The Maine Legislature is considering “An Act to Modernize and Simplify the Tax Code,” presented by Rep. Gary Knight, R-Livermore Falls, with bipartisan support of the so-called “Gang of 11.”

This bill, if enacted, has enormous implications and impact on every Maine taxpayer, employer and business. It is important for Sun Journal readers to understand what this “tax reform” bill would do and how it could be improved to benefit all Maine citizens.

To achieve tax and fiscal policy for Maine that is fair, simple, and promotes growth, economic development and job creation without facilitating the further growth in state or local government, the Knight bill must be amended. Here are my suggestions:

Property tax relief

Identical to the state Chamber of Commerce proposal drafted in 2004, the Knight bill creates a $50,000 homestead exemption. The Knight bill also replaces the circuit breaker program with a new “property tax fairness credit” for homeowners and renters.

The Knight bill should eliminate both the circuit breaker program and the fairness credit. Neither one is necessary.

By design, the homestead exemption targets relief only to Maine residents, only for their primary residence, and provides the greatest relief to taxpayers of modest means with modest homes in high mill rate municipalities. No additional property tax fairness program is required. The proposed “fairness credit” adds complexity, creates another government program that must be administered, and its extension to renters discourages, rather than encourages, home ownership.

The sales tax

The Knight bill increases the sales tax to 6 percent and broadens the sales tax to virtually all consumer purchases except health care and education. Tax would be charged on food, fuel, utilities and services. The bill then attempts to buffer that effect on lower income taxpayers with a new “sales tax fairness credit.”

Whether a taxpayer pays sales tax should not be dependent on income. This violates fundamental principles of parity, equity and fairness. 

The sales tax should not be extended to food, heat or utilities. They are all necessities of life.

Excise tax rate increases

The Knight bill almost doubles the cigarette tax, doubles the tax rate on beer and wine, and increases the tax on automobile rentals, lodging and meals.

The increase in the meals, lodging and automobile rentals tax export to non-residents a greater share of the tax burden, but not to an extent that is likely to cause significant damage to Maine’s critical travel and tourism industry.

The increases on tobacco and alcohol are not geographically fair because Maine residents in closer proximity to New Hampshire can avoid them and are not demographically fair because they hit hardest the poor and the addicted.

Income tax

The Knight bill decreases the top income tax rate from 7.95 percent to 4 percent. It imposes a flat tax of 4 percent on 100 percent of the income of all taxpayers who earn more than a specified amount. Further, it eliminates virtually all state income tax deductions, such as for mortgage interest, real estate taxes, medical expenses and charitable contributions.

It then attempts to buffer the impact of these changes on select taxpayers by application of the property and sales tax “fairness credits.” This adds complexity and violates fundamental principles of parity, equity and fairness.

The Chamber plan called for a reduction in the top rate to 6 percent and reductions in all rates. The public should not support a flat tax. We should support progressive income tax rates that are lower and fair for everyone and apply to all.

Nor should we eliminate state income tax deductions for homestead mortgage interest, homestead real estate taxes or charitable contributions.

Government can no longer meet the social welfare needs of its citizens. Eliminating the tax deduction for charitable contributions discourages private charity and increases the pressures on government to replace that assistance.

Nonprofit real estate tax exemption

Other than for religious places of worship, the Knight bill limits the property tax exemption for all nonprofits to the first $250,000 in value. Twenty-five percent of the value above that would be taxable. Among those hardest hit would be hospitals and educational institutions, whose real estate often has values of tens of millions of dollars.

If enacted, it would clearly have an inflationary impact on the cost of hospital care.

Further, imposing real estate taxes on nonprofit schools would inflate the cost of higher education and private K-12 schools. Low high school graduation rates and low percentages of residents who go on to college is a grave problem in Maine. This change would only exacerbate an already existing critical threat to Maine’s economic viability.

Taxing charities will have the same effect as eliminating the tax deduction on charitable gifts.

Revenue neutrality

The Knight bill is revenue positive: it takes more money from the taxpayers.

The motive for comprehensive tax reform, to be politically viable, must be pure. It cannot be a vehicle for tax increases or tax cuts.

A bill that increases revenue is a tax increase.

Spending controls

The Knight bill includes no provision to contain the rising cost of state and local government in Maine. Taxpayers need to be assured that the enactment of pro-growth tax reform will not be the means of further escalating the cost of government.

I reiterate the call I made nine years ago for a state constitutional amendment to contain spending by state and local government and school districts.

Ronald Lebel, past director and chairman of the Androscoggin County Chamber of Commerce, is an attorney with Skelton Taintor & Abbott. He lives in Auburn.

Editor’s note: LD 1496 was the subject of an intense public hearing on May 10 and has been worked during three sessions before the Committee on Taxation, with no action taken. The bill will be worked again this Thursday, May 30.

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