New tax reform plan is deeply flawed, but may start good conversation

I was able to get my hands on a draft copy of the tax reform proposal being introduced to the public tomorrow and soon to be submitted as a bill by Representative Gary Knight. I’ve also had some off-the-record (and a few on-the-record) conversations with legislators and others involved in or with knowledge of the negotiations that have taken place around the proposal that have helped me to understand its purpose and how it came about.

My verdict: the proposal has a number of serious political and policy flaws, but the fact that it was proposed may help move things in the right direction.

At the core of the plan is the idea of expanding and increasing the state sales tax in order to replace LePage’s proposed cuts to municipal revenue sharing, the homestead exemption and other state programs. The plan would also see the income tax flattened to 4% and the estate tax eliminated completely, the same numbers as published in a recent Press Herald article. A main goal of the plan is to shift more of the costs of government to out-of-staters who vacation or spend part of the year in Maine.

First, the policy problems: While it may not be as unpopular as property taxes, the sales tax is a steeply regressive tax. The lower your income, the higher percentage of it you pay and even the proposed tax credits to offset it contained in this plan may not be enough to make sure poor and middle class Mainers, especially those who rent, aren’t shouldering more of the burden of the budget. Flattening Maine’s barely-progressive income tax and cutting it to one of the lowest rates in the country, along with the elimination of the estate tax, would further ensure that the wealthy are the primary beneficiaries of this policy.

Even with the unveiling of Knight’s bill tomorrow, however, we won’t know the full impact of the proposal. Because of the way the taxes and offsets are structured, the impact could vary widely from town to town throughout the state.

Second, the political problems: Similar sales tax reform was proposed in 2009 and became law after a Byzantine legislative process that saw many interest groups carve out exemptions for themselves. Passed mostly on party lines, it was soundly defeated in a People’s Veto referendum by a coalition of Republicans, Greens, and industries that would have been taxed. The Maine Association of Realtors alone spent more than $200,000 to support the veto. I imagine similar interest groups are already quietly organizing to gut this legislation.

What’s more, in a Legislature where Democrats ran against tax cuts for the wealthy and even Republicans are now claiming to support tax fairness, a blatantly regressive move like instituting a flat income tax and eliminating the estate tax will likely be a non-starter among the current Democratic majority.

What seems to be a spark of good news in this proposal, in my mind, is that the Republicans involved, including some very conservative members of the caucus like Rep. Amy Volk and Rep. Lance Harvell, have now endorsed a budget solution that includes increasing revenue in a straightforward way, rather than trying to deny the fact of tax increases at the municipal level.

This is an important step for members of the Republican caucus, whose party has been increasingly doctrinaire and dominated by the tea-party, and a sign that the budget situation is bad enough that some of them are willing to split with Governor LePage (who has not yet weighed in on the proposal).

Democrats who were involved in the proposal negotiations made it clear that they see this compromise plan as an idea that moves the ball in the right direction, but that they’ve had to make some difficult choices to get to this point and are still considering other options.

“The income and estate tax pieces, on their own wouldn’t make sense, but in the context of a lot of other changes, they’re worth considering,” said Democratic Senator Emily Cain. “I am taking just as close and serious a look at the Fair Share Now! plan as I am this one. I’m taking all these plans seriously. All of these proposals that are coming forward need to be taken seriously in order to get to the best possible solution.”

(The Maine People’s Alliance, for which I work, supports the Fair Share Now! campaign and its proposed budget solution.)

Cain also praised her Republican colleagues.

“A Republican was the one who first invited me to participate in this conversation. I’ve been encouraged that Republicans are willing to play a leadership role in this conversation and make sure that everything stays on table, including raising significant revenue and making other changes in the tax code,” said Cain.

According to Nate Libby, a freshman Representative from Lewiston and one of the plan’s negotiators, it was the threat of the Governor’s budget that brought people to the table.

“If I were in the Legislature then, I would have fought against the unfunded income tax cuts that caused the budget mess that we’re in right now,” said Libby. “I think folks in both parties realize that the governor’s budget is going to hurt a lot of people and that created a situation where Republicans and Democrats came together to attempt to fix the budget and not raise property taxes.”

Libby, a member of the Taxation Committee, said there are other options that should also be considered as things move forward.

“[Representative] Peter Stuckey’s bill that would create income tax brackets to make sure the wealthy pay their fair share, that’s good policy and that’s really what the income tax is for,” said Libby. “Also the Buffett rule makes good sense, and Maine’s entire federal Congressional delegation has supported it.”

The proposal will be discussed at a press conference tomorrow, which promises to be a busy day, as LePage will also be unveiling his new school grading initiative.

Mike Tipping

About Mike Tipping

Mike writes about Maine politics and policy with a focus on analysis and explanation. He works at the Maine People's Alliance and Maine People's Resource Center, writes a political column for the Portland Press Herald