise local property taxes would be greatest in cities and towns where there are too few nonprofits subject to taxation under LePage’s plan, which would allow nonprofit-owned properties other than churches valued at $500,000 or more to be taxed.

A preliminary analysis by the Maine Municipal Association found that while roughly 150 municipalities in Maine stand to break even or benefit from levying property taxes on nonprofits in the wake of discontinued state revenue sharing, another 350 or so don’t appear to have nonprofits within town limits that would be taxable under the governor’s proposal.

The income tax reductions and sales tax credits alone would cut $120 million to $130 million from the state’s annual revenue, Johnson said. That shortfall would most deeply affect low- and middle-income households.

“Overall, the governor’s tax plan is a large tax cut, even after you account for the sales tax increases,” he said.

Johnson said the theory that reducing income tax would lure more businesses to the state and therefore benefit all Mainers is an old argument that has not panned out in other states that have gone down the same path.

What it would do, he said, is provide significant tax relief to the state’s wealthiest residents, who would save millions of dollars each year as a result.

“Generally speaking, this is a tax shift from the wealthy to the middle class,” Johnson said.

Correction: This story was updated at 12:48 p.m. on January 26, 2015 to correct numbers in our Tax Plan Savings chart.

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