April 14, 2012

M.D. HARMON: Tax changes coming for Maine, US, and they won't be pretty

M.D. Harmon

There's a hurricane on the horizon for national tax rates, but before discussing it, let's look at a bit of sun breaking through the clouds for Mainers.

For years, it appeared that there was something in the Maine psyche that likes being on the extremes of national averages.

And not the good end, either.

For example, when Forbes magazine rated the states recently for their friendliness to business creation or expansion, Maine ended up dead last.

And the most recent data available say the Pine Tree State is near the top in yet another category where the other end of the scale would be far more preferable.

In an article last Friday about a bill to reduce the state's top income tax rate to 4 percent (from 8.5 percent currently, falling all the way to 7.95 percent next year), we were reminded that Maine was ninth in the nation in overall state and local tax burden for 2009, according a 2011 report from the Tax Foundation, which offers no more recent data.

Still, we're doing better than three other New England states: Vermont is eighth; Rhode Island is fifth; and Connecticut is third. Massachusetts is 11th and New Hampshire (of course) is the regional outlier at 44th. The 8.5 percent rate, which is imposed on income beginning below $20,000, makes Maine's income tax ceiling the second-highest in the region -- in a state that is hardly New England's most prosperous jurisdiction.

The standings likely will change once the new tax rates affect the overall mix, but the key fact is that the impetus of the bill is to lower tax rates significantly enough to get some real attention at the national level for the first time in decades.

(Democratic lawmakers had passed an income tax cut of their own three years ago, but it was tied to increases in other taxes and provided no real relief. Mainers saw through the bait-and-switch and defeated it in a 2010 referendum.)

The new tax cut would be a real one, thought it would be linked to state revenue surpluses, with 20 percent of any surplus going into a fund to lower rates over time.

The proposal has a long way to go in the legislative process, and it drags out a reform that would yield real benefits if applied immediately, but it still reflects that the mood has changed in Augusta. (But change still has a distance to go. A tax cut on pension income failed this week to get through Appropriations, despite majority legislative backing).

But if the GOP maintains its control of the Legislature this November, our competitive status with low-tax states like New Hampshire could improve further.

Some people want progress sooner rather than later. Maine Taxpayers United has a rally in Lewiston this Sunday (1:30 p.m. at the Franco-American Center on Cedar Street) with other groups, who intend to show there is a strong constituency in Maine for lower tax rates and less government spending.

Speakers for the April 15 "Tax Day Rally" (which is actually two days before returns are due) include Gov. Paul LePage, activist Mary Adams, former state Sen. Carol Weston and Jonathan Williams, author of the book, "Rich States, Poor States."

But what about that national storm? Like other hurricanes, this one has a name: The Washington Post has noted that unless things change, the nation will face "Taxmageddon" when the calendar flips over to 2013.

That's because a variety of taxes will rise $494 billion -- nearly half a trillion dollars -- on Jan. 1. Federal Reserve Chairman Ben Bernake calls it "a massive fiscal cliff" and others say it's a "recipe for restarting the recession."

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