Maine’s income tax relief and reform up to voters to decide

By Ramona du Houx

May 23rd, 2010

LD 1495, An Act To Implement Tax Relief and Tax Reform, which passed in the Legislature last year, faces possible repeal. The law was heralded by the Wall Street Journal as, “Maine’s Miracle,” because it lowered taxes for every taxpayer during the recession — when most state had to raise income taxes.

Gov. Baldacci signed the tax reform and relief law in 2009, that would have cut income taxes for 95% of all Mainers. It still can if people vote No on issue one this June.
Gov. Baldacci signed the tax reform and relief law in 2009, that would have cut income taxes for 95% of all Mainers. It still can if people vote No on issue one this June.

The tax relief and reform law would reduce income taxes from 8.5 percent to 6.5 percent for people earning up to $250,000. Incomes over $250,000, which is only 2 percent of filers in Maine, would find their income tax bill reduced from 8.5 percent to 6.85 percent.

For someone earning $30,000 a year, that would amount to $600 saved.

The anti-tax coalition called Still Fed Up With Taxes gathered enough signatures to have the law go to referendum, a move that stopped the implementation of the law.

“The law has been put off an entire year. During that time the state would have reduced the tax burden by $53 million, and 95 percent of Mainers would have gotten tax cuts. Every week we wait we loose a million in burden reduction. Come June 8th, I think the people of Maine will see this is a huge tax cut, which reforms Maine’s tax code structure,” said state Senator Joe Perry of Bangor, who is the head of the Taxation Committee. Perry has been working on reforming the tax code for ten years.

“In the last six years there has been an intensive effort,” said Perry. “We reviewed hundreds of analyses from the Maine State Revenue, which showed us exactly where the revenues come from. This is step one, which we can build on, to continue to lower the tax burden for citizens.

Perry says Maine ranks in the middle of the pack of the 50 states for taxes.

“Keep in mind that every other state raised taxes to meet their budgets. We didn’t. We lowered the tax burden — during the recession. We bucked the trend,” said Perry. “Once the law is implemented, our ranking will improve, as the Wall Street Journal said, to around 20th. We’re moving in the right direction, faster than I ever thought possible. If we can get this law to stand, we can continue to lower the tax burden.”

1969 was the last time Maine’s tax code was revised to this degree.

“Over the last 40 years, Maine’s economy has changed dramatically, but until now our tax code hasn’t. It’s long overdue,” said Perry. “This law will move us into a 21st-century tax structure. It is a code which will spur economic development, as well as being a code that will provide more stable state revenues, which should help insulate the state whenever another financial crisis hits.”

Sen. Joe Perry at work in the state house
Sen. Joe Perry at work in the state house
The Maine Revenue Service estimates that 95 percent of Mainers will see their state income tax reduced. The “revenue neutral” law makes up dollars lost to the state treasury because of the lower income tax by increasing sales taxes, such as the meals and lodging tax, and no longer exempting some products and services — such as auto repairs, movie tickets, and dry cleaning — from the 5 percent sales tax.

“Every year the state takes in two billion dollars; with the new tax code we will continue to receive two billion in sales and income tax. The difference is, we will be collecting more sales tax and less income taxes,” said Perry.

There are changes that improve the tax code for some businesses.

“Our rental car system was unfair to companies, so we fixed that. There are numerous little fixes that will make a huge difference to businesses in Maine,” said Perry. “Finding the balance, so the law was revenue neutral was important. Basically we are asking visitors who enjoy the state’s amenities to pay a little more in certain areas.”

The increase in lodging tax goes from seven percent to eight and a half percent.

“There are a lot of sales taxes that are exportable. Someone from Boston gets a tax break lodging here, compared to staying at a hotel in Boston. In Boston a visitor pays 14.9 percent sales tax for lodging; in Maine it’s currently seven percent and will only increase to eight and a half percent. We’re still a bargain,” said Perry. “Seventy percent of hotel stays in Maine are made by nonresidents, so the increase will be mostly paid by nonresidents.”

Most income tax revenue in Maine is used for essential services. According to Perry, 88 percent of the budget goes back out into communities, in general purpose aid, to education, to revenue sharing, municipalities, and medical payments to hospitals.

Making sure the tax reform did not adversely affect citizens was a priority in drafting the law.

“For Mainers who may be hit by some of these expansions of these sales taxes, we’ve provided a refundable tax credit. So people earning $33,000 or less will get a refundable tax credit to help them bear the brunt of increases anywhere; at the same time they will see their income tax decrease,” said Perry. “There is also an important provision that will send checks of up to $150 to low-income Mainers.”

The law also increases funding for the marketing of Maine from the lodging tax revenue. Tourism generates approximately $10 billion for the state each year. According to numerous studies, including one by Brookings, Maine has the potential to do more with branding and marketing.

Sen. Joe Perry is congratulated by Governor John Baldacci for his work on the tax law in 2009
Sen. Joe Perry is congratulated by Governor John Baldacci for his work on the tax law in 2009

“As the state is marketed more from the revenue brought in by the lodging sales tax, we will see additional visitors. Those future visitors may decide Maine is a great place to live and set up businesses in Maine. The far-reaching implications for Maine after this tax restructuring becomes the law could be huge.”

Right after the law passed, a year ago, the state received calls from people who would like to relocate to Maine. The only thing that has kept them from doing it before was the state’s income-tax standing.

“Our new tax code will make the state a more attractive place for people looking to share our quality of life and for businesses to invest in. It is fairer for the people of Maine and will lead to greater prosperity,” concluded the state senator.

The proposed tax-code alterations:

• Lowers the top income-tax rate from 8.5 percent to 6.5 percent for income up to $250,000
• Lowers the top income tax rate for incomes above $250,000 from 8.5 percent to 6.85 percent
• Broadens the sales tax for certain services to 5 percent and increases them on meals and lodgings
• Makes a portion of the earned income tax credit refundable for lower- and middle-income families
• Increases funding for tourism marketing, from revenues collected on the lodging sales tax