Weekly Column: Lessons Learned from Tax Reform

June 26, 2007

Late last summer, a left leaning democratic senator and a right leaning republican senator met for a cup of coffee to have a serious conversation about Maine’s economy. The discussion inevitably led to Maine’s tax burden, and how it is ultimately hurting Maine people. The meeting of these two senators helped lay a foundation for bipartisan cooperation, which expanded on through the Legislature’s Taxation Committee.

Building on that good will, taxation committee members worked all session on different ideas and scenarios for major tax reform. By the end of the session, they made some important discoveries. One discovery was that major tax reform had not occurred since 1965. Another discovery was that no matter what they did, they probably weren’t going to please everybody. While some have tried to score political points by axing income taxes in half, the reality is our state inevitably works out of a budget. Any cut in revenues from sources like the income tax, would have a dramatic affect on our state’s budget.
For example, the $2 billion the state is paying to support K-12 education would undoubtedly have to be scaled back.

Under the bipartisan tax reform plan proposed by the Taxation Committee, Maine’s top income tax rate would have dropped from 8.5 percent to 6 percent. Many are often quick to point out that Maine is at the top of many lists indicating our tax burden is high. A 2.5 percent drop in our income tax rate would move our state from the seventh highest income tax rate in the country to the 34th.

Since the vast majority of Maine’s small businesses pay tax at the individual income tax rate, lowering the top marginal tax rate helps businesses, as well as individuals, because it provides small businesses with the resources to invest in new equipment and to hire additional employees. More importantly, it means more money in your pocket.

In addition to lowering the income tax rate, the plan also sought to expand Maine’s Homestead Exemption from $13,000 to $26,000. Essentially, the first $26,000 of the value of an individual or family’s home would be tax exempt. Moreover, the Circuit Breaker program, another tax relief program for homeowners and renters also would have been expanded.

It seems hard to fathom why this plan wouldn’t have the full endorsement of the Legislature? Right?

Unfortunately, some had reservations about the plan when it came to the issue of expanding the state’s sales tax. While it proposed cutting the income tax and providing property tax relief, it also required an expansion of the sales tax on a number of untaxed goods to help pay for the loss of revenue from the other cuts.

It turns out that out of a possible 168 categories of taxable services, Maine currently only taxes 24. Connecticut, as an example, taxes 80. The plan imposed sales tax on some services and removed some exemptions.

Although a nonpartisan analysis of the tax reform plan using state of the art super computers at Maine Revenue Services found that Mainer’s on average would have seen a $300 plus reduction in their overall tax burden, many did not like the expansion of the sales tax to help pay for the tax reform plan. Many, including myself, agreed that there were many expansions that were not very palatable and asked for them to be removed. Unfortunately, even when the ugliest of expansions were taken out, opponents still pressed forward with their opposition despite the compromise efforts.

The architects of tax reform worked hard until the final moments of the legislative session to continue to find more room for compromise. In the end, it seemed like many lawmakers needed more time to be convinced of the plan’s value to Maine people. Perhaps the public also needed more time and input to look it over as well. Given the amount information and misinformation that was swirling around about it, there is no doubt that it was easy to get confused with what everyone was saying about it.

Ultimately, the tax reform plan we hoped to pass did have its faults, but the bottom line is that it would have lowered taxes for Maine people and made our state a more attractive place to live and do business. It is unclear right now if the Legislature will revisit this issue in a special session or wait until January 2008. No matter what the case, there is a solid foundation for cooperation to build from as we move forward in the coming months.

Libby Mitchell is the Senate Majority Leader in the Maine Senate. She represents the communities of Augusta, Vassalboro, China, Oakland, and Sidney for District 24.