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Opinion

Date: 02/16/11

Budget Proposal Holds Many Tax Surprises

By Rep. Michael Willette

The most important bill the Legislature will handle this year is the state budget for the next two years, set to begin on July 1. The starting point is Governor LePage's $6.1 billion spending plan, which he outlined to a joint session of the Legislature on February 10. Under our system of checks and balances, the governor proposes a budget and the Legislature makes changes as it sees fit based on countless hours of public hearings and work sessions.

Clearly, certain parts of the budget package are already controversial, especially the changes to pensions and health insurance benefits for retired teachers and state employees. Those issues will generate plenty of conversation around the state. Instead of focusing on them, however, let me recap some of the tax highlights that have not been heavily publicized.

First off, taxes decline by $203 million over the biennium. This is a remarkable development when you consider that the governor took office facing an $800-million budget deficit. With the end of the federal "stimulus" program and recession-level tax revenues, observers were expecting a "cliff" budget of deep cuts. By realigning priorities, the governor and his budget-writing team have surprised nearly everyone.

Beginning in 2013, the second year of the budget, the top income tax rate drops from 8.5 percent to 7.95 percent. That's the lowest top rate since 1975. This is not just a tax cut for "the rich." For the 2011 tax year, it will take only $19,950 in taxable income for a single filer to hit the top bracket; for joint filers, the threshold will be $39,950. Some 240,000 Maine families will pay fewer taxes once the reduced rates kick in.

The governor's plan also conforms the Maine standard deduction to the federal amounts. This is a big deal. Under existing law, the 2012 Maine standard deduction for married joint filers is projected to be $9,800, according to Maine Revenue Services (MRS). The governor's change bumps that up to $15,000. An estimated 134,000 families will benefit from this adjustment. (Standard deductions for single and head of household filers already conform to the federal amounts.)

Additionally, the budget proposal increases Maine's personal exemption to $3,750, up from $2,850, where it has stood since 2000. An MRS analysis projects that more than 420,000 families will benefit from this change, with an average tax decrease of $132.

The governor's plan also eliminates Maine's alternative minimum tax (AMT) on individuals - one of most resented taxes on the books. It also eliminates the lump-sum retirement plan distribution tax and the tax on "early distribution" from retirement plans. More than 16,000 Maine families will benefit from the elimination of these taxes, including the AMT, with an average tax decrease of $366.

By 2013, according to the MRS analysis, approximately 439,200 families will enjoy an average tax cut of $288 based on the combination of those changes.

But that's not all. The budget also ends automatic indexing of the gas tax in the second year. As the governor said, "This levy is especially hard on working Maine families and gets passed on to virtually every Maine business."

Moreover, the budget proposal raises the Maine estate tax exclusion amount from $1 million to $2 million. (The federal exclusion amount is $5 million.) This will make it easier to pass a family business to the next generation and reduce the incentive for moving wealth out of Maine. According to the MRS, 400 estates of future decedents will not have a Maine estate tax liability beginning in calendar year 2013; some 150 estates will exceed the $2 million threshold.

Finally, the proposal makes major changes concerning write-offs of business equipment. It conforms Maine law with federal law for increased first-year bonus depreciation. Starting this year, Maine will conform to the federal 100 percent and 50 percent bonus depreciation provisions and the increased expense deduction amount - up to $500,000 for qualifying property placed in service in 2011 and up to $125,000 in 2012.

Under current law, Maine does not allow bonus depreciation deductions and limits expense deductions to $25,000. Obviously, this is a major improvement for Maine companies, including vendors who sell or service business equipment and other property.

It's all part of the governor's overall strategy to make Maine friendlier to business in hopes of generating more jobs, which in turn would generate more tax revenues, which in turn would enable the governor to drive taxes down even further. Maine faces a long road back to a strong economy, and this budget proposal is a good first step.

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