Maine Tax Cuts May Outlive Republican Rule

By: - December 21, 2012 12:00 am

Democrats won back control of the Maine House and Senate from Republicans last month in part with a message on taxes. They campaigned against the tax cuts the Republican-led legislature enacted in 2011, the largest tax cut in Maine history, arguing they were a giveaway to the wealthy.

Yet, despite Democrats’ victories, there are signs the tax cuts may well survive. That’s true even though Maine faces challenges rebalancing its current budget and balancing the new two-year budget that the legislature will write next year.

The biggest obstacle to undoing the tax cuts is Republican Governor Paul LePage, an anti-tax stalwart who could veto any plan. Democrats lack a veto-proof majority in either house of the legislature. But, while Democrats are talking about pushing for repeal, it’s not clear LePage will even need his veto pen.

The cuts included reduced income tax rates, other technical changes that lowered income taxes, higher exemptions for pension income and a higher income threshold for the estate tax. All told, the cuts are expected to cost the state around $400 million in the two-year budget period that begins July 1, 2013, with the income tax cuts representing more than $300 million of that total.

To cope with deficits in the current budget, LePage has signaled that he will soon order across-the-board cuts and ask for supplemental funding for the state Health and Human Services Department. For the next budget, the state forecast in October that it expects a structural budget gap of $756 million.

“What’s interesting from sort of a fiscal policy standpoint is that these tax changes came at a time when revenues are already significantly reduced by the recession,” says Garrett Martin, executive director of the Maine Center for Economic Policy and a critic of the tax cuts. “We have effectively created half the budget problem through the income tax cuts alone.”

Yet Martin says it’s unlikely the legislature will repeal the tax cuts or even delay them or roll them back in part. Others agree. “I honestly don’t think there will be any attempt by the Democrats to pull back on that at all,” says Republican State Rep. Gary Knight, who, as chair of the Taxation Committee in the last legislature, was a key supporter of the tax cuts.

One reason why is that while Democrats complained about tax cuts for the wealthy on the campaign trail — the state’s top income tax rate is falling from 8.5 percent to 7.95 percent — the law also includes tax breaks for lower-income Mainers. The lowest tax bracket, 2 percent, is eliminated entirely, dropping an estimated 70,000 people off the income tax rolls. Fresh off a difficult two years out of power, Democrats may be reluctant to restore those taxes.

Likewise, the state’s budget problems may not be quite as bad as it appears at first glance, reducing some of the urgency of finding new revenue. The state’s official $756 million structural deficit figure is based on the state abiding by funding formulas for education and local aid that it has a long history of ignoring. “There are a lot of assumptions in that number of the state dramatically increasing spending,” says Mike Allen, the state’s associate commissioner of tax policy. If you assume the state will continue to fall short of the formula requirements, the deficit would look smaller.

Still, Democrats are reluctant to allow new cuts to local aid, health care and other services without any effort at new money. Martin says one alternative to repealing the tax cuts is for lawmakers to pursue a new revenue-raising plan instead, such as a millionaire’s tax or removal of some tax credits, deductions and exemptions that reduce revenue.

Any of those steps, though, will also take Republican support to become law. The vision Democrats won with in 2012 is likely to clash with the vision LePage won with in 2010, leading to a potentially difficult two years on tax and budget issues. “From a political perspective,” Martin says, “the challenge is obviously what kind of budget deal can we arrive at that either the governor will sign off on or either allow the legislature to get the two-thirds majority to override his veto.”

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Josh Goodman

Josh Goodman helps lead research on fiscal management and place-based economic development programs as part of Pew’s state fiscal health project. Goodman has served as a primary author for Pew studies that examine how states should evaluate tax incentives and maintain budget discipline when implementing those incentives.