Lack of fairness doomed tax overhaul

by Rep. Mike Thibodeau

In his Republican Journal column of June 16, Rep. John Piotti seemed mystified by the rejection of the new tax system. He speculated that “some voters were confused and others were not well informed.” And he admitted, “We clearly didn’t give the majority of voters what they wanted.”

He got that last part right. On June 8, voters resoundingly rejected the new law by a landslide margin of 61 percent. I can understand his disappointment and his desire to at least partially blame the defeat on ill-informed voters. Rep. Piotti worked on this bill (LD 1495) for several years. That’s a lot of time to invest in something that ends up in the dust bin. But his diagnosis of the outcome ignores the facts.

There was a good reason why every Republican in the Maine House opposed this bill and why the voters repealed it. The lack of fairness in the package overwhelmed its positive features and rendered it unacceptable. Future legislators working on tax reform must keep in mind that fairness is paramount to winning the support of Maine residents. They also should remember to keep it simple. The goal should have been basic tax relief, not a total transformation of our entire tax system. LD 1495 was far too complicated.

Now that the dust has settled, let’s look at some flaws in the law that led to its demise.

1. The Democrats claimed that the new system reduced taxes among all income groups fairly. That is untrue. The law was a giveaway to a very small group of wealthy individuals and the tax system would have become much less progressive. Based on a Maine Revenue Services (MRS) report on the law’s impact in 2010, we see that a group of about 4,550 taxpayers with incomes over $316,000 would receive $28 million of the $46 million in net tax savings. This wealthy group would get a tax cut averaging $6,151, or 12 percent. Everyone else – the other 99.3 percent of Mainers – would get a tax cut averaging just $27, or a 1.1 percent reduction. The inequity is grotesque.

You can see why some of the richest people in the state donated huge sums of money for the advertising blitz in the campaign’s final weeks. Even a Wall Street hedge fund manager who vacations in Maine gave more than $100,000. The Democrats used their cash to run ads claiming that if the law were repealed, our taxes would shoot up by 30 percent. The ad was meant to frighten voters, but it backfired badly. The claim of a 30-percent tax hike was so obviously absurd that people wondered how good this new law could be if the proponents had to lie to get it enacted.

2. LD 1495 would have suspended the inflation adjustments in the tax tables until 2014. This devious maneuver would take that $27-tax cut for average Mainers and turn it into a $45 increase in 2013, assuming a 2.5 percent inflation rate. An MRS report for 2013 projected that a group of some 4,800 taxpayers with incomes over $340,000 would get a $34.3 million tax cut, while the other 99.3 percent of taxpayers would have a net tax increase of $8 million. In other words, the Democrats built in a secretive device that automatically raised income taxes for everyone except the wealthiest Mainers.

3. We all heard the headline claim that the new law lowered the income tax rate from 8.5 percent to 6.5 percent. The truth is that relatively few Mainers would have seen that drop in their top marginal rate. Actually, LD 1495 eliminated the lower, progressive rates of 0 percent, 2 percent, 4.5 percent and 7 percent. The impact of the various low rates is that more than 75 percent of Mainers have an effective tax rate of 3 percent or less. The new law established a flat rate of 6.5 percent for everyone except people making more than $250,000.

4. LD 1495 would have eliminated the income tax structure that lets us deduct such things as mortgage interest, property taxes, charitable contributions and medical expenses. The new law would have replaced those deductions – and the standard deduction – with a so-called “household credit.” But that credit would have started phasing out at income of $27,500 for singles and $55,000 for married couples. Based on the limiting of deductions, 82,000 taxpayers would have seen an average tax increase of $446.

Future tax reformers in the Legislature would be well-advised to keep their mitts off the mortgage interest deduction. Few things are sacred these days, but that’s one of them.

5. No part of the law received more attention than the expansion of the sales tax to more than 100 services and activities that had never been taxed before. Nothing seemed less fair to Mainers than imposing a sales tax on such things as diaper services and auto repair labor while exempting ski lift tickets and golf greens fees. Those taxes were in the original bill but were stripped out by politically connected lobbyists. This tampering by “insiders” attached a stench of cronyism to the whole bill.

The Democrats made a lot of noise about “exporting” taxes to tourists by raising the sales tax on meals and lodging from 7 percent to 8.5 percent, an increase of 21 percent. But MRS estimates that at least 70 percent of Maine’s meals taxes are paid by Maine residents. Voters resented this attempt to mislead them.

Many other examples of unfairness explain why this bill suffered such a withering defeat. Space limitations prevent listing them all. Suffice it to say that we dodged a bullet here. The voters were not confused or ill-informed, as Rep. Piotti believes. They understood that this was a bad deal and responded with common sense.

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