LEWISTON — Under the controversial tax package recently enacted by the Legislature, Mainers are set to see many changes beginning on Jan 1, 2010. Depending on who you listen to, the law will single-handedly either bring about the state’s destruction or economic resurrection.
By far the most partisan bill of the session, many Democrats have claimed it’s the most important law they passed this year. And while state Republicans have launched efforts to repeal it, national conservative voices such as the Wall Street Journal and the Tax Foundation have praised the move.
The law calls for a reduction in the state income tax rate that most Mainers pay, from 8.5 percent to 6.5 percent. Individuals earning more than $250,000 a year will pay 6.85 percent. Filers are no longer allowed to itemize deductions on their state returns, but a series of credits that target low- and middle-income filers have been established that will result in many Mainers paying even less than the 6.5 percent rate, according to Maine Revenue Services. (See info box.)
The income tax reduction is paid for in part by an expansion of the state’s 5 percent sales tax to items and services not previously taxed, including boat moorings, dry cleaning, movie tickets, shoe resoling and car repairs.
There are about 180 sales tax categories recognized nationally.
According to the House Majority Office of the Maine Legislature, Maine used to tax 25 of those. Now the state will tax “about 50.”
The rationale for expanding the sales tax was that state revenue relied too heavily on new car and home sales. Because the two sectors have suffered the most during this recession, lawmakers sought tax changes that would buoy state reserves in the face of similar circumstances. For instance, if people weren’t buying new cars, they would be repairing old cars. While the expanded sales tax categories include those like amusements and entertainment, which are commonly considered discretionary spending, Republicans say it was unfair to increase the sales tax on something that is a necessity for many Mainers, like car repairs, particularly for those in the lower and middle class.
The state’s meals and lodging tax also increased from 7 percent to 8.5 percent. (Click here to see how Maine’s sales tax rate compares nationally.)
The various revisions that the tax reform package went through during the legislative process prompted misinformation and rumors. Here is a look at the common myths — and the reality — of the package.
Candy, car repairs, haircuts and ski lift tickets are getting taxed.
It’s true, taxes on candy are going up. Instead of being taxed at the 5 percent sales tax rate like it was previously, it will be taxed at the new meals tax rate of 8.5 percent.
Car repairs will also see a tax increase; sales tax is already applied to auto parts. Now the state is extending it to the labor portion.
Haircuts are not getting taxed. They were in the version drafted two years ago, but not this year. Dog hair cuts, however, are included.
Ski lift tickets were included in the first version of the bill, but Gov. John Baldacci removed them in the version he signed. He wanted to avoid hitting industries with more than one tax increase, aides said, and ski resorts are subject to the increased meals and lodging tax.
The elderly and the poor will not benefit because they don’t pay income tax and will end up paying more in sales tax.
Maine Revenue Services used complicated computer models containing tax receipts from all Mainers to calculate how the proposed package would impact taxpayers. According to the law’s supporters, those projections were used to develop the income credits and refunds built into the tax structure. The goal is for the credits to offset the effects of the broadened sales tax on the elderly and middle- and low-income wage earners.
The elimination of state itemized deductions means I lose big time.
State itemized deductions have been eliminated, so there is no state tax break for mortgage interest or property taxes. There is still a benefit for the approximately 25 percent of Mainers who itemize, and presumably will continue to do so on their federal taxes. Noting the difference between how the old tax system worked and how the new one works is important in determining whether you will be a winner or loser.
There’s not enough benefit for Mainers to make this worthwhile.
The tax package is purported to be revenue-neutral, but Mainers are expected to pay less in taxes because more of the burden will be pushed onto visitors to Maine. This is achieved by raising the meals and lodging tax, the rental car tax and expanding the sales tax to items such as scenic and sight-seeing trips. How much more will be raised?
Two years ago, proposed reform legislation was supposed to save Maine taxpayers more than $100 million. At the beginning of this session, reform savings were pegged at $75 million. As of the last projections, the number had dwindled to $55 million.
Proponents of the law point out that the savings is proportional to overall tax revenue. The more the state collects in taxes, the more “savings” for Mainers. The number has declined because of the recession and, as a result, the state is collecting fewer tax dollars overall. Democratic lawmakers say as the economy rebounds, the benefit to Mainers will grow.
Maine’s business community is opposed to the changes.
The Maine State Chamber of Commerce opposed the measure, but the state’s three largest regional chambers — Androscoggin, Bangor regional and greater Portland — all endorsed it.
For the most part, chamber members say they applaud the income tax reduction, but dislike the broadening of the sales tax and raising of the meals and lodging tax from 7 to 8.5 percent.
Republican lawmakers say a survey conducted by the Maine branch of the National Federation of Independent Businesses shows 80 percent of small business owners polled opposed the legislation.
But because most small businesses in Maine file their corporate taxes as personal income tax, the overall reduction from 8.5 percent to 6.5 percent will be a benefit, say supporters of the new law.
Only the wealthy will benefit from the tax changes.
Individuals earning more than $250,000 a year will be taxed at a higher rate (6.85 percent versus 6.5 percent for everyone else). Also, the income tax credits offered to taxpayers in the reform package decline as income increases. Finally, those with higher disposable incomes are expected to pay more as a result of the expanded sales tax on items such as interior decorating, dry cleaning and boat moorings.
Legislators weren’t able to even read the final bill before voting on it.
In the previous Legislature, members of the Taxation Committee labored over writing a bill that received bipartisan support in committee. That effort failed in the full Legislature however.
Democratic leaders say they used that legislation as a basis for the tax bill they drafted this year. It received a public hearing and six work sessions before coming to the floor, where it passed in both the House and Senate thanks to Democratic majorities.
The governor vetoed the bill and filed new legislation that removed items such as ski lift tickets, bowling and golf course fees from being subjected to the sales tax. He also added the .35 percent “surcharge” to individuals earning more than $250,000 a year and eliminated the proposed increase in real estate transfer tax on properties worth more than $500,000. The printed version of that bill was presented to lawmakers not long before they were asked to vote on it.
GETTING TAXED
Amusements: theatres, movie, concerts, festivals, fairs, amusement parks, carnivals, circuses, petting zoos, race tracks, sporting stadiums, mini-golf, paintball, go-carts.
Candy
Installation, repair and maintenance: cars, guns, furniture, musical instruments, televisions, lawn mowers, rototillers, photocopiers, shoes.
Personal property services: dry cleaning, monogramming, car washing, house cleaning, interior decorating, storage and moving services, vehicle towing and boat moorings.
Pet services: boarding, grooming, training.
Pre-paid call cards
Limousine service
NOT GETTING TAXED
Amusements: Agricultural fairs, school or non-profit sponsored events, golf courses, bowling alleys, swimming pools, skating rinks, tennis courts, ski lifts, arcade games.
Health or fitness centers.
Installation, repair and maintenance: airplanes, boat, commercial trucks or tractors.
Personal property services: art, music or dance lessons, summer camps, plastic surgery, hair cuts, body piercing, tattooing, tanning, massage.
Meals served in retirement homes.
INCOME TAX
As part of the Maine tax code changes recently enacted, the state income tax rate was revised. Before the revisions, most taxpayers paid 8.5 percent in state income tax. Now, almost everyone will pay 6.5 percent. And you can chose between two credits that could further reduce taxes, depending on income. One credit is for those who itemize their federal filing, the other is for those who don’t. Additional credits are available to elderly Mainers and those with low incomes. Meanwhile, those earning more than $250,000 a year will pay a “surcharge tax” of .35 percent, for a total rate of 6.85 percent.
Standard credit option:
Individual: $700
Head of household: $1,050
Married: $1,200
Itemized credit option
Individual: $400
Head of household: $600
Married: $800
Plus, 5.5 percent of all federal itemized
deductions, with some modifications.
These itemized credits are capped at (not including other credits):
Individual: $1,150
Head of household: $1,750
Married: $2,300
Both options also allow a $250 credit for each additional dependent.
LIMITS
Each household credit is limited according to income, to
benefit lower income taxpayers.
Income credits are reduced by $1.50 for every $100 in adjusted gross income exceeding:
$27,500, for those filing as individuals
$41,250, for those filing head of household
$55,000, for those filing as married
ADDITIONAL CREDITS
• Low income: Mainers not earning enough to pay income tax can receive credits of
$50 for individuals, $70 for married filers
• Elderly: $60 for individuals 65 and older, $120 if filing as married
Elderly credits are reduced $2 for every $100 in adjusted gross income exceeding:
$32,000, for individuals
$48,000, for head of household
$52,000, for married
• Earned Income Tax Credit: The refund applies when the EITC exceeds the amount of taxes owed, in which case the state will refund up to $125 for individuals and $150 for married couples.
• A limited charitable-giving credit will also be available: 5 percent of federal charitable claims for deductions over $250,000.
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