Opponents of LD 1495, the Legislature’s recent attempt at tax reform, say it is one more broken promise from the Legislature.

It is worse.

In the aggressive effort to “export” the bills for Maine’s state spending to nonresidents, the law is almost certainly unconstitutional. One of the main things LD 1495 wants to do was to get people who do not live in Maine to pay more of Maine’s taxes. The targets for higher Maine taxes include tourists, nonresidents who work in Maine and part-year residents. Taxes on things tourists buy, like meals, hotel rooms, entertainment and rental cars, are fairly obvious. (The downside is Maine residents also eat in restaurants, stay in hotels, go to movies and rent cars.)

A more obscure way the Legislature plans to “export” taxes is by creating what appears to be a “Welcome Back Tax.” This was accomplished through a sweeping elimination of the long-standing income tax exemptions and deductions (itemized or standard) and replacing them with a new “household tax credit.”

The “household tax credit,” though, is only available to Maine residents. Nonresidents, who live outside Maine but pay taxes on income derived from Maine-based sources, do not qualify for the tax credit, and neither do new or returning residents who live here less than the full year.

The tax penalty for these people is no laughing matter. According to calculations by Scott Moody, chief economist for the Maine Heritage Policy Center, a new resident or nonresident who is married with two children and who earns as little at $35,000 would face a tax penalty of $2,275.

A comparable established resident, though, would have an income tax bill of only $75. That is a difference of $2,200.

How is this unconstitutional? There are three provisions of the Constitution which this part of LD 1495 clearly violates.

The U.S. Supreme Court has ruled, for instance, that the Privileges and Immunities clause prohibits states from using the tax code to discriminate against residents of other states. Property tax rates, for instance, must be the same for residents and non-residents. LD 1495 essentially creates two income tax rates, one for established residents and one for nonresidents and new or returning residents, which is something courts have found unconstitutional in similar situations.

The court has also ruled the Equal Protection clause prohibits states from passing one set of laws for residents and another set of laws for nonresidents, as it requires that all “classes” of people be treated similarly under the law. States have traditionally been granted some leeway to create classifications for tax purposes, but classifications that discriminate against new and returning residents in other states have been found to be unconstitutional on Equal Protection grounds.

Lastly, courts have consistently decided that laws imposing additional burdens on nonresidents may violate the Interstate Commerce clause of the Constitution, which prohibits states from enacting tax policies that interfere with the free movement of products and services between states.

States cannot, for instance, adopt import tariffs to make products from other states more expensive than those in their own states. LD 1495 makes working in Maine more expensive for certain people, and creates added costs and headaches for Maine businesses, many of which rely on workers from outside of Maine. Almost certainly, this provision of LD 1495 is unconstitutional on these grounds as well.

Constitutional issues aside, the heavy tax burden the new law places on nonresidents and young people trying to move home with their families is simply bad public policy. For those moving to Maine to live and work, including college students returning home and young families just starting out, the bill creates a “Welcome to Maine” tax that will cost them thousands of dollars in extra state income taxes.

For businesses along Maine’s border, the law seriously impairs their ability to recruit the best workers, some of whom may live in another state.

From a policy perspective, there are aspects of the new tax reform legislation that move the state in the right direction and there are aspects that move the state in the wrong direction. However, when policy — be it good or bad — is implemented with legislation that does not conform to the requirements of the U.S. Constitution, then policy becomes a secondary issue. The rule of law trumps legislative policy decisions every time.

Arnold Clark, Esq. is the director of the Center for
Constitutional Law at The Maine Heritage Policy Center in Portland, founded in
2008 to challenge state and local laws
and regulations that make it hard to start or run a business and create jobs in
Maine.