ComproTax Talks!

Story date: 06/13/2007 By Victoria Wallack

 The Legislature is expected to debate a controversial tax reform bill this week that would expand the sales tax to a long list of currently exempt services, in order to lower the individual income tax rate – a plan that may make it through the House where Democrats have a stronghold, but could have trouble in the Senate.

Described as a stealth bill by some because it has taken five months to come out of the Taxation Committee, the proposal is being opposed by a phalanx of business lobbyists, who are against the sales tax expansion and a companion hike in the meals and lodging and real estate transfer taxes.

The bill came out last week with a surprisingly strong and bipartisan 11-to-2 recommendation from the Taxation Committee, including Sen. Richard Nass, R-York, a fiscal conservative. Nass wants it tied to a constitutional amendment requiring a two-thirds vote of future Legislatures to raise or lower broad-based taxes.

While several House Democrats at a party caucus Monday spoke against the constitutional amendment, many spoke in favor of the basic tax reform bill.

“Why would you not want to lower income taxes?” asked House Speaker Glenn Cummings, who said a lower income tax rate would be good for business. “That top marginal rate is a hindrance to us,” he said, in terms of attracting businesses to the state. The proposal would replace the state’s current graduated income tax, which has a high top rate of 8.5 percent, with a flat rate of 6 percent – a move to counter Maine’s reputation as one of the highest taxed states in the country. Credits would be given to make the tax progressively less burdensome for middle and low-income taxpayers.

The plan does eliminate standard and itemized deductions – a point the real estate industry criticized in full-page newspaper ads because of the loss of the mortgage interest deduction. But it then creates a choice for taxpayers between a refundable tax credit or 12 percent of their federal itemized deductions, which include mortgage interest. In most cases, taxpayers would actually be better off under the new system, according to an analysis by the Maine Revenue Service.

The new sales taxes also would help pay for property tax relief through greater homestead exemptions for Maine homeowners and larger tax and rent refunds for lower-income residents.

To pay for those tax breaks, the 5 percent sales tax would be expanded to an array of services, from snow plowing to haircuts. What isn’t in the bill, which concerns some, are tax hikes on certain professions, most notably lawyers.

The meals and lodging tax would be increased from 7 to 8 percent and the real estate transfer tax would go up on a sliding scale, topping out at $15 per $1,000 on homes selling for $1 million or more.

Proponents say the proposal is not only revenue neutral – raising no more in taxes than it spends in tax relief – but will actually save Mainers $142 million because that amount of the new sales tax will be paid by out-of-state visitors.

Sen. Carol Weston, R-Waldo, the minority leader in the Senate isn’t convinced. Weston said the plan is simply a tax shift and what the Legislature should be doing is cutting spending to provide tax reductions.

“I’m opposed to it. It’s making new winners and new losers,” Weston said. “I think people had higher expectations, and they expected tax relief – tax relief for everyone.”

Under the plan, 96 percent of Mainers would see their income tax reduced and 90 percent overall would see tax savings, even with the sales tax expansion. That savings would average about $270 per tax filer, according to projections done by the Maine Revenue Service.

While Weston said some Republicans in the Senate support the plan, the question will be whether there is enough support to give Democrats cover. The Senate is closely divided with 18 Democrats to 17 Republicans, and Democrats don’t want to be solely responsible for a tax expansion that could come back to haunt them when it’s time for re-election.

“When you’re doing tax policy, it should not be partisan,” said Sen. John Martin, D-Aroostook, the assistant majority leader.

Senate President Beth Edmonds agreed.

“I think the tax bill is as good as we’ve ever seen,” she said, referring back to numerous attempts to revise a tax code that hasn’t been substantially changed for 50 years. As for whether Democrats in the Senate will support it, she said, “I think they want to see that there is a lot of support.”

The key to getting at least a respectable number of Republicans in the Senate could be in a companion bill that proposes three constitutional amendments, including one that would require a two-thirds vote of the Legislature to raise or lower the income, sales or vehicle excise tax. The poison pill in that package for some Republicans, however, is a second amendment that would allow cities and towns to adopt their own sales taxes to pay for things currently covered under the property tax.

The third amendment allows cities and towns to opt out of the part of an expanded homestead exemption that isn’t funded by the state. The proposal calls for an exemption of $26,000, but only $13,000 of that is reimbursed by the state.

(State House News Service)