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Opinion

Date: 03/22/11

Configuration of tax cut package still in flux

By Rep. Paul Bennett

When this legislative session comes to an end, sometime in June, Maine residents can count on one thing - tax relief is on the way.

A year ago, when the talk centered on a $1 billion shortfall, no one imagined that the next two-year state budget would see tax reductions. But a significant improvement in revenue projections ($365 million higher than earlier forecasts), coupled with a shift in spending priorities, enabled Governor LePage to send forth a budget that proposes $203 million in tax cuts.

What makes this all the more remarkable is that his budget increases spending on local schools by $63 million beyond expectations. It also adds $181 million to handle the enrollment surge in the state's Medicaid program - MaineCare.

Tax cuts and extra money for schools and Medicaid don't materialize out of thin air. To pay for them the governor's budget proposal saves more than $400 million through changes in retirement benefits for teachers and state workers. As you have probably seen in the news, this is not sitting well with teachers and state employees.

But there has been far less coverage of the tax cuts, which would benefit hundreds of thousands of overtaxed Mainers. They also would inject millions of dollars into the state economy, helping to create jobs and bring relief to small business owners, many of whom have been hanging on by their fingernails through this recession.

As a member of the Taxation Committee, I have been involved in analyzing the governor's tax cut package. Those of us "in the trenches" want to make sure that the cuts provide the maximum benefit and set a course for a more prosperous future. The governor's proposals could go through as they stand, or there could be some tweaking and rearranging of priorities. It's too early to say. And the budget itself will require a two-thirds supermajority of the House and Senate to pass. But let me offer a broad outline of the plan's components that will affect large parts of our population.

Beginning in 2013, the second year of the budget, the top income tax rate drops from 8.5 percent to 7.95 percent - 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 lower taxes once the reduced rate kicks in.

The governor's plan also brings the Maine standard deduction up to the federal level. 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. And it abolishes the lump-sum retirement plan distribution tax and the tax on "early distribution" from retirement accounts. 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 is $5 million.) This will make it easier to pass a farm or family business to the next generation and reduce the incentive to move wealth out of Maine.

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, but this tax cut package is a good first step. ###

State Rep. Paul Bennett (R-Kennebunk) serves on the Legislature's Joint Standing Committee on Taxation