Update: Tax reform was shot down by sixty-one percent of Maine voters on June 8, 2010, repealing the law.
In June 2009 a drastic overhaul of Maine’s state tax system was passed and signed into law by the governor. However, a petition was filed with the state that will give voters the option to veto the law on the June 8, 2010 ballot.
What Will Change If It Passes?
The proposed tax reform law would change Maine's income tax from a bracketed tax structure to a flat tax system in which everyone pays the same rate of tax. It would also expand the sales tax by increasing items subject to sales tax and increasing certain sales tax rates.
Moving to the Flat Tax
The tax reform law would remove the current tax brackets of 2%, 4.5%, 7%, and 8.5% and replace them with one flat tax rate of 6.5% for those with income up to $250,000. Any income over $250,000 would be taxed at 6.85%.
Trading Deductions for Credits
A component of the flat tax philosophy is to remove any special treatment or loopholes in order to be fair to all and to simplify the tax code. Under Maine’s tax reform law, the standard deduction, itemized deductions, and personal exemptions (deduction for dependents) would not be allowed. The Low-Income Tax Credit and the Retirement and Disabled Credit would also be removed. These deductions and credits would be replaced by the following new tax credits:
- Refundable Household Credit: a credit for full-time residents of Maine only. The base amount of the credit is $700 for single taxpayers and $1,200 for married filing jointly. The base amount is increased by $250 for each exemption (dependent) claimed on your federal return. The credit is refundable for up to $70 (married joint) and $50 for all others. The credit begins to phase out at $27,500 of income for single filers and $55,000 of income for married filing jointly.
- Alternative Refundable Household Credit: if you itemize deductions on your federal return you have the option of taking this credit instead of the regular household credit. This credit is also only for full-time residents. The credit amount is 5.5% of adjusted federal itemized deductions plus $400 for single filers, and $800 for married filing jointly.
- Charitable Contributions Credit: a credit of 5% of charitable contributions during the current year that exceed $250,000 and were claimed on your federal return.
- Elderly Credit: $60 for each taxpayer who is 65 or older. The credit begins to phase out at $32,000 of income for single filers and $52,000 of income for married filing jointly.
- Expanded Earned Income Credit (EITC): this credit will become refundable after 2009. The maximum refundable amount for both the household credit and the EITC together will be limited to $150 for married filing jointly and $125 for all others.
No More AMT
The alternative minimum tax (AMT) and the AMT credit for individuals would be repealed under the new tax reform law. In addition, under the new law, lump-sum retirement plan distributions and early distributions from retirement plans will no longer be taxed. This is consistent with a flat tax philosophy which seeks to eliminate double taxation.
Sales Tax on Clowns, Liquor, Sports Drinks, and More
Under the new law, the sales tax would be expanded to tax services (e.g. technology consulting, cleaning services, etc.). Additionally tax rates on liquor, prepared food, and living quarter rentals would increase from 7% to 8.5%. The sales tax rate on short-term vehicle rentals would also increase from 10% to 12.5%.
These items (which are not currently taxed) would become subject to the 5% sales tax under the tax reform law:
- All rentals of tangible personal property including daily rentals of items such as small tools, lawn care equipment, tuxedos, tables, chairs, etc.
- All beverages containing less than 51% vegetable or fruit juice (milk is excluded)
- Telecommunications services provided to residential customers
- Admission fees to entertainment venues and performances, including movies, concerts, museums, amusement parks, sight-seeing excursions, etc.
- Entertainment services such as those provided by bands, disc jockeys, clowns, jugglers, ventriloquists, etc.
- Services such as cleaning, repairs, and maintenance to personal property.
How It Will Look on the Ballot
According to the Maine Secretary of State, this tax reform law will be listed as on the ballot as Question 1 (People’s Veto) and the wording will be, “Do you want to reject the new law that lowers Maine’s income tax and replaces that revenue by making changes to the sales tax?”
Arguments for and Against Tax Reform
The primary arguments for a flat tax are fairness and simplicity. By eliminating deductions, the tax code is simplified and biases towards those who buy expensive homes or have children are eliminated. In addition, reducing the top income tax rate is thought to attract business and high income individuals into the state, thereby increasing overall tax revenue and economic stability. The sales tax increase is advocated as a way to push the tax burden from Maine residents to visitors and tourists.
The main argument against the flat tax is that it places an undue burden on the poor by subjecting them to high rates and removing deductions. Most flat tax systems get around this by exempting from tax those who fall below certain income limits. Maine’s proposed system does not do this, but instead offers several tax credits for low and middle income individuals. An increase in the sales tax is also seen as taxing the poor since they will feel the effects of the increase more because they have less money to spend.
More information on proposed sales tax changes, income tax changes, and other changes included in the tax reform law.