These proposed tax changes would stand in the way of building thriving communities and a strong Maine economy. There is a direct correlation between state resources and the ability to be proactive in making the kind of investments that lay the foundations for a strong economy. Cutting taxes for the rich at the expense of everyone else is a recipe for economic failure and more hardship for Maine’s working families and seniors.
Good after Senators Hamper and Dow, Representatives Gattine and Tipping-Spitz, and honorable members of the Joint Standing Committees on Appropriations and Financial Affairs and Taxation. My name is Sarah Austin, a policy analyst with the Maine Center for Economic Policy.
I’m here today to testify against parts D, E, and F of the governor’s proposed budget, LD 390. These proposed tax changes would stand in the way of building thriving communities and a strong Maine economy. There is a direct correlation between state resources and the ability to be proactive in making the kind of investments that lay the foundations for a strong economy.[i] Cutting taxes for the rich at the expense of everyone else is a recipe for economic failure and more hardship for Maine’s working families and seniors.[ii]
The governor’s tax plan cannot support a prosperous state. To balance costly tax cuts that primarily benefit the wealthiest Mainers, the governor cuts health care for Maine families, cuts funding for schools, and shifts even more costs onto towns and property taxpayers.
The governor’s proposal includes a tax plan that continues to give away tens of millions of dollars in taxes for the wealthy each year through 2021, but only sets out a spending plan to absorb the cuts through FY2019. This proposed budget leaves an open question on which programs will be cut in the next biennium and leaves our state entirely unprepared to tackle any unforeseen economic downturns.
Personal Income Tax Brackets and Rates
The governor’s plan disregards the will of the voters by leaving out the new 3 percent tax on the less than two percent of Maine households that earn more than $200,000 in taxable income a year. The dedicated fund for education that would harbor this money is also missing. The governor’s plan then further jeopardizes school funding and resources for other important services by eliminating gradual income tax brackets and rates.[iii] Taken together, these income tax changes give an average tax break less than $2 for the 40 percent of Maine families earning less than $37,000 in taxable income a year, while giving a $23,000 tax break for the one percent of Mainers making over $384,000 in taxable income a year.[iv]
Raising Maine’s pension exemption from $10,000 to $35,000 would allow all Mainers, regardless of income, to reduce the income that they owe taxes on pension or individual retirement income by up to $35,000. This exemption would be on top of any other exemptions or deductions already available to most Mainers. For example, most Mainers filing individually are eligible for $15,650 in personal exemption and standard deductions plus the $10,000 in pension exemption already available and married filers are eligible for $31,300 in exemptions and deductions plus $20,000 in pension exemption. Ultimately, this is a costly exemption that provides the greatest benefit to the most economically secure retirees.
Property Tax Fairness Credit
The governor increases the Property Tax Fairness Credit for low to moderate income Mainers with high housing costs. By providing targeted assistance to those who need it most, this is a step in the right direction. However, it will not make up for loss of homestead exemption for Maine homeowners under 65, and the maximum PTFC benefit remains well below the maximum $2,000 benefit provided under the old circuit breaker program.
This budget lacks a comprehensive approach to limit property tax increases for communities and contains other policy changes that build more pressure to increase already historically high property taxes.[v] The proposed increase in the PTFC will ultimately be outpaced by rising property taxes around the state initiated by policies contained in this budget.
Corporate Income Tax
This proposal eliminates the top corporate tax rate for corporate income over $250,000. The effective tax rate for corporations is significantly lower than current rate structure indicates. Maine’s corporate tax rate is not an impediment to new investment. In fact, a 2011 Ernst and Young study of the competitiveness of state and local business taxes on new investment ranks Maine’s effective tax rates as the lowest in the country.
The real issue for most corporations in Maine is property taxes rather than income taxes.[vi] Ultimately, this is a tax giveaway to the biggest corporations, many of which are likely headquartered out of state. Eliminating the top marginal rate paid only by the largest businesses cuts $12.5 million in state resources each year that could be better spent investing in infrastructure and education which benefit businesses both large and small as well as the economy overall.
Modernizing and broadening Maine’s sales tax base would help stabilize state resources; however, it does not make sense to do so in order to pay for expensive income tax cuts for wealthy Mainers like the governor’s budget proposes.[vii] The governor proposes a suite of base broadening that worsens the overall fairness of Maine’s tax system. There may be other areas to broaden Maine’s sales taxes, like legal and accounting services, that would bolster revenue without undermining tax fairness.
The current estate tax affects fewer than 60 of the more than 13,000 estates that pass from one generation to the next annually in Maine. Since 2012, limits on the estate tax have lifted the estate tax exemption from $1 million to approximately $5.5 million. Repealing the estate tax entirely means Maine communities will lose out on another $9 million annually. The loss of funding from this measure hurts our ability to fund the pillars of a strong economy like schools, infrastructure, and access to affordable healthcare.
A comprehensive analysis of the governor’s tax plan shows that on top of cuts to important services Maine families and our economy rely on; this budget increases taxes on the 80 percent of Mainers earning less than $92,000 and gives massive tax breaks to the top 1%.[viii]
Mainers just told us they support building a stronger public education system by asking wealthy Mainers to pay their fair share. Voters indicated they want more opportunities for Maine students, not less. This tax plan is bad for the economy. The Governor’s budget defies the interests and will of Maine people. And it will not move our state forward
Maine’s economic recovery has been slower than the nation’s – in large part due to Governor LePage’s cuts in previous years – but we are finally seeing modest signs of economic growth reflected in new revenues.[ix] In addition, voters approved new revenue to finally fund schools. The next two years are not a period of scarcity – we can fund current critical state and local services, we can fund schools at the level voters demanded, and we can look at new investments that will brighten Maine’s future.
We urge the committee to reject parts D, E, and F of the Governor’s proposal and instead protect the fairness of current tax law and invest in better schools, better paying jobs, and stronger communities.
A. Summary of distributional impacts of proposed tax changes
B. Impacts of proposed tax changes on sample households
C. Summary of major tax changes and with MECEP analysis
D. Description of how income taxes work
[i] State Income Tax Cuts Still a Bad Strategy for Economic Growth, Center on Budget and Policy Priorities http://www.cbpp.org/research/state-budget-and-tax/state-personal-income-tax-cuts-still-a-poor-strategy-for-economic “Despite the evidence that cutting personal income taxes does little to boost state economies, states may still be tempted to take the risk. That would be a mistake. With revenues in most states still weakened by the recession and reserves only partially recovered, states have little margin for error. Gambling on a personal income tax cut would put fundamental public services, which in most states depend significantly on personal income taxes, at risk. And with the federal government on track to impose further reductions in funding for schools and other services states provide, states have additional reason to protect their own revenue to limit damage to public services.”
[ii] Kansas Governor Sam Brownback made massive income tax cuts in 2012 and the results are telling. Brownback’s Sunshine on Tax Cuts Vanishes behind Big, Dark Cloud. The Kansas City Star http://www.kansascity.com/opinion/opn-columns-blogs/yael-t-abouhalkah/article104171736.html#storylink=cpy “Kansas’ gross state product — “providing an overall analysis of the performance of the economy” — rose 3.2 percent over the previous year. But for the third straight year, the Kansas rate fell behind the six-state region and the nation… Private industry wages in Kansas grew at a slower clip for the last year than they did in the region and America — just as they have over the last five year… The number of private business establishments in Kansas trailed both the region and the nation for the last year, again continuing a five-year trend.”
[iii] The Relationship Between Taxes and Growth at the State Level, Tax Policy Center, Brookings, https://www.brookings.edu/wp-content/uploads/2016/06/Gale-Taxes-and-Growth-42915.pdf “The overall impression generated by these results is that state-level economic growth is
not closely tied to state-level tax policy. The results are not consistent with the view that cuts in
top state income tax rates will automatically or necessarily generate significant impacts, or any
impact, on growth.”
[iv] MECEP analysis of data from the Institute for Taxation and Economic Policy (ITEP)
[v] Maine’s had a 3 prong approach to control property taxes, but policy changes have weakened this approach. The homestead exemption gives immediate savings to Maine homeowners and helps export some taxes onto 2nd home residents who are less likely to contribute to income tax revenues. The Property tax fairness credit, which is a smaller benefit than the old circuit breaker program, helps Mainers with low incomes and high housing costs. And, state funding of local services though revenue sharing, education funding, and other services, is critical for keeping the overall property tax rates low across the state as well as offsetting the municipal costs for ‘service center town’ that provide services for surrounding areas.; State and Local Budget Burdens, Maine Revenue Services http://legislature.maine.gov/legis/ofpr/compendium/compend/COMPEND_files/2014Compendium/Section%20VII.pdf
[vi] A 2015 Ernst and Young study of all state and local taxes paid by Maine businesses found that property taxes accounted for more than 55% of all taxes paid compared to the corporate income tax which accounted for slightly more than 5%.
[vii] Why Sales Taxes Should Apply to Services, Institute on Taxation and Economic Policy http://itep.org/itep_reports/2016/07/why-sales-taxes-should-apply-to-services.php#.WJ2gu28rKUk “Unfortunately, in recent years, lawmakers in states such as North Carolina have pursued a different type of tax tradeoff: expanding the sales tax base to include more services while using the additional revenue to fund income tax cuts. This type of “tax shift” typically results in higher taxes on low- and moderate-income families and lower taxes for those families with substantial incomes. In addition to the fairness problems with such an approach, these shifts are also likely to slow state revenue growth in the long-term since income taxes have traditionally provided a more sustainable stream of revenue than sales taxes.”
[viii] See attached MECEP analysis of data from ITEP
[ix] Nearly 9 years out from the start of the Great Recession, Maine has recovered only 68% of the 30,500 jobs lost in recession. Maine is one of only 7 states that hasn’t recovered jobs lost in the recession. Based on BLS non-farm employment data for December 2016