AUGUSTA — The Maine House on Thursday narrowly passed a bill that will slash the state income tax in half over time.
Republicans said the bill will spark jobs and send tax money back to Mainers.
Democrats said it will create a permanent fiscal crisis.
The measure, L.D. 849, passed the House 74-71. It faces additional House and Senate votes and will likely be referred to the Appropriations Committee for further consideration.
The bill, sponsored by Sen. Jonathan Courtney, R-Springvale, will slowly lower the top income tax rate over time using surplus state funds. The rate will be lowered only when there is extra money, but once the rate goes down, it stays at that level.
The bill adds an income tax relief account to the rainy day fund, putting it on a list of uses for surplus money which includes making payments to the retirement system. It would require 20 percent of any excess funds to be put into the tax relief account.
Over the last 30 years, the state has had surplus funds every year except for two, Courtney said. While it may take several years to cut the rate in half, he said the proposal is a responsible way to pay for tax relief.
“It sends a message that the Maine Legislature is committed to reducing the income tax to 4 percent,” he said.
Maine is second only to Vermont among New England states when it comes to the highest top income tax rate, according to the Federation of Tax Administrators. Neighboring New Hampshire has no income or sales tax.
Nationally, the median income tax is 5.99 percent.
In recent years, Maine was ranked first in tax burden, which is a calculation of the percentage of income that it takes to pay for all taxes. The most recent ranking drops Maine to 9th, according to the Tax Foundation.
Last year, Maine lawmakers voted to reduce the top rate from 8.5 percent to 7.95 percent, effective January 2013. For years, lawmakers have struggled with different proposals for tax relief, sometimes focusing on property taxes or a combination that would reconfigure both the sales and income tax.
In 2009, the Democratic Legislature passed a major tax reform package that would have lowered the top marginal income tax rate from 8.5 percent to 6.5 percent for those who make less than $250,000 and to 6.85 percent for those who make more than $250,000; expanded the 5 percent sales tax to more than 100 new services; increased the meals and lodging tax from 7 to 8.5 percent; and increased the tax on rental cars from 10 to12.5 percent.
Republicans gathered the signatures for a people’s veto, and the bill was repealed by voters in June 2010. Following successful passage of the budget last year, which included lowering the income tax to 7.95 percent, this is the next effort by Republicans to continue to lower the income tax.
During Wednesday’s House debate, Taxation Committee Chairman Rep. Gary Knight, R-Livermore Falls, said a lower income tax will help attract new business to Maine and encourage retirees to say in the state.
“When we have a tax rate bordering 8 percent, it’s too high,” he said.
But Rep. Bob Duchesne, D-Hudson, said there’s no long term plan to cover the permanent loss of revenue caused by lowering the income tax. Once the rate is lowered to 4 percent, it will mean the loss of $600 million a year in state revenues.
“The whole point of this bill is to trigger future budget crises,” he said.
The bill, which has received both House and Senate approval in its current form, will also require another layer of approval that’s reserved for bills that cost money. A fiscal note prepared by the Legislature’s nonpartisan budget office states that there could be “significantly reduced revenues” in future years once the tax rate is lowered.
That cost has concerned Gov. Paul LePage, who has said he supports lowering the income tax to 4 percent or eliminating it all together. He said earlier this year that he doesn’t think the state can afford to go to a 4 percent rate immediately, although Courtney said he believes the governor is supportive of his bill.
LePage spokeswoman Adrienne Bennett did not return a call late Thursday seeking further comment from the governor on the bill.
Rep. Wayne Parry, R-Arundel, said the taxpayers deserve to get some of their money back when the state has a surplus.
“We’re taking 20 percent of extra money,” Parry said. “One side of the aisle wants to give a little bit back, while the other side of the aisle wants to spend every penny.”
Rep. Kathleen Chase, R-Wells, said the bill fully funds a program for low income property taxpayers — known as the circuit breaker program — and uses money only after all other state bills are paid.
“It’s after all the bills have been paid, that’s when this cascade comes in, not before,” she said.
Democrats fought hard against the bill, saying while it begins to lower taxes when there’s extra money, the lower rate stays in place even when there are no funds to pay for it. Rep. Seth Berry, D-Bowdoinham, compared it to buying a car when you have enough money for the first payment, but no income to afford all future payments.
“The fact is the payment made toward reduction in income taxes is only in the first year,” he said. “All future years are left unfunded.”
Duchesne said the change made to the bill in the Senate, which lowers from 40 percent to 20 percent the amount of money put into the fund, doesn’t make enough difference to win his support.
“Now we’re just haggling,” he said. “The other body is now asking that we do it for 20 percent. I say we hold out until they throw in a toaster oven.”
Parry said the top tax rate kicks in at less than $20,000, so it won’t be only the rich who benefit from a reduced top rate.
“I think the people of Maine may be a little bit upset we’re only giving them 20 percent of their money,” he said.
Susan Cover — 620-7015
scover@mainetoday.com
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