Tax Reform MYTHs & TRUTHs

Tax Reform Myths

Though tax reform has been supported by every major newspaper and a wide range of economists and business leaders, it’s natural that change at this level doesn’t please everyone. Still, it surprises and hurts to read letters to the editors and hear comments that say the bill does things it simply doesn’t. The amount of misinformation out there is staggering.

Here are some corrections to false information being circulated:

MYTH: Tax reform will not help low and middle income persons, or the elderly.

TRUTH: Tax reform directly benefits these populations. Low and middle income Mainers will see their OVERALL tax burden (including both sales and income taxes) drop by over 18%. Senior citizens are rewarded with a special elderly credit, and those who may have little or no taxable income will receive cash back.

MYTH: Tax reform will result in taxes on Social Security.

TRUTH: Neither social security nor any pension benefits that are currently taxed will be taxed under the tax reform package.

MYTH: Tax reform is a give away to the rich.

TRUTH: Tax reform shares the benefits of reduced tax burden with people of every income group, so that every group sees their overall tax burden drop. But the rich actually see a lower percentage decrease. As a result, the new tax code is more “progressive” than the current code. This means that low and middle income residents pay a lower proportion of the overall tax burden than they do now. (Not only is the overall tax burden lower, but low and middle income persons pay a lower proportion of that lower burden.)

MYTH: Taxpayers will be hurt by tax reform’s elimination of personal exemptions and deductions.

TRUTH: Tax reform does eliminate exemptions and deduction, but replaces them with a smarter system that provides similar benefits using tax credits. As a result, over 95% of Maine taxpayers will see LOWER income taxes.

MYTH: Any savings in income taxes will be offset by increases in sales taxes.

TRUTH: The NET impact of tax reform is to lower the tax burden on Mainer residents by over $57 million a year. Income taxes will be reduced far enough so that the vast majority of Mainers (over 87%) will have extra money in their pockets AFTER any additional sales taxes are paid.

MYTH: Tax reform is based on uncertain economic projections, and the numbers can’t be trusted.

TRUTH: When Maine Revenues Services (MRS) analyzes possible changes to the income tax system, the computer model they use contains every Mainer’s individual income tax return; so the results are not hypothetical estimates based on broad assumptions, but actual numbers of how a proposal would affect each individual taxpayer. Estimates of sales tax impacts are not quite so precise, but they are based on solid data of what Mainers of different income levels pay for various goods and services. With this level of detail, MRS can say with near certainty how Maine taxpayers will benefit.

MYTH: Tax reform will scare away visitors by increasing the meals and lodging tax.

TRUTH: After the increase, Maine’s meals and lodging tax will still be far below most destination locations and the New England average. And there is no evidence that increasing this tax will reduce visitors. (One example: Vermont saw no impact when it raised its rate to 9% a few years ago.) In addition, tax reform pumps an additional $4 million/year into tourism promotion, which is a proven way to increase business within the hospitality industry.

MYTH: Tax reform may result in lower taxes now, but won’t over time.

TRUTH: The State Constitution prevents controlling the actions of a future Legislature. That is true regardless of what tax system in place. But there will be less temptation to change the tax code resulting from this tax reform package because the reform produces more stable state revenues. It is when state revenues are less stable that there is pressure for a tax change.

MYTH: Maine should provide tax reform by cutting spending, which is it isn’t doing.

TRUTH: Maine IS cutting spending. The new two-year budget that begins on July 1 is over $500 million smaller than the current two-year budget. And the current budget was basically flat from the previous budget, except for increases in K-12 education (which voters demanded through a statewide referendum, and which—if not provided—would have resulted in higher local property taxes).

Contrary to what many people have heard, the state is running lean. Taken together, the budget and tax reform are BOTH cutting spending and providing tax relief.

Fortunately, we CAN lower the tax burden on Maine people without also burdening ourselves and our children with further reductions in education funding, hospital payments, municipal revenue sharing, and countless other programs and services that Maine’s businesses, communities, and residents rely upon. Instead, we can reduce our tax burden by collecting our revenues more smartly.

MYTH: Tax reform was rushed through the Legislature.

TRUTH: Tax reform has been one of the most carefully considered policy questions of this past year, with six Legislative “work sessions” (when many bills get just one) and public forums held across the state. Partisan critics cry that some changes to the bill (as proposed by the Governor) were added at the end without adequate time to review, but that criticism is purely political. All but one of the changes involved additional tax relief, and the other change (which paid for this additional relief by lessening the tax reduction on persons making over $250,000/year) was immediately understandable.