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After months of deliberations, the Joint Standing Committee on Taxation has approved a “tax reform” package for consideration by the full Legislature. At this time, the committee vote is unanimous, although two members who are likely to oppose the package were absent for the vote. Overall, the package is revenue neutral, in that it neither increases nor decreases the state’s overall tax burden. Instead, it proposes to reduce income taxes and property taxes by roughly $250 million and to fund the reductions by increasing other taxes, primarily sales taxes, by $250 million. The principal components of the package are:
Income taxation…
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The elimination of all income tax brackets and the imposition of a flat rate 6% tax on all taxpayers;
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The elimination of the standard deduction, all itemized deductions and personal exemptions;
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The creation of new tax credits to offset the loss of exemptions and deductions for most taxpayers; and,
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The elimination of all corporate income tax brackets and the imposition of a flat 8.93% tax, which is currently the top marginal rate.
Property taxation…
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The most significant property tax measure in the package is a proposal to increase the current homestead exemption from $13,000 to $26,000.
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As under current law, the state would reimburse municipalities for only 50% of the revenues lost as a result of the exemption. The revenues lost by the towns as a result of the exemption, approximately $30 million, will presumably by passed on to nonresidential property owners.
Sales taxation…
The funding for much of the income tax and property tax relief would come from the elimination of a number of sales tax exemptions, the expansion of the tax to cover hundreds of services which are not now taxed and increases in the tax on a number of other items. Among the exemptions slated for elimination are:
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The exemption for certain telecommunication services, including interstate services;
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The exemption for basic cable and satellite TV service when packaged with expanded services;
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Sales through vending machines; and,
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Sales of newspapers and magazines.
Among the services which will be subjected to the five-percent sales tax for the first time are the following:
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Personal Care Services including services such as massages barbers, beauticians, manicures, health clubs, elective cosmetic surgery, etc.;
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Personal Property Services
including all leases of personal property (except for production machinery,) dry cleaning, laundry services, car washing, pet services, domestic services (e.g. painting, papering, cleaning,) janitorial services, meal preparation, warehousing, storage, vehicle towing, etc.;
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Real Property Services
including electrical, plumbing, cooling, and heating services, landscaping, tree removal, lawn care, pest control, security system work, fire protection, snow removal, waste removal, etc. (Construction services are not included);
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Installation, Repair and Maintenance Services
including work on jewelry, cameras, watches, electronic equipment, computers, motor vehicles, appliances, etc. On the plus side, as a result of a last minute amendment, installation, repair and maintenance services provided at manufacturing facilities will be largely exempt from taxation.
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Delivery Services
including UPS, FedEx, independent couriers, etc.; and,
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Amusement, Entertainment and Recreational Services
including admission to theaters, concerts, amusement parks, ski areas, fairgrounds, race tracks, ball parks, museums, golf courses, tennis and racquetball courts, billiard parlors, bowling alleys, exhibition shows, etc.
Among the other sales tax increases are the following:
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An increase in the tax on meals and lodging from 7% to 8%;
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The reimposition of a modified version of the 5% “snack tax;” and,
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An increase in the tax on short-term auto rentals from 10% to 15%.
Collectively, these sales tax expansions and increases will raise more than $184 million annually. The remainder needed to fund the income tax and property tax reductions – roughly $50 million - will be raised in the following manner:
Other tax increases…
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A doubling of the current excise tax on beer and wine; and,
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A hefty increase in the Real Estate Transfer Tax for both commercial and residential properties.
The Maine State Chamber will be actively opposing the proposal for the following reasons:
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Rather than true tax reform, the package simply shifts tax burdens from some taxpayers to others.
Put another way, it simply increases some taxes to reduce others. And the burden of those increases falls disproportionately on the business community.
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If enacted,
this proposal will do nothing to reduce Maine’s overall tax
burden. Maine will continue to have one of the highest tax burdens in the country.
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There is
nothing in the package to control future increases in government
spending, which, after all, is the driving force behind tax burdens. The spending caps recently enacted in so-called LD 1 can continue to be overridden by a simple majority vote of the Legislature and the governing bodies of local governments. This increases the likelihood that we will be trading temporary tax reductions for permanent tax increases. Some may respond that the package minimizes that risk since it proposes a constitutional amendment to require a two-thirds vote for sales and income tax increases. The proposed amendment, however, requires a two-thirds vote only to increase sales and income tax rates. The Legislature would continue to be able to dramatically increase taxes by broadening the tax base, eliminating exemptions, and any other action short of changing the rates – by a simple majority vote. The sales tax expansions in the proposed package itself are a good example of how taxes can be increased without affecting tax rates.
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While most taxpayers will see a reduction in income taxes, the Bureau of Revenue Services estimates that
roughly 30,000 taxpayers will actually experience a significant tax
increase. These are likely to be taxpayers who now claim high-itemized deductions with incomes in the $100,000 to $150,000 range.
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The increase in the homestead exemption will result in tens of millions of dollars of property tax burden being shifted from residential to business properties.
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The new flat rate corporate income tax will penalize the smallest and least profitable
corporations. Under current law, corporations with incomes less than $25,000 are taxed at a 3.5% rate. That rate increases in steps until the maximum rate of 8.93% is reached at incomes greater than $250,000. Under the new flat rate scheme, companies earning $10,000 will be paying at the same rate as those earning $10 million – 8.93%.
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The expansion of the sales tax to hundreds of now untaxed services will represent a significant new burden
for thousands of Maine companies.
The full Legislature will begin debate on the package this week (June 11-15). And, since they are scheduled to adjourn by June 20, a vote on the package will occur very soon. For that reason, members who are concerned with this proposal are strongly encouraged to contact their local legislators to voice their concerns. If you are uncertain how to contact your elected officials, please visit the Chamber’s website at
www.mainechamber.org
and click Contact Lawmakers from the Advocacy drop-down menu.
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