Maine Tax Reform and Relief Plan Download the Maine Tax Reform and Relief Plan as a Word document Download a PDF file with graphics, showing the projectedi mpact of the plan on Maine taxpayers Download the Q & A section below as a Word document Questions & Answers Is this all just a tax shift? The tax package does shift taxes, and that is a good thing. For instance, by using sales taxes to lower income taxes, we are helping spur Maine's economy (encouraging entrepreneurship and business expansions). We are also creating a more predictable revenue stream (which helps prevent unsustainable spending). And by relying more on taxes that are partially paid by non-residents, a revenue neutral shift also helps lower the tax burden on Maine residents. Why aren't you cutting spending? The Legislature is cutting spending. The recently passed budget included over $270 million in cuts, at the same time that it increased state aid to education (to slow increases in local property taxes) - and the state budget is $240 million below the Legislature's spending cap! Tax reform to achieve a more fair distribution of taxes, and cutting spending are two separate things. The tax package is a companion to the budget - it’s more appropriate to make spending cuts through the budget, not the tax plan. The tax plan (in of itself) is revenue neutral, meaning it brings in the same amount of revenue as the current tax system. It still provides relief, by requiring that more revenue is brought in from non-residents - which reduces the tax burden on Mainers. Why cut the income tax? First and foremost, it is guaranteed money back in the hands of Maine people with every paycheck. But Maine's high income tax is also a barrier to business growth. Most economists will tell you that taxing consumption makes much more sense than taxing income. We want to encourage people to build businesses and create jobs. The vast majority of businesses in Maine are small businesses, and most of them pay the individual income tax rate - so cutting the income tax would also provide a major tax cut to small businesses, encouraging them to hire more people, invest in equipment and grow their operations. How do people who don't pay income taxes benefit from this new system? A portion of the new tax credit is "refundable," meaning that it will be paid back as cash to Maine residents even if they do not pay income taxes. But the new tax plan isn’t only about income taxes. It also provides eligible persons with relief from property taxes or rent. Why a flat tax? Isn't that regressive? A flat tax by itself wouldn't be fair, because it potentially hurts people with lower incomes. But the tax plan modifies this effect by providing a new "resident credit" that helps low and middle income persons. (The overall "progressivity" is slightly greater than Maine's current system.). A flat tax was chosen because it is easy to understand and because it appeals to many people. With the new credit, there are no downsides to a flat tax. What does the plan do to the home mortgage deductions? Home mortgage deductions will not be eliminated. In fact, many middle class tax filers will have a chance to write-off a greater portion of their itemized deductions under the new system, through a new "itemized credit." Only about 2% of Maine's tax filers are in a situation where they currently itemize but make too much money to take advantage of the new credit. But most of these people (9 out of 10) will benefit so much from the lower tax rate that they will still get an income tax cut. What does the plan do for local property taxes? This plan provides additional property tax relief by expanding the existing Circuit Breaker program and the Homestead Exemption. The plan also establishes a tax deferral program that will allow elderly residents to defer property taxes under they sell their home or die. Finally, the plan earmarks a portion of revenue growth to communities for the purpose of further property tax reductions. Why tax services? Taxes on services are often more stable and more exportable than taxes on goods. As the economy turns to rely more on services, most states have modernized their tax system accordingly. But not Maine. Maine taxes only 24 out of the 168 categories of items, avoiding most services. By comparison, Connecticut taxes 80 items. How did you decide what new services to tax? There is logic to what new services will be taxed. Almost all of the focus is on services used by consumers, as opposed to business-to-business services that could restrain economic growth. Beyond this, we purposely avoided new taxes on certain consumer services (including accounting, engineering, and legal services), because these kinds of services involve intellectual property that is entirely portable. Increasingly, people are obtaining such services remotely from professionals in other states, where Maine cannot impose its own taxes. So by imposing a tax on the Maine firms that provide these services, we put these firms at a competitive disadvantage. It is not surprising that these kinds of services are taxed in very few states. Is this plan unfair to tourists? The plan is not unfair to tourists. At present, tourists visiting Maine get a good deal. Because we tax so few services (compared to many states), visitors to Maine get tax cuts here they don't get in their home state (when they get their hair cut or go to the movies). The most obvious tax that tourists pay (the "meals & lodging" tax) will be set at only 8%, the same rate as New Hampshire. Many tourist destinations with far less appeal than Maine have much higher taxes. A lot of Maine people go out to eat. How does increasing the meals tax export tax burden? A lot has been made of the fact that about 65-70% of Maine meals are purchased by Maine residents. But if you increase the meals tax in order to reduce income taxes, you are exporting a great deal of tax burden, because about 95% of income taxes are paid by Maine residents. As long as the percentage of Mainers who pay income taxes is higher, a shift from one to the other will reduce Mainers' overall tax burden. Will it be difficult for businesses to set up the process to begin collecting taxes? Most of the businesses that will need to apply new taxes to services (like a beauty parlor) already collect taxes on the products they sell. So for many of these businesses, the difficulties are minimal. There will be some businesses that will be collecting taxes for the first time, but is that a good reason to avoid modernizing our tax system to keep pace with the times? What about claims that an increased real estate transfer tax discourages home ownership? The increase in the real estate transfer tax is very modest for primary residences owned by Mainers. The increased tax on a $200,000 home will be only $320. (For the vast majority of Mainers, this tax will be completely offset by the other tax savings in less than a year.) Maine's rates for non-residential real estate remain competitive at 1%. By comparison, New Hampshire's rate is 50% higher. I want tax relief, not tax reform. Why should I like this plan? This plan provides BOTH tax reform and tax relief. And BOTH are important. Tax reform lays a foundation for the future. We stabilize revenues and spur economic development. Meanwhile, tax relief puts money in your pocket. We need BOTH.