New tax law neither fair nor practical

by Rep. Paul Davis

The radical changes to Maine’s tax code have received a lot of attention, particularly now that a major effort is underway for a people’s veto to repeal the new law. I would like the opportunity to give my opinion.

The new law expands the sales tax to scores of items that have never been taxed before. In some cases, it actually raises the sales tax on things that are currently taxed. The meals and lodging tax, for example, has gone from 7 percent to 8.5 percent. The tax on car rentals has jumped from 10 percent to 12.5 percent. Long-distance telephone calls will be taxed now, too.

The new sales tax revenue is to be used to cut the state income tax rates – to make the change “revenue neutral.” Maine has one of the highest income tax structures in America. This new law lowers the top rate from 8.5 percent to 6.5 percent for folks making under $250,000. For those above $250,000, it lowers it to 6.85 percent.

It also eliminates the lower brackets of 2 percent and 4 percent. Everyone will be in the new bracket of 6.5 percent. According to Maine Revenue Services (MRS), the overall tax burden will actually increase for at least 85,000 Maine families, averaging $440 more per year, after factoring in the sales tax increases.

There are two questions that need to be answered. Is the new law fair? Will the new law work?

First, is it fair?

The new law, based on LD 1495, establishes the “flat” income tax rate of 6.5 percent. That sounds good, but taxpayers may be surprised to discover that the new law also eliminates all current deductions that we use to reduce our taxable income. Gone are deductions for mortgage interest, property taxes, medical expenses, charitable contributions and other things. We never heard much discussion of that change from the Democrats who passed this bill. The law also wipes out the standard deduction. In the place of these deductions is something called a “household credit,” which supposedly will be somewhat equal to the value of your deductions.

The problem is that the household credit begins to phase out for single people at incomes above $27,500 a year and $55,000 for married couples. With each dollar of income above those thresholds, your household credit erodes and eventually disappears. In fact, the elimination of itemized deductions is the main reason that more than 31,000 taxpayers will face a tax increase averaging $924 a year.

This tax increase on middle income folks funds the estimated income tax cut of $32.6 million for a group of 5,362 taxpayers with income over $333,388. In other words, the biggest tax cuts go to the richest Mainers at the expense of the working class and the poorest residents. That’s why the Green Party is now enthusiastically engaged in the drive to get this law repealed.

Thanks to a laborious analysis of the plan by Albert DiMillo, we now know that it contains other damaging features. DiMillo, a Democrat, is a retired certified public accountant who once headed the tax divisions of Bath Iron Works and Raytheon Co. His findings are devastating. For example, the Democrats constantly asserted that the plan would drop the top tax rate by 2 percent to 6.5 percent, but they never told us that at least 75 percent of taxpayers already pay an effective tax rate of less than 4 percent, due to the progressive nature of the various tax brackets and the personal exemptions. With those lower brackets wiped out, all taxpayers will pay the 6.5 percent rate.

Meanwhile, the expanded sales taxes will apply to labor on most anything that needs repair. This includes labor for domestic help (housecleaning) and labor for car repair. Tickets to most amusements will be taxed, including theaters, movies, water parks and race tracks. The list of newly taxable activities goes on and on – boat shows, auto shows, antique shows, gun shows, animal shows and more. Scenic tours now will be taxed. Guide services will be taxed. Courier services will be taxed. Storage sheds will be taxed, along with vehicle towing, boat mooring, moving services and even dog grooming. My conclusion is that a lot of middle- and low-income people will receive little or no tax relief and will have a whole bunch of new taxes to pay. This law is not in any way fair.

Will it work?

The idea behind the law is if we lower the income tax and broaden and raise the sales tax we will be able to attract new investment and stimulate Maine’s stagnant economy. The plan would produce a bonanza of small business startups; entrepreneurs would come stampeding into Maine.

Albert DiMillo demolishes this argument, too. His analysis of an MRS report finds that the new tax law will have no favorable impact on taxes paid by the most successful small businesses. The report estimates that the 60,000 taxpayers with income from $114,104 to $333,388 will face a net total tax increase of $813,000, or an average increase of $14 each. This income category includes most successful small business owners.

What about the really big-money people – how will they fare? The Maine Heritage Policy Center has studied the new law and determined, when everything is factored, at best the top tax rate payers will see only a slight decrease from 8.5 percent to 8 percent. A person with a taxable income of $1 million a year currently pays the State of Maine $85,000 in income taxes. At 8 percent that person will save $5,000 a year. We are supposed to believe saving $5,000 a year will make an investor turn from states like New Hampshire and Florida, which have no income tax, to Maine, where they will only have to pay 8 percent. Of course it won’t work.

Cutting or eliminating the income tax is a very good idea; doing it by increasing taxes on middle- and low-income taxpayers is an awful idea. Instead of helping the backbone of our economy – small businesses – it will punish them. This law will give a tax break to high-income earners and little or no tax relief to low- and middle-income people. It will only hurt Maine’s economy.

Again, this is a very bad law and needs to be repealed. If you agree with me and want to help with the repeal, call me at 876-4047.

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