Maine Tax Overhaul is a Boost for Low-Income Working Families

Earlier this week, Maine lawmakers overrode Gov. Paul LePage’s veto of the state budget for fiscal year 2016, thus enacting a significant tax overhaul lawmakers had agreed to weeks earlier in a bipartisan fashion.  

The final tax reform package improves the state’s tax code and includes several major tax changes: lower income tax rates, a broader income tax base, new and enhanced refundable tax credits, a doubling of the homestead property tax exemption, an estate tax cut, and permanently higher sales tax rates.

With the exception of increased sales tax rates and a cut in the estate tax, the overhaul contains provisions that modestly improve the progressivity of Maine’s tax code  (see ITEP’s analysis below).

Coming to an agreement was not an easy feat. Gov. LePage’s initial tax proposal announced in January involved a costly, sweeping tax shift package, which would have resulted in a significant shift away from progressive personal income taxes toward a heavier reliance on regressive sales taxes.  While almost every Mainer would have received a tax cut under this plan, the benefits were heavily tilted in favor of the state’s wealthiest taxpayers and would have left the state with $300 million less revenue when fully enacted.

Democratic legislative leaders in Maine responded in April with a plan entitled, “A Better Deal for Maine”, the tax benefits of which would have been targeted to low- and middle-income Mainers rather than the wealthy. Finally, Republican lawmakers released their own proposal in May that would have hiked taxes on the average taxpayer with income below $89,000 while delivering a tax cut to wealthier taxpayers.

After months of debate and competing tax reform and tax cutting proposals,  lawmakers enacted the final package with a great deal of compromise between both parties of the Maine State Legislature.

Major Elements of the Final Tax Package:

• Restructures the state’s personal income tax brackets and rates: the starting point of the top income threshold increases and the top rate lowers from 7.95% to 7.15%
•  A significant increase in the standard deduction, which replaces the state’s zero percent bracket; the standard deduction is also phased out for upper-income taxpayers
• All itemized deductions  are subject to the state’s cap (around $28,000; charitable contributions and medical expenses had previously been exempt from the cap); itemized deductions fully phase out for upper-income taxpayers
• Introduces a new refundable credit for low- and middle-income Mainers to offset sales tax rate increases
• Makes Maine’s earned income tax credit refundable at its current level (5 percent of the federal)
• Doubles the homestead exemption for all Maine resident homeowners;
• Maintains the current temporary 5.5% sales tax rate and the 8% tax on meals (set to drop to 5% and 7% this month)  while increasing the lodging tax to 9%;
• Cuts the estate tax by raising exemption level to match federal level
• Reduces local revenue sharing

While the plan includes some very good income tax base broadening measures–most notably applying all itemized deductions to the state’s cap and fully phasing out itemized deductions for upper-income taxpayers– it is still a subtle tax shift in that most of the personal income tax cuts are paid for with higher sales tax rates. As a result, the state will slightly shift its reliance away from its progressive personal income tax onto a narrow and regressive sales tax.  However, this plan is vastly different from other proposed and enacted tax shifts, as it reduces taxes for most low and moderate-income families and somewhat improves the progressivity of the tax code.

This outcome is accomplished in two main ways. First, the plan converts the state’s 5 percent nonrefundable Earned Income Tax Credit (EITC) to a refundable credit. In other words, low-income working families have the ability to receive the entire value of the credits regardless of any personal income tax liabilities, resulting in an increase of after-tax earnings for many working poor families in Maine by about $7 million to $9 million per year.

Second, the plan enacts a new refundable sales tax fairness credit, which will lessen the impact of the included sales tax rate increases on low- and moderate-income Mainers.   The credit has a maximum value of $250 and begins to phase out at $20,000 for single filers and $40,000 for married filers. The refundability of this credit ensures that taxpayers will get the full value of the credit regardless of how much tax they owe.

With the inclusion of the refundable sales tax credit as well as the refundable EITC, Maine’s new budget will direct approximately $40 million more to low- and moderate income families in the state. This is indeed a win for working families; however, threats from Gov. LePage to dismantle the income tax have not waned. In his veto letter LePage proclaimed, “Mainers deserve to have the debate over whether the income tax should be phased out. The future of our state depends on our ability to be competitive with the nation and the word. We must work aggressively each year to cut back the income tax until it’s gone.”

The decrease or disappearance of income taxes would undoubtedly result in tax increases and spending cuts elsewhere. Based on LePage’s previous proposals, such changes would adversely affect low and middle-income groups. If the recent bipartisanship displayed among Maine’s legislatures is any indication of future policymaking, they will continue to remain strong in rejecting damaging proposals, while lifting up proposals benefitting Maine families.