Tax Reform Package Deserves the Support of Maine Businesses

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After years of effort, in this session Augusta finally delivered a significant tax reform package. Legislators and the Governor alike deserve a round of applause. Working together - and with many constituencies from across the political spectrum - law makers have crafted a compromise that will help Maine and Maine people.

Perhaps like any compromise, the package has been criticized from many points of view. And while not every provision will please everyone, the package signed by the Governor achieves two important objectives. First, it will reduce the total amount of taxes paid by Mainers, directing tax relief to almost 90% of all Maine households (and over 95% of households with incomes below $45,000). This is true after all the changes in the bill are tallied up, including changes both to income taxes and sales taxes.

Second, tax reform will smooth the peaks and valleys in our State revenue stream, making the amount we collect in taxes more consistent from year to year. This will help prevent large, unexpected gaps from appearing in our state budget, and thus will limit the need to make recurring, drastic cuts to public programs and services. More predictable revenues will allow Maine to better plan for our future investments in things like education, health care, infrastructure, and public safety.

Not surprisingly, however, for a bill that contains as many moving pieces as this one does, most people have found some things to love and some things…not to love. The major features of this tax reform package include:

• A reduction in the top income tax rate from 8.5% to 6.5% (lowering taxes on taxable income above $39,000 for couples and $19,500 for singles)
• The creation of a surtax, adding another 0.35% tax onto taxable income above $250,000
• A broadening of the sales tax base to include some new items and services, such as movie tickets, limousine rides, and the labor on car repairs
• An increase in the taxes on meals, hotel rooms, and rental cars – all of which will help collect more taxes from out-of-state visitors

Beyond these changes, the package also simplifies the application form for the Property Tax and Rent Refund Program (or “Circuit Breaker”) and combines this form into the state tax forms. Rather than asking people to fill out separate forms at a different time of year, now it all can be handled in one place at one time. In addition, the package makes Maine’s Earned Income Tax Credit partially refundable (21 of the 23 other states that have EITCs already have made them fully refundable). This will provide some added relief to thousands of working families with children. These two provisions begin to redress the disproportionate share of household incomes paid by low-income Mainers under the past tax system.

For those most concerned, instead, with the effects on businesses, there also is a good deal in this package to love. For years now, many business proponents have made lowering the top income tax rate a key policy objective, arguing that this will stimulate investment and accelerate economic growth. While the empirical evidence does not support this assertion, nevertheless, as a result of these reforms, Maine’s income tax rates will drop to 20th in the nation. This places us squarely in the middle of the pack. In addition, for those concerned about the effect that higher meals and lodging taxes will have on restaurants and hotels, the state now will spend additional millions each year promoting Maine as a tourist destination, thereby bringing more visitors to the table.

All of these reforms to Maine’s tax system were the result of compromises on the part of both Democrats and Republicans. Neither conservatives nor progressives are happy with every part of the new system. As a total package, however, the reforms will put money in the pockets of most Mainers and will make Maine’s state budget less vulnerable to ups and downs in the economy.

Unfortunately, a few spoilers have vowed to launch a “People’s Veto” effort to overturn these reforms. If successful, the veto effort would return Maine to the budget rollercoaster we have ridden for too long now, while denying Mainers millions of dollars in tax decreases. Maine people and businesses have too much to gain from the adopted tax reform package to allow the spoilers to have their way.