Maine Owl

Let me start by saying I've always been skeptical of last year's tax reform bill (LD 1495). With a repeal referendum a day away, it's time for a solid decision on it. My decision is to vote Yes to repeal.

This is difficult because I am making common cause with some loopy Republican wingnuts while many progressive Democrats and decent social change groups I've supported in the past are on the other side. Below the fold I have included the full text of two of the emails on this issue I've received in the last few days. One is letter-headed "Engage Maine" and the other is from Maine State Senate Majority Leader Phil Bartlett. I'm not going to take these items apart point-by-point. I'll just discusses why I feel these emails lack the full story of what's going on here.

The reason I disagree with the No vote urged by these emails is that LD 1495 violates what should be a solid-rock Democratic principle: It issues the highest-income taxpayers a large rate reduction while giving the rest of us, through elimination of progressive rates in favor of a flat rate higher than the effective rate most of us now pay, ameliorated by a new complex credit, what in the short term amounts nearly to a wash, and what could in very few years become something of a tax increase.

Built into the new law are clearly regressive sales taxes. Previously-untaxed categories of services that can cost lower-income people higher percentages of their income, like car repairs, would be taxed. A few expensive trips to the mechanic (like the $2500 of attention the Subaru we once had needed a few years ago) easily could wipe out the meager income tax savings offered to lower-income taxpayers like us.

Rhetoric saying "income taxes will drop for over 95% of Mainers" may be well true in a surface fashion in the near term. But this is a shallow statement. Even a slight amount of analysis of figures supplied by Maine Revenue reveals that the biggest winners in tax reform will be the richest Maine taxpayers. The initial "drop" for most of us would be razor-thin while inflation indexing is reduced leading potentially to higher taxes in the future.

Careful analysis on this was done by Portland-area accountant (and long-time Democrat) Albert A. DiMillo, Jr. The best critiques of the "95%" rhetoric are found HERE, at a site called called Maine Democrats For Fair Tax Reform.

DiMillo has sparked some heated controversy. Sometimes I don't like the way he argues. But at Maine Democrats For Fair Tax Reform I've found THIS DOCUMENT very helpful because it is a direct critique of many shallow talking points. And it illustrates the upper-income bonanza that ought to remind us of the Bush years instead of celebrate the wondrous progressive thing we've done.

Albert A. DiMillo, Jr.: The MRS report for year 2013, estimates that a group of 4,638 taxpayers with income over $350,810 will get a net income and sales tax cut of $34.8 million. The other 99.3% of Mainers will have a net income and sales tax increase of $3.5 million.

So it's hardly a "fairer tax base" that's being created here, as the letters below would have you believe. Even worse, Senator Bartlett falls into a trap set by years of Republican media talking points: that the rich deserve to get a big amount of money in tax cuts because they pay more, "Higher income people do receive more money back, because they pay more in taxes;"

Well of course they pay more in taxes! They have more of the money. This is not the point. The real question is what rate do they pay? The bedrock Democratic principle ought to be that those who accumulate money well beyond the marginal incomes the rest of us earn ought to pay significantly higher percentages of that income. Now, I'm not in favor of unreasonably high rates on the rich. But they should be charged what they can can afford to pay. Just like the rest of us. Sadly, Senator Bartlett and Engage Maine, et. al. have shown their willingness to back away from this principle. I will not.

Below I have included the full text of these messages, along with basic provisions of the law from Maine Revenue. I won't bother to refute points myself. Read DiMillo for that. Readers can look at these facts and arguments and judge for themselves. Try decoding the new tax system for yourself by starting HERE. This is just one aspect--a complex credit designed to ameliorate the effect of the flat rate for lower-income resident taxpayers:

The Refundable Credit:

A new refundable household credit is enacted containing the following elements:

• only resident individuals qualify; nonresidents and part-year residents do not qualify;
• the base credit amount is $700 /single; $1,050 /HH; $1,200 /MJ; $600 /MS (married separate);
• the base credit is increased by $250 for each exemption claimed on the return;
• the credit is phased out by $1.50 for every $100 that Maine taxable income exceeds: $27,500 /single/MS; $41,250 /HH; $55,000 /MJ;
• the credit is refundable up to $70 for MJ returns and $50 for all other returns.

An alternative refundable household credit is also enacted. A taxpayer who has itemized deductions may elect to use this credit instead of the regular household credit described above. The alternative credit contains the following elements:

• only resident individuals qualify; nonresidents and part-year residents do not qualify;
• the base credit amount for the alternative household credit is 5.5% of adjusted federal itemized deductions plus: $400 /single/MS; $600 /HH; $800 /MJ. (The adjusted federal itemized deductions amount is calculated using Maine Form 1040ME, Schedule 2 adjustments);
• the maximum base credit amount allowed is: $1,150 /single/MS; $1,750 /HH; $2,300 /MJ;
• the base credit is increased by $250 for each exemption claimed;
• the credit is phased out by $1.50 for every $100 that Maine taxable income exceeds: $27,500 /single/MS; $41,250 /HH; $55,000 /MJ;
• the credit is refundable up to $70 for MJ returns and $50 for all other returns.
  
  For tax years beginning after 2009, the Maine withholding tables will be adjusted to reflect the impact of the regular household credit on the Maine income tax.

This credit gives the poor (like me) something to offset the fact that the rich have their rate cut. But it's really peanuts, right on the edge of actually being a tax increase.

Here is the LETTER FROM "ENGAGE MAINE":

On this June's ballot you'll be faced with some tough choices. One of them will be Question 1, which aims to repeal the tax reform law passed last year by the Legislature. The question asks, "Do you want to reject the new law that lowers Maine's income tax and replaces that revenue by making changes to the sales tax?"

We urge you to vote NO on Question one and support Maine's tax reform law. The law, if allowed to take effect, will move us forward as we work to recover from the current economic recession and promote prosperity for all Maine residents. Though not perfect, this law is a significant step in the right direction for Maine. It will make our tax base fairer and more stable. Reversing the law would be a mistake:

• The tax reform law makes Maine less vulnerable during tough economic times by diversifying our sales tax. Currently, Maine has one of the narrowest sales tax bases in the country. We tax just 25 out of 161 categories of goods and services, which means we rely far too heavily on the sale of certain items like cars and building supplies - making revenues soar when the economy is robust and plummet when the economy is in decline. Wild fluctuations in tax revenue hurt us all. They make public services vulnerable in tough times, often resulting in reduced funding for programs that we all rely on: education, health care, public safety and infrastructure. Such reduced funding also has negative impacts on job creation and preservation. The tax reform law helps this problem by responsibly diversifying the types of goods and services we tax.
• The tax reform law creates a fairer tax base. Residents and visitors alike benefit from Maine's public infrastructure: schools, health systems, police and fire protection, state parks, environmental protection, safe bridges and roadways, etc. As a result, both visitors and residents are responsible for working together to ensure these services and structures are supported and maintained. We do this by paying taxes. The new tax reform law balances that responsibility. It will reduce income taxes for 9 out of 10 Maine families and shift a more appropriate share of costs to tourists and visitors by broadening the sales tax base to include services used by non-residents and increasing the sales tax on select items and the lodging tax. This ensures that we are all working together for the common good.
• The tax reform law will help Maine's most vulnerable citizens. We all benefit when Maine families are healthy and prosperous, which is why Maine's tax reform law enacts a partial "refundability" of the Earned Income tax Credit (EITC) for low income Mainers. This feature of tax reform means that once the EITC has reduced a household's tax bill to zero, the family would get some or all of the remaining value of the credit. In combination with household credits under the new law this should deliver $50-$75 of direct support to at least 15,000 of Maine's lowest wage-earning families. The law also aligns the Circuit Breaker application with the timing of the state income tax form. This feature of tax reform will make it easier for tens of thousands of moderate and lower income Mainers to apply for and receive this existing tax rebate. Eligible households received $450 under this program on average in 2009-2010. Estimates from the Maine Revenue Service are for refunds to average $570 for the 2010-2011 program year.

In this challenging economy, we must think creatively to advance innovative solutions that will ensure economic recovery and prosperity now and into the future, which is exactly what Maine's new tax reform law does for all Mainers. Please join us in voting NO on Question 1.

For more information please visit the Maine Center for Economic Policy at www.mecep.org.

Signed,
Engage Maine
Homeless Voices for Justice
Preble Street
Coastal Enterprises, Inc.
Maine Center for Economic Policy
MSEA-SEIU Local 1989
Maine Council of Senior Citizens-Alliance for Retired Americans
Maine Women's Lobby

Finally, here is the mass email letter from Maine State Senate Majority Leader Phil Bartlett:

Facts on Questions 1

The tax overhaul passed by the Legislature last year is on hold until "Question 1" is settled at the ballot box on June 8. A "NO" vote will reject the repeal and allow this landmark law to be implemented.

The new law lowers the top income tax from 8.5% to 6.5% (on income under $250,000) and to 6.85% (on income over $250,000). But most Mainers will pay far less than 6.5%, due of a system of new household credits. Income taxes will drop for over 95% of Mainers.

At the same time, the new law expands Maine's narrow sales tax base in order to stabilize revenues and export more of the tax burden to non-residents. But in the end, the new system puts more money back in the pockets of Mainers. Nearly 90% of Mainers see an OVERALL tax cut (once both sales and income taxes are included).

Economists praise the new law because it will boost the economy and create jobs. The State Chamber of Commerce, Portland Chamber of Commerce, Bangor Chamber of Commerce, and the Androscoggin Chamber of Commerce all support it.

The politics behind this issue are frustrating. The law that passed is the outgrowth of an extremely thorough and transparent legislative process that began in 2007. At that time, several Republicans supported the bill, but Republican legislative leadership subsequently made defeat their priority, and the bill failed in the closely-divided Senate. The new bill that emerged in 2009 soon became partisan; but fortunately, that partisanship was only inside the State House. Dozens of business leaders and other citizens-both Republicans and Democrats-were engaged in the process, and they pushed for passage of the new law.

It amazes me to hear the misstatements about this law. It seems that once some people decided that it made political sense to oppose it, they forgot about truth. People who should have known better have said publicly that the law does many things it doesn't, such as taxing haircuts, electricians, and social security. Some of the latest falsehoods twist the non-partisan analysis of Maine Revenue Services in preposterous ways. Here are the facts.

NOTE: All of this information has been checked for accuracy by Maine Revenue Services.

• FACT: The NET impact of the new law is to lower the tax burden on Mainer residents by about $50 million a year. Over 87% of Mainers will have extra money in their pockets after any additional sales taxes are paid. Low income people who pay little or no income tax will receive a cash credit to compensate for sales tax increases.
• FACT: The new law shares benefits fairly. The new tax system is more "progressive" than the current code. Low and middle income Mainers will see their overall tax burden (including both sales and income taxes) drop by about 20%. Each income group pays essentially the same proportion of taxes as it does now; but because the tax burden on Mainers will be lowered by $50 million, every group wins-whether low, middle, or upper income. Higher income people do receive more money back, because they pay more in taxes; but low and middle income people receive a larger percentage decrease.
• FACT: The benefits of itemized deductions are NOT eliminated. Maine taxpayers who itemize will retain these benefits through a special new credit. In most instances, the new credits provide greater benefits than the old system. Now, these new credits do phase out as incomes rise, but very gradually (so that a couple filing jointly with large enough itemized deductions and two children will still receive some credit until their income exceeds about $275,000/year); and most higher-income taxpayers receive enough benefit from the lower top tax rate that they do not need a full credit to come out ahead. Overall, over 95% of Maine taxpayers will see lower income taxes.
• FACT: The tax benefits continue over time. The new law adjusts the credits upwards in 2014, and includes a provision to do so earlier if economic circumstances allow. But even if the credits are not increased before 2014, 93% of Mainers will see an income tax cut in 2013. And if the economy is robust and the state can afford to adjust the credits upwards before then, this favorable outcome will be even more favorable. Some opponents of the law claim the whole credit system in unconstitutional, but Maine's Attorney General has said otherwise.
• FACT: Even after new sales taxes are added, Maine will still have one of the narrowest sales tax bases in the nation (taxing far fewer items than many states). Beyond that, all of the new sales taxes on Maine residents will total about half of the amount of tax cuts that flow to Maine residents. Plus, broadening the sales tax base reduces the volatility of Maine's revenues-which will in turn help stabilize Maine's economy. The overall economic impact of this expansion will be positive.
• FACT: 40% of Maine's meals and lodging tax is paid by non-residents. That means that under the new law, a full one dollar in benefit flows back to Mainers for every 60 cents Mainers pay in meals and lodging tax. (Wouldn't you pay 60 cents to buy a dollar?) Moreover, Maine's meals and lodging rate (after the increase to 8.5%) will still be far below most destination locations and lower than our biggest competitors, New Hampshire and Vermont. And there is no evidence that increasing this tax will reduce sales. (Vermont saw no impact when it raised its rate to 9% a few years ago.) In addition, the new law pumps additional funding into tourism promotion, which is a proven way to increase business within the hospitality industry.
• FACT: The new law creates a smarter tax system that spurs economic development. It lowers Maine's top tax rate and capital gains rate, which are the major impediments to business investment and recruitment. Beyond this, Maine's small businesses will benefit from $50 million in extra money that Mainers will have to spend. In short, the vast majority of Maine businesses will see direct tax benefits, while all of Maine businesses will be poised to benefit from an improved economic climate.

I thought you would appreciate this factual information about Question 1. As always, don't hesitate to contact me with questions or comments: bartlettforsenate@gmail.com

By the time we vote on June 8, the delay caused by placing this issue on the ballot will have already cost Mainers over $20 million in savings and hundreds of new jobs! We can't afford to pass up that kind of opportunity anytime, but especially not now.

Sincerely,
Maine Senate Majority Leader Phil Bartlett