|5/20/2010 9:52:00 AM|
The Struggle for Fair Tax Reform
Lower income taxes, broaden sales taxes? Voters decide June 8
by Christine Parrish
|“Stop lying.” Albert DiMillo referred to Maine Revenue Services data while accusing Rep. John Piotti of a hidden tax increase. Maine Revenue Services says DiMillo’s analysis is inaccurate.|
|Heated Debate —|
|Albert DiMillo, a Certified Public Accountant from southern Maine and a Democrat, has become the face of the Republican effort to kill the tax bill. |
"This law won't stabilize anything. It's a smokescreen. It's ridiculous," DiMillo shouted at a tax debate sponsored by Wiscasset Republicans last week.
"This law will have five percent of the population paying for one percent, the very rich," said DiMillo. He waved a sheaf of papers from Maine Revenue Services that he said supported his analysis. "The rest in the middle will pay $50 more."
"Stop lying," he screamed at Rep. John Piotti, who is chairman of the Legislative Tax Committee and sponsor of the original version of the tax reform bill.
DiMillo turned to the audience of more than a hundred people gathered in the gym of the Wiscasset High School.
The audience cheered DiMillo and hissed and booed Piotti.
Mike Allen, an economist and the Director of Economic Research at Maine Revenue Services, a public agency with no political affiliation whose role is to provide expert information to the executive branch, said DiMillo is using Maine Revenue Services numbers inaccurately.
"What he's saying is just not true," said Allen, noting that it is important to look at the distribution tables and refers everyone with questions to look at the Maine Revenue Services Web site (www.state.me.us/revenue/taxreform.htm).
Allen said DiMillo is not so much cherry-picking the numbers as doing an inaccurate comparison.
"This reform is going to move us from having the seventh highest income tax in the country to the 17th," said Allen, noting that it's not ideal, but it does put us more in the middle of the pack.
"After the sales tax increase, the estimate is that 87 percent of Maine residents will pay less in taxes," said Allen.
DiMillo, who interpreted the tax reform law as a hidden tax increase, was at the Wiscasset debate to lend support to Senator David Trahan, who led the effort to get the repeal vote on the ballot.
One of DiMillo's criticisms was that indexing for inflation was taken out of the law, meaning that the 87 percent rate was inaccurate. The adjustments for inflation were taken out until 2015.
Allen said that was a political decision, not one made at his agency. The impact means that in 2013, about 80 percent of Mainers will pay less taxes, instead of 87 percent. He expects that the rate will be between 80 and 87 percent when indexing kicks in in 2015.
For years, Maine was said to have the highest tax burden of any state in the country. It turned out not to be true-the abnormally high number of nonresidents (15 percent of the population own vacation homes) skewed the numbers. Now the Tax Foundation marks Maine as 15th highest in the tax lineup. Not great, but not astonishly bad, either.
Still, Maine has high income tax and property tax and unstable tax revenue from sales taxes. The Maine tax code, by any economist's measure, is not a fair tax code or one that attracts business to come to the Pine Tree state.
Last year, the Maine Legislature didn't try to lower taxes, they aimed to make the tax code more fair in a bill called LD 1495. It passed the Legislature last June and was to take effect this January, but a repeal effort put the law on hold.
One man's tax reform is another man's tax reform target
LD 1495 was designed to create fairer taxation by spreading the tax burden around without raising taxes overall. According to the Maine Revenue Services, the bill, LD 1495, would lower income taxes for 95 percent of Maine residents - and 87 percent of Mainers would see their overall tax burden go down. But to do that meant increasing the number of items and services subject to sales tax.
The goal was to lower income tax that tops out at 8.5 percent to a flat 6.5 percent rate, and generate a steadier stream of sales tax revenue by adding new taxes to services, recreation, dining, car rentals and lodging.
Income taxes down? That's popular. Sales taxes up? That's not.
The tax reform bill has been hailed as the most substantial reform of the state tax code in 40 years by the Tax Foundation, a nonpartisan tax research group based in Washington, D.C.
But sales tax changes are a wave-the-teabag issue, and opposition to LD 1495 formed immediately after the governor signed the bill into law.
Republicans spearheaded the campaign to repeal LD 1495 and they collected enough signatures last summer to get a people's veto on the ballot for June 8.
How Maine stacks up to other states- before LD 1495
LD 1495 passed, but the people's veto process meant it didn't go into effect, so the existing tax code is still the status quo. Right now, Maine has the 15th highest overall tax burden of any state in the country (Tax Foundation, using new methodology, 2008).
Income taxes: Maine has the seventh highest income taxes of any state, topping out at 8.5%, but the kicker is that the top rate starts at a very low taxable income level of around $20,000, according to the Federation of Tax Administrators. This high income tax rate is considered a disincentive for businesses and individuals to relocate in Maine, according to Richard Woodbury, an economist and former unenrolled State Representative from Yarmouth who chaired the Legislature's tax committee and who recently was a visiting scholar at the New England Public Policy Center, where he researched tax reform initiatives.
Estate taxes: Maine's are higher than federal rates and are also seen as a disincentive to live in Maine, particularly for the elderly. According to Woodbury, there is anecdotal evidence that this has caused elder flight to states like Florida and Arizona or the six-months-minus-a-day resident - wherein people live in Maine just shy of six months, so they don't have to claim Maine residence by law.
Sales taxes: The Maine general sales tax rate is five percent, with seven percent on dining and lodging, ten percent on rental cars, and less than one half percent on real estate tax transfers. Overall, the Maine sales tax rates are lower than average and narrow in scope, with about a third of the taxes collected from construction materials and automobile sales - both of which vary dramatically, depending on other economic factors. This creates a boom/bust cycle of tax revenue, not a steady stream, and creates uncertainty. It also encourages a glut in spending during good times and a panic during bad economic times when cuts are felt most severely.
Maine is often compared to its No-Sales-Tax neighbor, New Hampshire. By contrast, New Hampshire has a lodging tax, meals tax, and car rental tax of nine percent. Overall, New Hamphire generates 61.3 percent of its tax revenue from state and local property taxes, making it the state with the highest property tax rate in the country.
Property taxes: Maine has the third highest property taxes of all 50 states (estimated at 5.3 percent of income by the U.S. Census Bureau), but Maine also has the highest rate of nonresident home ownership in the country (15.6 percent of owners are nonresidents, according to the U.S. Census Bureau). Those are vacation homes that tend to have high evaluations and high taxes, so any lowering of property taxes across the board could mean a shortfall in local revenue that would have to be made up elsewhere. Property tax reform was not a prime target of LD 1495.
Tax reform in Maine - a 30-second history
This unbalanced approach to collecting tax revenue to fund state services spawned almost a decade of continuous efforts at tax reform of one kind or another.
Efforts at reform have taken three directions.
The first was to address the property tax burden, and nine out of the last ten referendums that have come up before voters have included property tax issues. Two have passed: the 2004 School Funding Referendum and the 2005 LD 1 Property Tax Reform.
The school bill increased the state's share of the cost of a baseline education to 55 percent, but it has not necessarily reduced property taxes, because that choice was left up to the municipality.
Hand in hand with the state paying a larger share of education, two efforts that have been sucessful in reducing property taxes for Maine residents are the Property Tax and Rent Refund Program and the Homestead Exemption.
The Property Tax and Rent Refund Program (known as the Circuit Breaker) guidelines keep changing, mostly to benefit taxpayers, but the general thrust of the program is to refund a portion of property taxes to Maine residents who pay more than four percent of their income in property taxes. The benefit is capped at $2,000 and tapers down as income goes up. Maine residents who make above $80,000 don't qualify. Non-resident property owners also don't qualify.
The Homestead Exemption allows Maine residents to take $13,000 off the assessment of their primary home, thus effectively lowering property taxes, especially in areas with high mil rates. Since municipalities lose local revenue as a result of the exemption, the state reimburses towns half of what they lose.
The second type of reform is to lower the overall tax burden by capping taxes and reducing spending or making summer people and tourists pay more. The Palesky tax cap and the two TABOR tax reform referendums were all efforts to cap taxes. They were seen as extreme measures by tax analysts and they all failed at the ballot box.
The third type of reform has been aimed at rebalancing the source of tax revenue, without raising taxes overall. This revenue-neutral approach usually aims at reducing the income tax or property tax, or both, and raising sales and excise tax. The 2009 tax bill (LD 1495) which passed the Legislature and now is up for a repeal vote through voter veto fits here: it lowers income taxes and broadens the range of services that will be taxed, with the overall aim of reducing the tax burden.
Tax Reform 2010— Three economists discuss LD 1495 —
Robert Tannewald gives the tax bill two and a half stars. Tannewald, a former Vice President of the Federal Reserve Bank of Boston who now works at the Center on Budget and Policy Priorities, gave LD 1495 a weak thumbs-up when he spoke at the Muskie School of Public Service in Portland last month.
"I think the (veto) referendum should be defeated. I give [LD 1495] two and a half stars. It needs work, but it's progress," he said.
Tannewald, an expert on state and local tax policy, said businesses looking to relocate in Maine are typically more concerned with skilled labor, infrastructure, and business regulations than they are with income taxes.
"Where businesses want to locate, taxes are not the top priority," he said, adding that lack of stability in the tax code is more of a problem.
"If I was in business I would look at how the tax system treats workers, yes, but it isn't that different under [LD 1495] than current law. As income goes up, tax credits will go down. It's just not that different. When I talk to businesses, they want stability more than anything, so they can plan prices. Any change is destabilizing."
LD 1495 is revenue neutral, meaning that it will lower income taxes by $90 million and increase sales taxes by $90 million. As a result, more of the tax burden (an estimated $48 million) will be shifted from Maine residents to nonresidents and visitors, according to Maine Revenue Services.
Richard Woodbury, an economist and former State Representative, scrutinized LD 1495.
"Nonresidents will bear more of the burden of taxes. That's probably a good thing, since one in six homes in Maine are owned by nonresidents," said Woodbury.
Under LD 1495 the income tax rate will go down to 6.5 percent for those earning under $250,000. With exceptions, it can bump up to 8 percent, but not as high as where it is now at 8.5 percent. A household credit will replace deductions and will phase out at higher income levels.
An example from Woodbury's analysis of tax reform in Maine may be helpful:
Consider a married couple with two children and adjusted gross income of $40,000. The flat tax, before the credit is applied, would be $2,600 (6.5 percent of $40,000). But this family's standard household credit is $1,200, plus $1,000 for the four personal exemptions claimed on the federal return. That leaves the family with a net tax obligation of $400 (under current law, this family would owe $606).
It gets more complicated for those who used to itemize deductions-itemization is being replaced with a household credit-and that lack of simplicity is one of the pitfalls of the law, according to Woodbury.
Mainers who owe no Maine income tax because of low income will receive $50 to $70 back from the government to offset increases in sales tax-but they must file a tax return to get it.
Analysis by the Maine Revenue Services shows that 87 percent of Maine residents will pay less sales and income taxes if LD 1495 is enacted; 95 percent of Maine residents will pay less income tax than they currently do.
"The high income tax makes Maine stand out," said Woodbury, referring to the current tax code. "Sales tax collects revenue from everybody in Maine. It's more fair."
If LD 1495 goes into effect, it would raise the lodging and meals tax to 8.5 percent, increase rental car tax to 12.5 percent, tax candy at 8.5 percent, and expand sales taxes to apply to the following services: entertainment and recreation (including movies, but not skiing); repair, installation, and maintenance (including computer and car repair); personal property services (including car washing and dry cleaning); and limousine or courier services.
Maine Economic Analyst Charles Colgan says current tax structure hurts Maine.
"I agree taxing services is a good thing. Sales tax is too dependent on building equipment and automobiles," said economic analyst Charles Colgan, who is with the Edmund S. Muskie School of Public Service at the University of Southern Maine. "It's too boom-bust and it expands and contracts, hurting education budgets and more."
"It's funny," said Colgan, who has been an economist in Maine for decades and whose long-term economic forecasts are used by the Maine Department of Transportation and the Economic Development Districts of Maine. "The Democrats lowered the tax rate and taxed services. Republicans wanted that 20 years ago," he said. "But not now."
"There is a disconnect between what we get from government and what we pay to government," he said. "We can't see that we are buying goods and services not provided by anyone else."
Posted: Sunday, May 23, 2010
Article comment by:
I'd surely like to know why skiing is exempt from the new entertainment and recreation tax. Seems to me that if any sort of recreation and entertainment should be taxed, it is such luxury activities as skiing where participants surely have plenty of extra disposable income (or they wouldn't be off skiing). Surely skiing is one of the big items that draws lots of out staters in so again, makes no sense to exempt it, that is if we are trying to get them to pay their fair share to use our state. But go see a movie and now pay at least another $1 when the tickets are already way over priced. Or get your old clunker fixed just so you can get to work and again, pay even more. My guess is that because most members of the state legislature are among the priveleged upper-middle and upper classes, and thus more likely to ski than go to a movie or have an old clunker repaired, they made sure that they got a very unfair exemption. As in, corrupt politics by the few at the expense of the many, yet again. usual. Methinks Les Otten played a hand in this one. With all he spends on ads, you'd think he could afford a small tax when he goes skiing.
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