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Date: 04/21/11

Significant Tax Relief on the Horizon

By Rep. David Burns

Significant income tax cuts are on the way for Maine residents, marking the first time in years that taxes will drop.

Under a $203 million tax reduction plan passed by the Taxation Committee on April 13, income tax cuts would average $343 in 2013. This is the kind of economic stimulus we will need to fuel business activity and spark job creation. We're not talking about a one-time deal, either. The reforms make permanent structural changes to the state's tax system.

By a party line vote of 8-4-1, Republicans on the Committee approved most of the tax changes in Governor LePage's budget proposal. The panel also made adjustments that eliminate income tax liability for some 70,000 low-income filers starting next year. The first $10,350 of income for any Maine resident will be exempt from the income tax.

The plan also gets rid of the 7 percent tax on meals served at retirement homes, which has been a nagging problem for Maine seniors on fixed incomes.

The tax-cut initiative now moves to the Appropriations and Financial Affairs Committee for consideration. Changes to the package are possible as the Appropriations panel crafts the state's financial blueprint for fiscal years 2012 and 2013.

One potential complication involves the $400 million saved through changes in retirement benefits for teachers and state workers. That money, along with $365 million in projected higher revenue, has been redirected to cover the enrollment surge in MaineCare, to increase state aid to schools and to fund the tax reductions. The retirement changes also slash the unfunded pension liability in half, saving taxpayers at least $2 billion. To pass, the budget needs a two-thirds majority vote in both the House and Senate. Consequently, there could be some compromises regarding the tax changes and pension reforms.

Assuming the tax package remains largely intact, it would simplify Maine's complicated income tax system by reducing the number of tax brackets from four to two. For the 2012 tax year, the rates would be 6.5 percent and 8.5 percent. In 2013 the rates would be set at 6.5 percent and 7.95 percent. Thanks to higher exemption and deduction amounts, however, those rates would kick in at much higher income levels.

The governor's plan brings the Maine standard deduction up to the federal level. This is truly a big deal. Under existing law, the 2012 Maine standard deduction for married couples filing jointly is projected to be $9,800, according to Maine Revenue Services (MRS). The governor's change increases that 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 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 Taxation Committee maintained those changes and eased the income tax even further. In 2013, for example, a family of four electing the standard deduction would owe no income tax if their adjusted gross income is below $35,750 versus below $21,400 in the current law. A family of four with an adjusted gross income of $60,000 would owe $1,576 instead of $1,928 under the existing law.

The governor's budget proposal contained about $60 million in corporate depreciation benefits. Those of us on the Taxation Committee suspected that some of that benefit would go to companies based out of state. We wanted to preserve the maximum benefit for Maine residents and businesses, so the Committee removed the so-called "bonus depreciation." We used the money to increase the income tax cuts and remove those 70,000 low-income filers from the tax rolls.

We kept the governor's recommended changes to eliminate the marriage penalty and the alternative minimum tax. We also provided a credit for investment in public saltwater and freshwater fishery infrastructure. And we eliminating the sales tax on fuel used in all commercial fishing vessels in the Gulf of Maine.

Overall, this is a very positive compact for Maine residents. It provides the framework to move to a flat income tax over time, while allowing Mainers to keep more of the money they earn. ###

State Rep. David Burns (R-Alfred) serves on the Taxation Committee