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By Thom Watson and Seth Berry
March 24, 2009
The last major change to the state’s tax structure was nearly fifty years ago, when Maine’s economy was driven by manufacturing, forestry and fishing. That system does not work for an economy now driven primarily by the service sector. To say that tax reform has been a challenging issue for the Legislature would be an understatement, but the current economic times have served to both highlight the flaws in our current tax code and to clarify why we must take action now to deal with tax reform and relief this session.
We need to reduce the income tax burden on Maine families and small businesses. Building on the bi-partisan work of the tax committee in the last session, we have crafted a plan that will lower the state’s income tax and put $75 million in the pockets of Maine taxpayers while providing state government with a more stable and predictable revenue stream in good times as well as bad.
The plan proposes to drop the state’s top income tax rate by over twenty percent from 8.5 percent to 6.5 percent. Reducing the top rate is critical because that rate kicks in at less than $20,000 for single filers, meaning almost all wage earners in Maine pay the top rate. The proposal (LD 1088) also includes a choice of two substantial resident tax credits, one standard and one based on the current deduction system that will lower the effective tax rate for over 90 percent of Maine income taxpayers to even less than 6.5 percent.
This is accomplished by making smart choices in what else we tax. Our current tax structure relies too heavily on income taxes and a very narrow sales tax base. By exporting a portion of Maine’s tax burden to visitors and non residents as other states do, we can reduce the burden for Maine residents.
This is not a “soak the people from away” plan. It is a plan to ensure those who visit our state pay their fair share. Maine’s current sales tax base is so narrow (30 percent of our sales tax revenue comes from two items, car sales and building supplies) that most tourists get sales tax breaks in Maine they don’t get in their home state and Mainers continue to pay one of the highest overall tax rates in the country.
This is not a radical idea. In fact, it is a plan that has been used by many states to reduce the tax burden for its residents and give them more control over their money. By putting more money in the pockets of residents we can spur our economy, help to bolster our small businesses (most of which pay at the individual income tax rates) and put our state in a strong position to move forward as the national economy improves.
By modestly broadening the sales tax and using those funds to lower the income tax we can bring significant relief to Maine taxpayers. Since 40 percent of the proposed expanded sales tax is paid for by non residents and all of those funds are used to reduce income taxes, Maine residents will receive an additional $75 million in their pockets each year.
Let us be clear – under this plan the state does not make any money. By adjusting our sales tax base to cover some services currently exempt we are capturing $75 million in revenue from non residents and returning that directly back to Maine taxpayers. At the end of the day and accounting for any expanded sales taxes paid during the year, the vast majority of Maine residents and businesses will see tax savings of $100 to $500.
While reducing the tax burden for Maine residents is the main objective of this plan there are other advantages as well. By expanding the tax base and lowering the income tax we will create a more stable revenue stream and avoid some of the boom and bust cycles the state has seen in recent years. Further, the plan is a real incentive for business expansion. A lowered income tax rate will make Maine far more competitive when trying to attract new business and that low rate will allow existing businesses to keep more of what they make and reinvest it in our economy.
Now is the time to prepare our state for economic recovery. The tax reform and relief plan presented in LD 1088 is a major component in that recovery. We are excited about this proposal and what it can mean to help people in this tough economy. We look forward to working with both sides of the aisle, and with the Senate and Governor, to move this important piece of legislation forward in the coming weeks. Together we can bring Maine taxpayers tax relief this session.
Thom Watson represents House District 62 and is the co-chair of the Taxation Committee.
Seth Berry represents District 67 and is the Assistant House Majority Leader.