House gives initial passage to historic tax reform package

Bill will lower income tax rate, provide property tax relief, balance sales tax base

June 13, 2007

AUGUSTA – The Maine House of Representatives gave initial passage on Wednesday to a historic bipartisan tax reform package geared at reducing the tax burden on Maine people, encouraging new business growth and balancing the state’s volatile sales tax base. The House voted 87-49 in support of the package and sent it to the Senate.

The reform package is the result of more than five months of bipartisan and public work in the Legislature’s Taxation Committee, with Democrats, Republicans and the Committee’s Independent member working together toward the final package after marathon public work sessions and feedback from fellow lawmakers, the public and Maine Revenue Services, and more than a dozen revisions.

“We began this process by agreeing to a set of underlying principles,” said Rep. John Piotti, D-Unity, the House chair of the Tax Committee. “We would reduce the burden on Maine people, and that we would do this in a revenue neutral way.”

A week ago the committee voted 11-2 in support of the package that will cut taxes by $142 million to Maine businesses and residents. The vote came only a few hours after the Legislature enacted a bipartisan budget that cut spending by more than $250 million and created a more sustainable school funding formula to relieve the local property tax burden and slow the growth of spending at the state level.

The negotiated package is designed to spur economic development and deliver a more fair tax structure for Maine taxpayers by substantially lowering the top income tax rate, providing new property tax relief, balancing the states outdated and volatile sales tax code and reducing the overall tax burden on Maine people.

The plan would immediately lower the top income tax rate by nearly one third - from 8.5 percent to 6 percent - dropping Maine’s income tax from 7th highest to 34th in the nation. It would also establish a universal income tax rate of six percent and create new credits for Maine residents that will result in most every Mainer paying less in income taxes than they do now. Maine Revenue Services projects that the new rates will lower income taxes by an average of almost $400 per year for most Mainers.

“This plan will provide a tremendous economic boost to the state of Maine,” Piotti said in his floor speech. “It will be a huge stimulus for people in state who want to expand and for people out of state looking to do business. It’s a plan of fairness. It’s a plan that develops the right balance for our tax system.”

"The best economic bang for our buck is reducing the income tax because that puts more money in the pockets of Maine people,” said Rep. Randy Hotham, R-Dixfield, who serves on the Taxation Committee and supports the plan.

The plan also provides $50 million in property tax relief to Maine residents and businesses by expanding rebates through the “Circuit Breaker” refund program and doubling the state’s contribution to the Homestead Exemption. It would also dedicate a portion of local sales taxes back to communities to provide property tax relief for both businesses and residents.

Rep. Bruce MacDonald, D-Boothbay, pointed out another useful property tax relief item in the bill that he believed would be important to seniors. The bill would instate a tax deferral program for seniors 65 or older, allowing them to defer their property taxes until they sell the home or die.

“One of the biggest problems we’ve heard is of older Mainers on limited incomes who face the threat of being thrown out of their homes,” said MacDonald on the House floor. “This alone solves that problem. It’s not the only reason to support the plan, but it’s a good one on its own.”

Although the tax reform package would bring sweeping changes to a range of different tax policies, it will actually simplify Maine’s income tax system by creating a new three-step income tax form; coupling Maine’s tax code with federal deductions, making it easier for businesses and residents to file; providing a new resident tax credit that cuts taxes and encourages people to live and work in Maine; and offering a new mortgage credit that would increase the tax return on mortgage interest for most Mainers.

The bill would bring much-needed balance to the sales tax base, which is one of the narrowest in the country. The state only taxes 23 services, while many others tax more than 100 - and when the few industries that Maine collects taxes on experience downturns, the state sees massive revenue shortfalls and vital state services suffer.

“The package affords the opportunity to shift some of that burden to the folks who come to visit here,” said Hotham. “And it does so in a way that I believe will keep those folks coming.”

Committee members recognized that legislators have faced an extreme amount of pressure from special interests that either do not completely understand the package or are misrepresenting the facts, and spent time during floor debate dispelling what they described as misleading or inaccurate claims.

“We are swimming against a very strong tide,” said Hotham. “But nothing we do, particularly in this venue is going to be easy.”

Rep. L. Gary Knight, R-Livermore Falls, countered claims that the plan would be bad for business, by referring to the $96.4 million that would go back to Maine small businesses; and Rep. Kathleen Chase, R-Wells, provided anecdotal evidence that her family-owned store in Southern Maine did not suffer from Maine’s sales taxes driving consumers across the border, and there’s no expectation that taxes on services would either.

“It is tough to be in the position that all of us are in,” said Piotti on the House floor. “It’s not easy to be called evil on the radio as some of us have been. But it s the right thing to do for Maine people. This is our chance. This is our opportunity. We came here to deliver something real for the people of Maine. Don’t be scared to do it.”

“I worry about what will happen if we don’t do this. We cannot in the state of Maine cut our way to prosperity. It’s not possible. We need sensible spending and reform to get there,” said Piotti.

According to Maine Revenue Services the plan will substantially reduce the overall tax burden for roughly 90 percent of Mainers, with an average overall reduction of around $300 even after adjusted sales taxes are figured in, because of the considerable income and property tax reductions.

Piotti said that economists have marveled at the Committee’s success in reducing taxes for such an overwhelming percent of the state. He referenced the 1986 federal tax reform package passed under President Ronald Reagan that has often been heralded as a model for tax reform, and said that it was also revenue neutral, but it increased taxes for more than 20 percent of Americans.

The plan will lower the burden on Maine people by $140 million a year,” said Piotti. “That translates to the average tax filer of two or three or four hundred extra dollars in their pocket. That’s real money. That’s extra money even after the adjusted sales taxes.”

“We’ve taken a large step toward real tax reform and reducing the burden on Maine people with this vote today,” said House Majority Leader Hannah Pingree, D-North Haven. “The Tax Committee did a phenomenal job working up a strong bipartisan plan, and we’re looking forward to working with the Senate and Governor to get it passed into law.”

The House also defeated a floor amendment that would have further lowered the income tax by increasing the sales tax from 5 cents to 6 cents. The tax reform package now heads to the State Senate for a vote.

Earlier in the day the House voted on a separate bill that also would attempt to provide property tax relief, by proposing an amendment to the constitution that would allow communities to opt out of their local portion of the Homestead Exemption and establish a local option sales tax for property tax relief. If the measure passes with two-thirds support in the House and Senate, it would need to be ratified by voters. Then communities would have the option to adopt either initiative, or both.

Contact:

Travis Kennedy, Communications Director, 287-1433