Proposition 1 facing voters in the June 8 Gubernatorial primary proposes to rescind a major tax revision passed by the Legislature last year dropping the maximum state income tax from 8 1/2% to 6 1/2% but expanding the state's sales tax to make up the lost revenue.
A "YES” vote agrees with Prop 1 - that is, cancels these revisions. A "NO” vote says keep them.
The Boothbay Harbor Region Chamber of Commerce's newly formed Public Policy committee has asked our Local legislators Senator David Trahan (R-Waldoboro) and Representative Bruce MacDonald (D-Boothbay) to explain how these tax revisions will impact on a) economic development, b) small business, c) residents and d) state revenues. Plus list three other critical considerations. Their answers are below.
(Public Policy committee members are Chair Lori Bailey, Wayne Sheridan, Lindy Bragg, Bill Bailey, Lisa McSwain and Hamilton Meserve).
What's the impact of Proposition 1 on:
1. Maine's economic development and attracting investment and good paying jobs?
SENATOR TRAHAN: Question 1 will further depress the job market. I see no positive effect on Maine’s business climate; I see the opposite for several reasons. The new tax reform law creates a disincentive for any business or individual to come to Maine. Contained within the law is a redefinition of residency for the purpose of income. If a person moves to Maine on Jan. 2nd of the tax year they are not eligible for the resident income tax credit. If that person earned an income equivalent to a 2% effective rate, that individual under the new law would have to pay 6.5% with no credit. This welcome home tax is a 350% increase in the income tax, hardly an attraction for anyone.
REP. MACDONALD: The new tax law was carefully crafted to spur economic development. There is no greater impediment to business attraction (and business investment) than Maine’s 8.5% top income tax rate (which is also the capital gains rate). Maine has the 6th highest rate in the nation, and that is often a “show stopper”. The new law will lower this top rate from 8.5% to 6.5% on income under $250,000 and to 6.85% on income over $250,000. In the words of Wick Johnson, President of Kennebec Technologies and a member of the State Chamber Board, “This is a game changer!”
Some people worry that the new sales taxes will negatively impact business, but most economists do not. The sales tax expansion is modest, and over 95% of it is in consumer services not business-to-business services. The modest negative impacts that SOME businesses may see are expected to be far outweighed by the positive impacts on those same businesses (from the extra income in their customers’ hands, as well as their own tax benefits).
The increase in the meals and lodging tax from 7% to 8.5% keeps Maine’s rate at a competitive level, still below New Hampshire and Vermont (which are both 9%), and far below the national average (of 12.5%). Vermont saw no negative impact on business when it went from 7% to 9% a few years ago. In addition, the new law provides over $4 million a year in new money for tourism promotion, which is a proven way to increase business.
2. Maine's small business growth, currently the chief generator of jobs statewide?
SENATOR TRAHAN: Question 1 punishes small businesses with increased costs. Price Waterhouse Coopers did a 2006 study on streamlining the sale tax and found that for a business doing $1 million in sales or less, the cost of administering the sale tax was 13.5% of the tax collected. For a business above $1 million, the cost was 2.2%. Obviously, the costs are much more for a small business, with less opportunity to absorb new costs. Ninety percent of businesses in Maine are small business; worse, every dollar collected must be remitted to the state, who will pay the extra cost? Either the consumer or the business -- neither is acceptable in the current economic climate. Last winter, when Governor Baldacci amended the law to remove ski tickets and golf greens fees from the over 100 new items to be taxed, he cited the negative impacts of taxing these industries. Why is taxing golf and skiing bad for business and the other thousands of small business sales taxes and raising meals and lodging taxes ok for business? The answer is, it is not, except these businesses had no effective lobby.
REP. MACDONALD: Maine’s small businesses will benefit in a big way under of this new law. Almost all of Maine’s small businesses are partnerships, sole-proprietorships, or S-corps that pay business taxes under the individual income tax, and the new laws lowers the individual income tax. The top rate drops from 8.5% to 6.5%, but the effective tax rate drops to far below 6.5% for almost all Mainers. (Despite rumors to the contrary, business deduction are NOT changed by the new law.) In addition, Maine’s capital gains rate drops by about 25%. This will make a HUGE difference to small business owners when they sell their business.
Beyond this, the new law will put $54 million in new money in Mainers’ pockets. (Mainers will see income taxes lowered by $107 million and sales taxes increased by $53 million, for a NET tax reduction of $54 million.) Much of that money is expected to be spent at Maine’s businesses. The State Planning Office conservatively estimates that this will create 750 new jobs, most at small businesses.
Opponents say that it will be a big burden for small business to collect new sales taxes, but their numbers come from a study is that is not applicable to the kind of changes we are making in Maine. In addition, most of the impacted businesses are already collecting taxes on some items.
3. Mainer's disposable income?
SENATOR TRAHAN: Question 1 will only make it worse. Maine is one of the poorest states in the nation with one of the top tax burdens. Our per capita income is somewhere near 36 in the nation and our tax burden as a share of income is 6th in the nation. This law taxes services like, auto repairs, appliance repair and repair of lawn and garden equipment. Who do you think pays the taxes? Certainly not out-of-staters as supporters of this law imply. Mainers also pay the lion’s share of the meals tax. On the subject of out-of-staters, who made them the bad guy, who should pay higher taxes? For every new tax dollar collected and sent to Augusta, it is one less dollar spent in our communities. Maine Revenue Services estimates that for every dollar collected from out of staters, $2 is collected from Maine residents. This new law relies on the concept of collecting $100 million in new sales and income taxes and then redistributing the money in an elaborate credit system. For historical purposes, this fact is important, over the last 8 years, the Maine Legislature and the Governor have, by statute, adjusted taxes, fees, assessments, and credits to raise money over 340 times for a total of $1.6 billion. Do any of you believe this new money will come back without the state keeping a cut? For those who said yes, sorry but the law is designed to do exactly that.
There is a not so clever gimmick buried in the law that eliminates inflation indexing of credits and income tax rates until the year 2014. It is worth noting in 2002 Legislators restored indexing with the intention it occur each year. According to data supplied by Maine Revenue Services, taxpayers lose between $8 and $12 million each year when indexing is removed. Your loss is the State’s gain. Thousands of taxpayers that get a small tax cut in the first year of reform, unfortunately, they will lose the tax cut in subsequent years. MRS reports, for the year 2013 a group of less than 5,000 taxpayers earning over $340,000 will get a net tax cut of $34 million, while the other 99.3% of Mainers who pay taxes will see their bills soar by $8 million. It is true, there are winners and losers in each category, but this new tax code will leave behind a long trail of victims.
REP. MACDONALD: As noted above, Mainers will have an extra $54 million in their pockets in 2011. Opponents of the new law have made a big point of the fact that this amount decreases to about $32 million in 2013 (under current projections) before leveling off after that. However, $32 million is still $32 million MORE than Mainers will have in their pockets without the new law. Beyond that, there is every indication (with the economy beginning to improve) that the increase in disposable income will be higher than $32 million.
According to Maine Revenue Services, 9 of 10 Mainers will have extra money in their pockets in 2011 and at least 8 out of 10 Mainers will have extra money in 2013 (though the situation for 2013 could improve from that). You may see different numbers from some of the opponents of this law, but their analysis has been discredited by Maine Revenue Services (See Free Press, May 20 issue).
4. Maine's government revenue intake?
SENATOR TRAHAN: More money for the state means less money in your pocket. The loss of indexing of income taxes for three years will result in about $40 million in additional tax revenue in 2013 assuming a 2.5% inflation factor in years 2011-2013. In addition, inflation will increase the new sales tax collections by another $7 million, so the law raises about $47 million more revenue than current tax law that will stay in Augusta.
More tax collectors on the trail. The law also keeps $1 million to hire new revenue agents, another $4 million for the tourism fund, and this little jewel. According to Maine Revenue Services estimates, mostly elderly and on fixed incomes will pay more in sales taxes under the plan. It is true that they will be eligible for a tax credit of about fifty bucks, seventy for couples. Of course, these taxpayers will have to file an income tax return to get it. The state is betting many won’t bother. In fact, the tax folks in Augusta have tucked away $5.7 million dollars in the budget based on the expectation that 112,000 Mainers won’t even bother to claim the credit. Obviously, the bill is not revenue neutral.
REP. MACDONALD: The new law is designed to be “revenue neutral,” meaning that it will bring in approximately the same amount of money. (This is confirmed by Maine Revenues Service’s analysis, which extends through 2013.) If these numbers are off and the law takes in more revenue than expected, the law contains a provision to provide more tax relief back to Mainers (by increasing the new household credit) so that it remains revenue neutral.
Some may ask: Why bother to change the tax code if you are going to take in the same amount of money? They are missing the point. Tax reform is all about collecting taxes in a smarter way. Why wouldn’t we want to collect revenue in a way that spurs economic development and at the same time rewards Maine residents and residency? Having a smarter tax code make sense regardless of what budgetary decisions are made in Augusta. There will always be tensions between people who want to see the state spend more and those who want the state to spend less; but that is a separate issue. Regardless of spending decisions (made now or in the future), the state and its residents will benefit from this new law.
What three other factors should Maine voters weigh concerning Prop 1?
SENATOR TRAHAN: Don’t get sick or donate to your local charity - you’ll pay more income taxes. That’s the message in the new tax shift law. The tax collectors in Augusta estimate 81,000 Maine families will pay significantly higher taxes. This unfortunate group is made up mostly of individuals with high deductions for medical expenses, interest expense, charitable donations and property taxes. These deductions are repealed and replaced with a complicated capped credit system.
102 new taxes on the way! If this new law is not repealed in June, the sales tax will be expanded to 102 new items and services. Thousands of small businesses throughout the state will have to start collecting taxes and will be subject to potential new auditing by Maine Revenue Services.
Just the beginning! If this law is not repealed on June 8th, supporters in Augusta will claim Maine people support expanding the sales tax. There are currently $2 billion in sales tax exemptions on the books. This bill is just a foot in the door and the path to an endless supply of money to fund the state budget. We have seen many bills to expand the sales tax further, to items like, newspapers, haircuts, plumbing and carpenter services, legal services and to tax non-profits. If this law is not repealed, who can argue that their industry deserves a pass, while other industries should be taxed? This law is just the beginning and if not repealed with a yes vote on June 8th, expect more of the same.
1) REP. MACDONALD: The new law will help stabilize state revenues during tough times, by broadening and diversifying our tax base. At present, Maine has one of the narrowest sale tax bases in the country. In good years, 40% of sales tax revenue comes from the sale of just two items (new cars and building supplies). This revenue falls off to close to nothing when the economy falls, and we all suffer. We will all see higher property taxes in the future because of the cuts in state aid to education that result when state revenues fall so far. Budget cuts to health care providers including nursing homes and hospitals have a negative impact on our health. This new tax system will help cushion these swings in revenue due to downturns in the economy.
2) The new law will provide tax relief to Mainers. Over 95% of Mainers will see a reduction in their income taxes and over 87% will see a reduction in overall taxes AFTER any new sales taxes are added in. You can see precisely the impact on you by going to the “tax calculator” at Maine Revenue Service’s website at http://www.maine.gov/REVENUE/incomeestate/1040/taxreformindividual.htm
3) The new law is fair, on various levels. First, it is fair to visitors and non-residents, who will still be paying lower sales taxes than in most other states. Second, it is fair to Mainers, by spreading the benefits across all income groups. Some opponents of the law had the audacity to claim that this law is a give away to the rich. This is a completely UNFAIR and UNTRUE statement that Maine Revenues Services has denounced. All income groups benefit under the new law, but low and middle-income people receive slightly more of the benefit, proportionally.