AUGUSTA — The Senate voted along party lines Tuesday to significantly expand Maine’s exemption to the “death tax” in what could be a precursor to bigger debates over cutting taxes during a tight budget year.

Under current law, family members who inherit valuable estates — whether businesses, property or farms — only pay the “death tax” when the value of those estates surpasses $1 million.

The bill that received preliminary approval in the Senate on Tuesday would bump up that exemption to $5 million, conforming Maine’s tax code with the federal government’s estate tax exemption.

Supporters claim the current, $1 million exemption penalizes families who own small businesses and farms with valuable real estate while encouraging wealthier Mainers to establish residency in other states with more lenient tax codes.

“The result of this has been that we have driven wealth out of Maine,” said Sen. Jonathan Courtney, R-Springvale, the Senate majority leader.

The Democratic opposition, however, accused the majority party of offering large tax cuts to Maine’s wealthiest residents at a time when lawmakers are considering cuts to social services programs for the state’s poorest residents and “tightening the vice” on middle-income families.

“People of Maine are hurting; people are taking cuts,” said Sen. Justin Alfond, D-Portland, the Democrats’ assistant minority leader. The estate tax bill endorsed by the Senate, Alfond said, would only benefit one small group of wealthy individuals.

The bill endorsed by the Senate, LD 1147, is not the only measure pending in the Legislature that would increase the estate tax exemption.

The administration of Gov. Paul LePage has proposed doubling the exemption to $2 million as part of a tax reform package contained in his two-year, $6.1 billion budget. The estate tax changes, which would kick in on Jan. 1, 2013, would benefit the heirs of an estimated 400 estates that would be subject to taxation under current law.

Republican lawmakers on the Taxation Committee endorsed the $2 million estate tax exemption and tweaked LePage’s other tax-cutting proposals to include a reduction in the top income tax rate from 8.5 percent to 7.95 percent as well as other changes.

Those proposals are still pending with the Legislature’s Appropriations and Financial Affairs Committee, which is working long hours to craft a balanced budget that will win the two-thirds support needed in both chambers. But the tax cut proposals could become sticking points as the committee considers cuts to social service programs and changes to state employees’ pension system.

On Tuesday, Senate Republicans pushed forward with the separate, more sweeping estate tax bill, which would have to go through the Appropriations Committee.

Sen. David Hastings, R-Fryeburg, said Maine loses more than simply tax revenue when wealthy retirees from Maine choose to establish residency in Florida or other low-tax states. It also loses their involvement in local communities.

Sen. Doug Thomas, R-Ripley, said it doesn’t take much to hit that $1 million trigger for many small businesses today.

“A million dollars in logging equipment is not what it used to be,” Thomas said. “Some of that equipment is now $500,000” apiece.

But Democrats questioned the timing of the bill, coming during a budget crunch. Several Democrats, including Sen. Bill Diamond, said they supported increasing the exemption amount but were uncomfortable with jumping to $5 million in one swoop.

Alfond said Maine’s entire tax code needs to be overhauled — rather than one small portion of it — if the state wants to keep wealthy Mainers as residents. Alfond pointed out that his grandfather, the late Harold Alfond who founded Dexter Shoe Co., did not move to Florida because of Maine’s estate tax but because “their entire tax code is better.”

LD 1147 faces additional votes in the Senate before being sent to the House for consideration.

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