07/23/2007
Legislative session concludes for 2007
Small businesses can breathe a sigh of relief now that the Legislature has adjourned. We dodged a number of bullets and were successful in fighting proposals that would have made Maine a tougher state for small-business owners. Below is the first installment of an overview of this year's legislative session.
Laws enacted take effect on Sept. 20 unless passed as emergency measures that took effect immediately upon being signed by the governor. While some proposals were left for dead, many important bills of the 1,931 issues proposed were carried over to the 2008 session.
One of the most controversial efforts this session was a proposal to reform Maine's business and personal tax code. While the reform package was ultimately defeated, it is safe to say that many of these issues and concepts will likely be back in one form or another. As always, we'll be ready to assess the impact of any tax changes to ensure they are fair and equitable to small business.
2007 session report: Tax reform and tax relief
A major change in Maine's tax laws (LD 1925) was set aside after dozens of business groups (including NFIB) and members of the public criticized the new and higher taxes that were proposed, as well as uncertainty over the effects of proposed personal income tax changes. LD 1925 as proposed by an 11-2 majority of the Taxation Committee:
- Personal Income Tax: would have cut taxes by about $195 million including:
- set flat rate of 6 percent instead of the current brackets and 8.5 percent top rate
- abolish the Alternative Minimum Tax (Maine is one of about 12 states with this tax)
- conform with federal Sec. 179 depreciation rules
- Property Tax: would have provided about $41 million in relief for homeowners including:
- expand Homestead exemption to $26,000 from $13,000
- increase Circuit Breaker benefits
- allow people 65 and older to defer on paying taxes
The overall income and property tax cuts for individuals and homeowners would have amounted to about $246 million. Those cuts were to be offset by increases in other taxes.
- Corporate Income Tax: would have provided some tax relief and provide some tax increase resulting in an overall increase of about $6.8 million:
- set flat rate of 8.93 percent (Maine's would have been the 6th highest flat rate in the nation had that change occurred)
- abolish Alternative Minimum Tax (Maine is one of seven states with this tax)
- conform with federal Sec. 179 depreciation rules
- Sales Tax: would have increased taxes by about $185 million including (see NFIB Web site for detailed list of services that would have been affected):
- 8 percent meals and lodging tax (increase from 7 percent)
- personal services tax (new)
- personal property services tax (new)
- real property services tax (new)
- installation, repair and maintenance services tax (new)
- transportation and delivery services tax (new)
- amusement, entertainment and recreational services tax (new)
- telecommunications services tax (new)
- various other new or increased sales taxes
- Other Taxes: would have increased revenues by about $51 million including:
- beer and wine excise tax rates doubled
- real estate transfer tax significantly increased
The initial support for LD 1925 as strong, receiving strong bipartisan support in the Taxation Committee (six Democrats, four Republicans, one Independent supported; one Democrat and one Republican opposed), and initially strong partisan support in the House (82 Democrats, four Republicans, one Independent initially voted in favor; four Democrats, 44 Republicans, one Independent voted against).
Ultimately, the reform effort was rejected in the Senate after business and public outcry arose.
Lawmakers became more concerned about the effects of the proposed changes, and it became clear that Gov. Baldacci did not support the legislation. Several major amendments were prepared for adoption on the floor, that attempted to respond to public and legislative concerns, but the rapidly nearing adjournment date for the session also rapidly closed the window of opportunity for proponents of tax reform. A revised version of tax reform legislation may be considered later by the Legislature.
- Constitution Amendments: A majority of the Taxation Committee also voted in support of amendments to the Maine constitution (LD 1819) that would have:
- authorized municipalities to adopt a local option sales tax (that must have been used for property tax relief)
- authorized municipalities to opt out of the Homestead exemption increase
- required a two-thirds vote of the legislature to INCREASE the RATE of income, sales, or motor vehicle excise taxes (this would have applied only to rates, not tax burdens)
- required a two-thirds vote of the legislature to DECREASE the RATE of income, sales, or motor vehicle excise taxes (again, this would have applied only to rates, not tax burdens)
The Senate voted to only support the two-thirds vote proposal while the House voted to only support the Homestead exemption opt-out. NFIB noted, however, that the tax reform legislation could have been enacted into law while the constitutional amendments could have been rejected by voters -- the controversial tax reform legislation was not contingent on voter approval of constitutional changes.
NFIB also noted the two-thirds vote proposal would have only applied to tax rates, not tax burdens. Changing the definition of what is subject to sales and income taxes, for example, can significantly affect the tax burden without touching the tax rate. In addition, making it more difficult to lower taxes was questionable policy in view of Maine's high income tax rates.
Maine's top personal income tax rate of 8.5 percent ranks sixth highest in the nation, behind Vermont (9.5), California (9.3), Oregon (9.0), Iowa (8.98) and New Jersey (8.97).
Maine's top corporate income tax rate of 8.93 percent ranks eighth highest in the nation, behind Iowa (12.0), Pennsylvania (9.99), Minnesota (9.8), Massachusetts (9.5), New Jersey and Rhode Island (9.0) and California (8.84). If Maine had gone to a flat rate of 8.93 percent, as proposed in LD 1925, this would have been seventh highest among the 29 states that have a flat corporate tax rate.
- Local Option Tax: Several bills were killed that would have established a local option sales tax or local option real estate transfer tax. However, the most surprising development was a proposed constitutional amendment (LD 1819 noted above) that would have, subject to voter approval, opened the door to a local option sales tax. NFIB opposes local option taxes.
- Estate Tax: Meantime, the legislature carried over to 2008 legislation (LD 1556) that would conform Maine's estate tax law to federal tax law. The state claims the proposed tax conformity would cost about $23.7 million in lost revenues in fiscal 2009 and $33.0 in fiscal 2010; however, proponents note Maine is losing a number of wealthy retirees who declare residency in a more tax-friendly state, and proponents have commissioned an economic study to illustrate the adverse effects of Maine's current estate tax. NFIB supports this conformity.
- Small Business Equipment Expensing: NFIB highlighted the need for Maine's income tax law to conform with Section 179 federal income tax law expensing thresholds and, while that issue was ultimately scuttled along with the tax reform legislation (LD 1925), NFIB will again put that issue on the front burner in 2008.
Maine small businesses are currently allowed to deduct from taxable income only the first $25,000 of annual new equipment purchases; the balance is subject to depreciation and reporting on individual or corporate income tax forms. With one of the highest individual and corporate income tax maximum rates in the nation, this situation can create a significant tax penalty on equipment investments by small-business owners. The federal expensing deduction is currently at $112,000. Most states conform to the federal threshold, but Maine and a number of other states do not.
Where does Maine rank on tax issues?
Maine Tax Burden: The Legislature's Office of Fiscal and Program review released a report in April 2006 titled, "Maine's Tax Burden: History and Projections". A copy of the report is available online.
The Tax Foundation also publishes reports on state tax burdens, including a report issued January 2007 that compares states on a variety of measures. State and local tax burdens have reached a 25-year high, according to the group. The Foundation's research is controversial and has been criticized for its reliance on faulty data from the U.S. Census Bureau, which some experts note contains inconsistent and incomplete information on state revenues and expenditures. Nevertheless, Maine is widely viewed as a high tax state.
