Dueling Tax Reform Proposals Take Shape in Maine

Despite its setting among rugged coastlines and quaint lighthouses, there will be nothing picturesque about the coming tax battle between Gov. Paul LePage and legislative leaders in Maine. The current debate is the latest in a string of Maine tax reform efforts; in 2013 the “Gang of 11” proposed an ambitious bipartisan plan that was dashed like a fishing boat along a rocky shore, and in 2009 lawmakers passed a tax package that was soundly rejected by voters at the polls.

LePage unveiled his budget proposal back in January, and it included a package of changes that would fundamentally change the way Maine taxes its residents. The governor wants to cut income taxes through across-the-board rate reductions. The threshold for the zero income tax bracket would increase from $5,200 to $9,700. Any income between $9,700 and $50,000 would be taxed at a reduced rate of 5.75 percent, and income between $50,000 and $175,000 would be taxed at 6.5 percent. Income beyond $175,000 would be taxed at just 5.75 percent – an outrageous concession to the already well-off.. His plan also increases the exclusion for pension income from $10,000 to $30,000, introduces a refundable sales tax credit (though the state’s nonrefundable Earned Income Tax Credit is axed under the plan), and boosts the state’s targeted property tax fairness credit.

LePage has gone on record as wanting to eliminate Maine’s income tax – most recently at a Tax Day press conference – calling it “an obsolete form of taxation.” If the state income tax were eliminated, half of Maine’s annual $3 billion in revenue would go with it.

LePage wants other provisions that would inordinately benefit wealthy Mainers as well. His plan would eliminate Maine’s estate tax at a cost of $85 million over four years, and the top corporate income tax rate would fall from 8.93 percent to 6.75 percent.

To pay for his proposed cuts, Gov. LePage wants to increase the sales tax rate to 6.5 percent and expand the sales tax base to include personal and professional services. He makes further changes to the personal income tax as well, including eliminating itemized deductions. He would also end the state’s practice of sharing revenue with municipalities, while allowing cities and towns to implement a new tax on large nonprofit organizations in their jurisdictions. Lawmakers and local officials fear this will upend municipal budgets and force property tax increases at the local level.

The governor’s plan would shift revenues from progressive income taxes to regressive sales and property taxes, and the state will net a revenue loss of $300 million if all changes take effect. The shift would also make state finances more volatile over the long run; as this ITEP brief explains, the income tax displays more robust growth over time than do sales and property taxes.

Last week, legislative leaders in the Maine House and Senate unveiled an alternative to Gov. LePage’s plan entitled “A Better Deal for Maine.” The alternative proposal would also cut income taxes and increase sales taxes, but the benefits would be targeted to middle-income Mainers rather than the wealthy. The average taxpayer with income under $167,000 would get an income tax cut, but the top personal income tax rate would remain untouched and many of the state’s richest residents would see a modest tax increase under the plan. Rather than increasing the 0 percent bracket, the alternative plan boosts the state’s standard deduction and phases out the benefit for upper-income taxpayers. 

The sales tax rate would remain at 5.5 percent, but the base would be expanded to include services, as it would under LePage’s plan. Like the governor’s plan, the alternative introduces a new refundable sales tax credit and increases the property tax fairness credit, but it retains the current pension exclusion amount.

The Better Deal alternative proposed by legislators does not eliminate revenue sharing with municipalities, as the governor would. Under the alternative plan, the Homestead Exemption property tax benefit would be doubled to $20,000 for all homeowners; under the plan proposed by LePage, the homestead exemption was doubled only for homeowners over 65 years of age. Unlike the governor’s plan, the alternative plan is revenue neutral.

An ITEP distributional analysis found that the “Better Deal for Maine” plan would provide bigger tax cuts for more Mainers while protecting investments in critical services like education. Under Gov. LePage’s plan, the average taxpayer in the top 5 percent of Mainers would see significant cuts, while the alternative plan would see taxes increase modestly for most in the same group. Overall, the alternative plan would make Maine’s tax system more fair.

The “Better Deal for Maine” plan has already won an opening salvo, garnering the support of many of the state’s major newspapers. The Bangor Daily News praised the alternative for its focus on reducing property taxes, which fall more heavily on the bottom of the income scale, than income taxes that are felt more heavily at the top. The Morning Sentinel and Kennebec Journal said in a joint editorial that the alternative plan would “boost demand and lead to economic growth” because it targets middle-class consumers rather than wealthy businesses.