AUGUSTA – Majority Democrats, already embroiled in a showdown over taxes with their own governor as this year’s legislative session draws toward a close, faced off with Republicans on Thursday over a second tax issue and new state borrowing.

One breakthrough appeared imminent as Democratic support built for accepting changes that Gov. John Baldacci demanded in a tax code overhaul package that had been sent to his desk for signature.

Baldacci, with an implicit threat of veto, called for limits on a proposed sales tax expansion. The House bowed to the governor’s demand and the Senate followed suit.

The replacement measure that was advanced Thursday retained the central elements of the tax code overhaul originally enacted last week. That was designed to lower the state’s top income tax rate and broaden the sales tax while keeping overall tax collections steady.

Subsequent changes sought by the governor and endorsed by the House and Senate on Thursday included the addition of a partially refundable earned income tax credit aimed at benefiting lower-income residents. It would be worth $125 to $150.

The package of changes would also limit an expansion of the state’s 5 percent sales tax from applying to some recreational services, such as skiing and golf, and would scrap a real estate transfer tax increase on high-end homes.

In most cases, the state’s top income tax rate would still be reduced from 8.5 percent to 6.5 percent. But for the highest tier, the top rate would be set at 6.85 percent on that portion of individual income above $250,000.

Democratic supporters said the proposed overhaul could save Mainers about $55 million in aggregate by shifting more of the overall tax burden to tourists and other nonresidents. They conceded, however, that typical savings for individuals would be modest.

Republican critics warned that new sales tax provisions could harm businesses and create uncertainty over which new products and services were covered.

In addition to the tax code debate, sporadic talks continued on new fuel taxes to fund highway maintenance and on new state borrowing for capital projects.

Copy the Story Link