Chapter 4: LePage targets the income tax rate

The left, the right and just about everyone in-between has long agreed on one thing about Maine’s taxes — the income tax had to be fixed.

The main problem with it was that it treated working people like they were rich. The top 8.5 percent tax rate kicked in at an income level of $19,500.

In 2008, the Tax Foundation said Maine’s 8.5 percent was the seventh-highest state income tax top rate in the country. It wasn’t long after that that Democrats, who had control of the Legislature and governor’s office, came up with a plan to lower the income tax rate.

Championed by Democratic state Rep. John Piotti, it called for a flat tax rate of 6.5 percent but a broadening of the sales tax to make up for the lost income tax revenue. Politically, Democrats would not support a plan that reduced state revenues and required cuts in spending.

It passed the Legislature and was signed into law by John Baldacci, but voters killed the plan in a June 2010 referendum, its failure widely attributed to the sales tax increases and to Baldacci’s changes to the bill exempting some favored businesses, such as real estate and skiing, from the new sales tax.

State Sen. Joe Perry, D-Bangor, told The Associated Press that the vote marked 40 years of failed attempts to reform Maine’s taxes, putting Maine at a competitive disadvantage with other states.

Then came another vote just five months later — the election of LePage, who in the recent interviews with the Center described his political philosophy: “I don’t define myself as a Republican. I define myself as a conservative, as someone who believes in self-reliance, smaller government — and only enough taxes to run the show.”

Now, the income tax problem was back on the table — and the timing was perfect. The Tea Party movement, founded on a visceral dislike of deficits and high taxes, scored successes on the national and state stage, including Maine.

Paul LePage proposed what he hoped would be the first step in lowering taxes: take the top rate down from 8.5 percent to 7.95 percent. That became part of the governor’s first budget, and it was approved with votes from both parties.

His claim that it was the largest tax cut in Maine history, at $400 million, has not been refuted.

What did it do to Mainers’ taxes? Here are some projections for 2014 from the Maine Revenue Service:

The biggest change in taxes on a percentage basis goes to the working poor — a reduction in their income taxes of 83.6 percent. That group is counted as 19,503 “tax families.”
The biggest change in taxes on a dollar basis goes to the tax families making $325,974 and above. Their taxes will down $3,021 per family. There are 6,643 families in this group.
A broader view comes by looking at the middle — those making from about $33,000 to roughly $87,000, about 40 percent of all taxpayers. Their taxes go down about 8.6 percent. On an annual basis, this group’s average savings is about $220.

Interpretations of the new tax have been a projective test of where you stand on the ideological spectrum. Those that call it a giveaway to the wealthy tend to be left-leaning Democrats and progressives. The ones who see it as overdue include the business establishment and the long-frustrated fiscal conservatives, mostly Republicans.

“Fiscally irresponsible … that primarily benefits Maine’s wealthiest taxpayers,” claimed a white paper from the Maine Center for Economic Policy.

From the Maine Wire, the “news service” of the conservative Maine Heritage Policy Center: “These tax cuts benefit all Mainers by putting more money in the pockets of hardworking people and stimulating economic activity, which in turn creates jobs.”

Caron, one of the most cited centrists in the state, points out that the Brookings report found that the state’s high income tax was a major impediment to growth.

The LePage tax cut, he said, was “an important goal,” but he questions the way it was done because there was no way to pay for the $230 million cost of the first two years of the tax cut.

Instead, he said, LePage’s next budget made up for that loss with cuts in the money the state would give back to cities and towns — known as revenue sharing. Even though the Legislature restored some of those cuts, the reduction is translating into higher tax rates in some cities and towns, although it is too early in the tax cycle to have precise data.

LePage has mixed feelings when he reflects on the tax cut.

On the one hand, he boasts that 70,000 people no longer pay taxes and that 450,000 of 630,000 Mainers got a tax reduction. On the other, he said, “We were better off not lowering at all compared to what we’re doing now.”

The “now” is the budget the Legislature approved — over his veto — that temporarily raises the sales tax rate and taxes on meals and lodging.

One reason legislators increased taxes was to make up for the millions they added back to revenue sharing. Opponents to the LePage-sized cuts predicted those cuts would cause local taxes to rise. If that happened — and it has in some communities — it could hurt legislators’ chances for reelection in 2014.

LePage doesn’t buy the argument that cities and towns had to raise taxes to make up for the loss in revenue sharing. Instead, he said they should do what he did with some success as mayor of Waterville — consolidate.

“Take a look at Lewiston,” he said. “Thirty-six thousand people. They have one town manager, one police chief, one fire chief, one public works director, one superintendent (of schools), one tax assessor. Then you go back to Waterville, Winslow, Fairfield and Oakland,” he said, slapping his hand on the dining room table with the name of each town. “Four communities and they have roughly 36,000, maybe 37,000, people and they have 24 administrators. Lewiston has six — that’s the problem with revenue sharing.”

(Fact-checking his claim is complicated by the fact that local staffs have a variety of titles, some are part-time, some have mid-level officials, etc. But supporting the thrust of LePage’s view is the Brookings study, which cited the need to consolidate local services.)

Payne, the former head of a business group and formerly a town councilor in Falmouth, is a fiscal conservative, but the revenue sharing reduction “was not a particularly wise choice.”

“I’m not convinced the towns have a lot of fat,” but he said that may not be the case “on the schools’ side.”

Mills, the former legislator and a student of the state’s finances, said LePage may have missed an even better opportunity to fix the state’s tax system when he rejected working with an ad hoc bipartisan committee that came up with a fresh tax reform plan this year.

The group was led by independent state Sen. Dick Woodbury of Yarmouth — as Mills points out, a Harvard-educated economist.

There were obstacles, Mills said, such as the plan’s expansion of the sales tax, but it would also have eliminated many of the business tax breaks that economists say are ineffective, while reducing the income tax far more than LePage’s bill did.

“If he had got behind it, it would have picked up intense credibility,” Mills said. “And if he had gotten it through, it would have reduced the Maine income tax to four percent or thereabouts.

“It’s what economists have been telling us to do for decades — reduce the income tax and broaden the sale tax base,” Mills said. “It’s just what Reagan did with the income tax in 1986 … got rid of the gimmicks.”

But LePage rejected the bipartisan proposal because of the sales tax increases, even though they are offset by decreases elsewhere.

Instead, he has said he wants to eliminate the income tax all together by the end of his second term — if he gets one.

LePage was having lunch in the Blaine House when the legislators — including Republicans — overrode his veto of their budget.

His reaction was resignation, not anger. And a bit of his signature sarcasm:

“It’s too bad because we simply don’t want to get out of 50^th place — and I just hope Puerto Rico doesn’t want to become a state,” he said, and then laughed. “Because they are doing much better.”

Continue reading Chapter 5: LePage stays firmly to the right of the issues

Naomi Schalit contributed to this story. Disclosure: Severin Beliveau, who is quoted in this story, contributed $250 to the Center in 2013. The Maine Center for Public Interest Reporting is a nonpartisan, non-profit news service based in Hallowell. Email: mainecenter@gmail.com. Web: www.pinetreewatchdog.org.

About the author: John Christie is the co-founder, publisher and senior reporter of the Maine Center for Public Interest Reporting. He has covered local, state and national politics as a reporter, editor and publisher at newspapers in Maine, Massachusetts and Florida and holds a BA in political science from the University of New Hampshire.

: Gov. Paul LePage

: This is part of a nine-part story that develops a fuller picture of Gov. Paul LePage and his motivations: Headlines don’t tell the whole story of Paul LePage Chapter 1: Why LePage was elected Chapter 2: LePage tackles fiscal issues aggressively Chapter 3: Friendlier toward job creators than environmentalists Chapter 4: LePage targets the income tax rate Chapter 5: LePage stays firmly to the right of the issues Chapter 6: LePage wants cheaper energy for Maine Chapter 7: Drama overshadows LePage’s work on domestic violence and ethics Chapter 8: ‘He really doesn’t care if anyone likes him’