Mills vetoes bill restructuring income tax brackets

Gov. Janet Mills has vetoed a bill to restructure Maine’s income tax brackets with the aim of reducing taxes for middle-income workers while increasing taxes on wealthier residents.

The bill, L.D. 1231, passed both the House of Representatives and Senate and was expected to modestly increase state revenues. But the support was well short of the two-thirds that would be needed to override the governor’s veto.

Mills took issue with the way the bill advanced through the Legislature and also said that while well-intentioned, it would not deliver meaningful tax relief.

“Over the past several years, we have substantially reduced, it not outright eliminated, the tax burden for low-income Mainers,” the governor wrote in a letter to lawmakers Friday. “While I am always open to conversations about how we can continue to reduce the tax burden for Maine people, I do not believe this bill effectively achieves its aim.”

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The bill’s sponsor, Rep. Meldon Carmichael, R-Greenbush, argued that blue-collar workers like farmers, carpenters, welders, electricians and mechanics need help to keep up with inflation, which has outpaced increases in their earnings – at a time when the state continues to record surpluses in revenue, driven partly but not wholly by income taxes.

Carmichael said Friday that his bill originally called for the use of the surplus to provide middle-income tax relief, but it was amended in the Taxation Committee to offset that relief with higher taxes on the wealthy.

“I was never crazy about paying for it with a tax increase on the higher incomes, but I really thought it was important for the middle-income people, who have seen the value of their dollar shrink, get some kind of relief,” Carmichael said. “I hope the governor and members of the Legislature can get together in the 132nd Legislature and push something through that everyone can agree on.”

The bill would have expanded the upper limits of Maine’s three existing tax brackets, lowering taxes for low- and middle-income earners, while adding higher tax brackets and rates for wealthier families.

The lowest current tax bracket – of people earning less than $25,500 annually – would continue to owe 5.8% of taxable income, while people earning middle incomes of up to $500,000 would see a decrease in what they owe, and those earning more than $500,000 would see their taxes increase.

Mills said that in recent years there have been numerous expansions of eligibility for, and increases in, the value of deductions, exemptions and tax credits specifically targeted at low-income taxpayers, and that as a result low-income Mainers already have little or no tax liability.

She said that expanding the 5.8% bracket – which the bill expanded to include those earning up to $41,599 – would provide no relief and that it would take $50,000 of federally adjusted gross income for a taxpayer to start to see benefits under the bill.

Maine’s highest income tax rate of 7.15% is the 10th highest state income tax rate in the country, and Mills also has concerns that increasing that top rate further would create challenges because it would increase the state’s reliance on a small number of taxpayers – less than 1% – whose income is disproportionately composed of highly volatile sources such as capital gains and business income.

“Income tax revenue, which already varies significantly year to year, would become more volatile and likely more closely tied to economic conditions,” she said.

The governor also criticized the process by which the bill advanced through the Legislature, saying it was introduced as a vague “concept draft” with no actual legislative language available at a public hearing.

“The tax increases included in the enacted bill were not presented during the public hearing; they were first unveiled and discussed at the work session afterward, which denied the public and stakeholders, small businesses for instance, the opportunity to weigh in and shape the discussion,” Mills said.

CONCERNS ABOUT THE PROCESS

Carmichael said there is some validity to Mills’ concerns about the process, but he said the intent was not a lack of transparency. “Between negotiations and talking with Maine Revenue Services to try and get a tax bracket that made sense to them and one that did what I wanted it to do, there were a lot of moving parts and it took us quite a while to do,” he said.

Garrett Martin, president and CEO of the Maine Center for Economic Policy, said in a statement Friday that the governor’s veto is a missed opportunity to add fairness to Maine’s tax code.

“While our state’s tax systems are already among the fairest in the nation, it’s also true that wealthy people and corporations continue to avoid paying their fair share, leaving those with the least to pick up the slack,” Martin said.

“L.D. 1231 wasn’t a perfect tax bill – most of its benefits targeted upper-middle-class households and no benefits were available for Mainers with the lowest incomes – but asking the wealthy to pay more was a step in the right direction,” he said.

Rep. Laurel Libby, R-Auburn, praised Mills’ veto in a written statement.

“I was glad to see Gov. Mills veto L.D. 1231 today, recognizing that raising taxes on Mainers during an economic recession is unacceptable. Maine already has one of the top marginal individual income tax rates in the country,” Libby said.

In addition to the income tax bill, Mills on Friday also vetoed L.D. 373, which would require that any state agency or entity responsible for granting a lease of state land for a clean energy development project require that the project developer enter into an “employer and employee harmony agreement” with any labor organization seeking to represent the developer’s employees at the project site.

Mills has now vetoed seven bills this legislative session. Lawmakers concluded a bulk of their work for the year last week but are expected to return to Augusta for at least one additional day to take up the governor’s vetoes.