TAX NEWS - JUNE 2010

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Maine Tax: Reform restores balance to tax system

Next Tuesday, Maine's voters will attempt to sort out the arguments over tax reform after an odd campaign in which the proponents of repealing the law have struggled to find a consistent message.

It's hard to believe now that tax reform had been a bipartisan priority as recently as 2007, when the bill appeared to be on its way to enactment until Gov. John Baldacci raised unspecified concerns with his fellow Democrats and threatened to veto the bill — at which point negotiations collapsed.

The Republican contribution to the debate back then was an insistence that reform be tied to a constitutional provision that any future tax increases receive a two-thirds vote. That's the kind of undemocratic weighting of the scales that has thrown states like California into fiscal chaos, where it has been embedded in the state constitution since Proposition 13 was enacted in 1978.

At least Republicans were still at the table then, and some were willing to vote for reform. By the time the bill became law two years later, all the Republicans except Sen. Peter Mills had disappeared. Baldacci this time made his concerns public — which consisted of some dubious concessions to the real estate and ski area lobbies — and the measure was finally signed.

Giving this skirmishing, it was probably inevitable that a group of Republicans senators, unwilling to accept the legislative results, would launch a veto campaign, which has led us to the June 8 vote.

Tax reform was never an issue to wow the public or transform state government. It is, or should be, a bipartisan and even non-partisan quest to correct a tax system that has long been out of balance.

Maine has a relatively robust state income tax at a time when most states have been shifting toward consumption taxes. Its sales tax base has always been narrow, and made narrower by the steady nibbling of new tax exemptions over the decades. And, particularly for a tourist state, its taxation of such discretionary purchases as restaurant meals, hotel rooms and rental cars has been well below the national average.

The tax reform bill brings all this back into balance, so that Maine can have a more "average" tax system, with greater stability of revenues and significant reductions in the amount most families pay in income tax. It's such a moderate reform that it's hard to plausibly attack it, yet opponents have made the attempt.

When the bill was before the Legislature, the most frequent criticism was that this was a "tax shift," rather than a reduction in taxes. But of course shifting to different sources of revenues is exactly what tax reform is about, so this was a difficult line to sustain.

After enactment, and as the repeal campaign was gearing up, the argument was that new taxable items, such as auto repairs, were unjust. So, apparently, were taxable services that were in the 2007 version but not in the 2009 text, such as haircuts. Campaigning against what is not in the law is another dubious tactic.

In the final days of the campaign, the national real estate lobby has weighed in by running the only television ad campaign in favor of Question 1, and repeal. It turns out the national lobby is not concerned about anything that would trouble most Mainers.

An increase in the real estate transfer tax that would apply to expensive homes ($1 million and up) was previously stricken from the bill at Baldacci's insistence.

What remains is the real estate lobby's tortured argument that the credit that replaces the home mortgage interest deduction is phased out at higher income levels. This adjustment was made to keep the tax code somewhat progressive — meaning that upper income taxpayers pay higher rates, much as they do with federal taxes. Without the phase-out, the replacement of income with consumption taxes would make state taxes significantly more regressive, hitting lower-income people harder.

Pressed on the point, the real estate lobby says its real concern is potential limits on the federal mortgage deduction, not so much Maine's.

So there you have it — three inconsistent and ineffective lines of argument against tax reform, plus a general suspicion of change.

Tax reform's moderate virtues, meanwhile, remain unchanged — lower income taxes for almost everyone, and a modest shift of the tax burden from Maine residents to seasonal visitors.

It's a complicated law in terms of details, yes, but the central themes are clear enough. We will know soon enough whether voters were able to sort through all the static and focus on the issue at hand.
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