The latest state revenue forecast shows no end in sight for Maine’s budget crisis. The state’s general fund is expected to bring in $58 million less than previously forecast, bringing the structural budget gap for the two-year period beginning in July to a whopping $938 million (equal to 31% of FY 2013 General Fund revenue). In response, Governor LePage has offered changes to his original budget proposal released in January.
Among the proposed changes are significant revisions to the state’s tax code. Most notable is a $27,500 cap on itemized deductions (See Section GGGGG-7 at the linked pdf) that would effectively raise taxes on high-income Mainers. Typical itemized deductions include mortgage interest payments, charitable donations, various business and personal expenses, and many other expenses and payments. According to Maine Revenue Services, the governor’s proposed cap on these deductions would raise $65 million over the two-year budget period beginning in July, 2013. The vast majority of that new revenue would come from 8,700 families with more than $119,000 in expanded income (taxable income plus various exemptions and deductions). Half would come from 2,000 families with more than $324,000 in expanded income.
Raising additional revenue from high-income earners by capping deductions makes sense. As MECEP analysis has shown, the current budget crisis is due to revenue collapse created by the recession and recent tax cuts that mostly benefit the wealthy. Heavy use of itemized deductions is one of the reasons why the top 1% of Mainers pays a lower effective state and local tax rate on average than everyone else. In addition, high-income earners have largely recovered from the recession while low- and middle-income families continue to struggle. New revenue should come from the top, not the bottom and the middle.
However, in addition to the cap on itemized deductions, the Governor’s proposed changes include other revisions to the tax code that would cost the state $66 million over the coming biennium and wipe out all of the new revenue the tax increase would generate. These revisions would conform Maine’s income tax laws with recent modifications to federal income tax laws contained in the American Taxpayer Relief Act (aka “the fiscal cliff deal”), which President Obama signed in January. They include a fix for the so-called “marriage penalty”, a new phase-out for personal exemptions, a more generous student loan interest deduction, a continuation of special business equipment tax breaks, and several other smaller provisions.
|Revenue Impact of Tax Provisions in Governor’s May 2013 Change Package|
|Fiscal Year||Conformity with the American Taxpayer Relief Act (“Fiscal Cliff Deal”)||Cap State Itemized Deductions at $27,500||Total Change in Revenue|
Source: Maine Revenue Services
The governor still plans to close the $938 million structural budget gap almost entirely on the backs of schools, towns, and property taxpayers.
Most of the benefits of the 2011 and 2012 tax cuts accrued to the wealthy (See column 10 of this table), and the tax cuts in total blew a $430 million hole in the two-year budget period beginning in July. The 2011 estate tax cut alone—which only benefits between 400 and 600 estates worth more than $1 million—is responsible for more than $51 million of that hole.
The governor’s $65 million tax hike on the wealthy is enough to cover the cost of conforming to recent changes in the federal tax code, but the rest of his budget proposal remains the same. It raises taxes on low- and middle-income families by suspending income tax indexing, eliminating property tax relief, and shifting hundreds of millions of dollars in costs to local property taxpayers. It also delays voter-approved bonds for investments that the economy desperately needs.
If lawmakers want to balance the budget in a way that’s fair to low- and middle-income Mainers while maintaining funding for educating our kids, developing a skilled workforce, and building transportation and communications infrastructure for the 21st century, they will need to get serious about addressing Maine’s revenue collapse in the wake of recession and recent tax cuts. Rolling back recent tax cuts for wealthy Mainers and their estates should be the next step.