With state revenues expected to remain strong and the state’s savings account flush with cash, Republicans and some Democrats are floating tax reduction proposals, signaling that the economic and political environment may be right for long-term reforms.
At least 17 bills have been submitted to change the income tax code and a similar number have been submitted to modify the sales tax. While the bills run the gamut from getting rid of the income tax altogether to raising taxes on higher incomes, lawmakers from both parties have submitted proposals that would cut taxes for lower-income Mainers.
Details about those bills, including the impact on state revenues, aren’t yet available. But the bill titles and the individual lawmakers backing them show the potential for a bipartisan push to lower taxes.
Mark Brewer, a professor and chair of the political science department at the University of Maine in Orono, said the state’s strong fiscal health, coupled with bills from both parties aimed at lowering income taxes for the middle class, shows that lawmakers could take significant action this session. And making a concession on income taxes could help Gov. Janet Mills achieve her stated goal of passing a bipartisan budget, he said.
“The fact that Maine continues to be in a relatively positive budget state allows these items to be discussed in a bipartisan way,” Brewer said. “I think there’s a lot of room for negotiation here. The environment seems right.”
The state has emerged with record surpluses since the onset of the pandemic – surpluses fueled by federal relief and increased tax revenues because of higher consumer prices and rising incomes. Federal officials have been raising interest rates in an effort to slow inflation, but the economy remains strong, allaying some fears about a looming recession.
Maine’s nonpartisan revenue forecasters predict that the state will take in $10.5 billion in revenue over the next two years and $11.6 billion in the following two. That’s up from $9.4 billion in the current two-year cycle.
And the state’s budget stabilization account, or Rainy Day Fund, stands at $900 million, nearing the statutory limit of $970 million, or 18% of general fund revenue.
After supporting several rounds of state relief checks over the last two years, Republicans in the House and Senate made it clear earlier this year that reducing income taxes would be one of their top priorities. While the relief checks effectively serve as tax rebates, Republicans argue that recurring surpluses mean the state is collecting more than it needs.
“Clearly, if we’ve got over a billion dollars more in hand than we had just two years ago when we went through this exercise, the people of the state of Maine are taxed too much,” said Senate Minority Leader Trey Stewart, R-Presque Isle, in response to Mills’ $10.3 billion budget proposal. Mills’ budget, if passed by the Legislature, would increase spending by nearly 10%, or $900 million.
Republicans are not alone in calling for income tax cuts.
Sen. Joseph Baldacci, D-Bangor, has submitted a bill that would lower the income tax rate for low- and middle-income families.
Although the bill has not been printed, he said in an interview that he wants to provide income tax relief to individuals earning as much as $80,000 and married couples filing jointly earning as much as $160,000. Taxes for those with higher incomes would remain the same, he said.
Baldacci said his proposal would reduce the bottom tax rate from 5.8% to 2.9% and reduce the next-lowest tax rate from 6.75% to 5%.
“I’m not saying my bill is the best way to go, but I think we need to focus on reducing permanent tax rates on middle-income Maine families,” he said. “Rebates are good one time, but a permanent reduction is obviously good longer term.”
Baldacci acknowledged that tax cuts may not be a priority for some members of his party, although he expects some support. He will undoubtedly have more support across the aisle.
Rep. Jack Ducharme, R-Madison, is taking a similar approach to Baldacci. Ducharme said his bill would reduce the lowest income tax rate to 4.5%, which he said would effectively mean workers earning less than $50,000 would not have to pay any taxes after other credits and deductions are factored in.
“My intention is to leave the top two tiers alone and really focus in on the bottom tier because that’s going to hit the greatest bulk of the taxpayers and reduce some of the flow of money into Augusta that seems to be becoming a supplemental budget that we have to do something with,” he said.
Ducharme said Republicans have been successful in advocating for rebates that have been sent back to taxpayers in the form of relief checks instead of using the surpluses to expand government programs. But that may not always be the case in the future.
Last year, taxpayers received $850 checks totaling $1.2 billion. Earlier this year, lawmakers approved a round of $450 checks totaling $473 million.
“We want to leave (the money) in their pockets to start off with,” Ducharme said. That would avoid the debates about whether to spend the money or return it to taxpayers.
Twenty-one states, mostly controlled by Republicans, have cut income taxes since 2021, according to Jared Walczak, the vice president of state projects at the Tax Foundation, an independent tax policy nonprofit. That list includes New York, which is controlled by Democrats, although Walczak said lawmakers in that state also increased taxes on high earners.
Thirteen states are considering tax reductions this year, while three, including New York, are considering tax increases, Walczak said.
Assistant House Minority Leader Rep. Amy Arata, R-New Gloucester, said her constituents have appreciated the rounds of rebate checks but want lawmakers to lower taxes. She has submitted placeholder bills to reduce income taxes, which she said would make the state more competitive, and sales taxes, which would benefit lower-income households, “to see which one would stick.”
“I’m interested in collaborating with Democrats on this and reaching consensus,” said Arata, who does not support efforts to eliminate the income tax. “I realize that even a fraction of a percentage point helps, and if it’s something we can afford, then we should do it.”
Some Democrats, however, are proposing tax increases on high-income earners.
Rep. Laurie Osher, D-Orono, has reintroduced a bill from last session to create a new tax bracket for high-income earners. Her proposal would increase the top tax rate from 7.15% to 8.35% and create a new tax rate of 11.5% on taxable income exceeding $125,000 for single individuals, $175,000 for heads of households and $250,000 for married couples filing jointly.
Osher is looking to increase state revenue to fund a range of needs, including services for adults with disabilities and people with substance use disorder.
“I was upset when the governor made her State of the State address (last year) saying she was going to give money away to people,” Osher said. “There’s so many things we’re not doing. Getting revenue to do those things is my goal.”
Tax increases face an uphill climb, however. Mills said during the campaign that she would not support any tax increases, and Democrats would need Republican support to overturn any gubernatorial veto.
When asked about the governor’s position on proposals to reduce the income tax, a spokesperson responded by listing the tax relief measures that Mills has supported, including the rebate checks, increasing the value of the earned income tax credit, increasing the amount of retirement income that is exempt from taxes and various property tax and student debt relief programs.
“The governor is always interested in hearing ideas about how we can reduce the tax burden on middle- and low-income Maine families, while also ensuring that important long-term needs are met,” spokesperson Ben Goodman said in an email. “The supplemental and biennial budget proposals are in the hands of lawmakers, and the governor looks forward to following their discussions and negotiations.”
House Speaker Rachel Talbot Ross, D-Portland, said in a written statement that House Democrats “support an overall tax structure that ensures that everyone pays their fair share and we have the resources necessary to fund the state’s obligations,” highlighting future economic uncertainty as inflation remains an issue.
“As we consider any changes to the tax code, we’ll prioritize working and middle-class families and small businesses, while cleaning up any loopholes that are being exploited in the corporate tax code,” Talbot Ross said. “Ultimately, what House Democrats want is a tax code that provides the resources for good schools, modern infrastructure, and community services that help our economy grow and make sure all Mainers have a chance at success.”
Senate President Troy Jackson, D-Allagash, supported efforts last year to exempt more retirement income from taxes as well as expand property tax relief programs. However, a spokesperson suggested that Jackson and his caucus may not embrace permanent tax reductions.
“President Jackson expects that lawmakers will ultimately proceed cautiously when it comes to the tax code and prioritize commitments already made to Maine people,” spokesperson Christine Kirby said in an email. “He also thinks that though we have a healthy rainy day fund, lawmakers must be prepared for any future economic downturns.”
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