By: Albert A. DiMillo Jr.

, Retired Corporate Tax Director, CPA & Life-Long Democrat

(Revised on 4-24-10 to include the MRS revised estimates of the impact on Mainers)

Tax Reform: Reducing the tax burden for Maine people

That was the headline from a 2009 Legislative Update I received in the mail from my
South Portland Democratic representative, which was followed with five statements
about “tax reform” to support the headline. Unfortunately, not one of the five statements
that followed were true. My representative, like the vast majority of the legislators did
not understand the details of the law they voted on and continue to make false and
misleading statements about the law. Unlike my representative, I have spent over 300
hours analyzing the details of the law. The following are the statements made in the
Legislative Update and are currently on the Democratic website related to “Maine Tax
Reform”. The real facts about LD 1495 and the five statements are analyzed below:

1. Passed a sweeping tax reform package that reduces overall taxes for over 87% of
Maine citizens.

The 87% comes from the original Maine Revenue Services (MRS) report of the impact of
LD 1495 on the sales tax and income tax for the year 2010 (the revised MRS report made
minor changes and this analysis has been revised based on that report). However, what is
not included in these numbers is the MRS estimate that at least 50% of low income
taxpayers who currently don’t pay any income tax will only have an income tax decrease,
if they file a tax return to receive a $50 - $70 tax refund. MRS estimates that at least 50%
of these taxpayers will not file for the refunds, because of the small amount of the refund
and the cost to file the return. When one includes a conservative estimate of 125,000 low
income non filers, who all will have a sales tax increase, the percentage of Mainers with a
net tax cut goes down to about 70%. The other factor that was disingenuously left out of
the equation was the fact that just days before passing LD 1495, the legislature passed LD
353, which included numerous tax increases to help balance the FY 2010 budget.
Included in that bill was a $10.5 million income tax increase from reducing the inflation
adjustment, a 20% reduction in the property tax circuit breaker rebate program and a
reduction in the property tax homestead exemption from $13,000 to $10,000. When one
combines the LD 353 tax increases with the LD 1495 “tax reform” bill, the percentage of
Mainers with a net “overall tax” decrease (sales, income and property taxes) drops to
about 54%. Finally because LD1495 does not have inflation adjustments to the income
tax until 2014, the number of taxpayers with a net tax cut will go below 50% by 2013,
assuming a conservative inflation adjustment of 2.5% in years 2011 -2013.

2. Lowers the top income tax rate and capital gains rate from 8.5% to 6.5% for
Mainers making less than $250,000 a year, and 6.85 % for those who make over that
amount.

The truth is less than 5% of Mainers will see their top marginal tax rate drop from 8.5%
to 6.5%. Actually LD 1495 replaces the old 0%, 2%, 4.5%, 7.0% and 8.5% income tax
rates with six rates of 6.5%, 6.85%, 8.0%, 8.35%, 8.5% and 10%. For the majority of
taxpayers, LD 1495 cuts the top tax rate at most from 7% to 6.5%, because 63% of
Mainers have a top marginal tax rate of 7% or less. Other higher income taxpayers will
see their top rate go down from 8.5% to 8%. However, in some cases LD 1495 actually
increases the 2% and 4.5% marginal tax rates under the old law to 6.5% and the old law
7% marginal tax rate to 8% or from 7% to 10%.

3. Reduces overall taxes on Mainers by $57.1 million per year and exports taxes to
non-residents.

The revised MRS report for year 2010 estimates that the net income and sales tax cut
would be $51.9 million, before adjusting for the $5.7 million of refunds it budgeted that
would not be collected by low income taxpayers, because they will not file due to the
small $50 to $70 tax refund and the cost to file a return. Accordingly, the actual income
and sales tax cut is reduced from $51.9 million to $46.2 million. As noted above, LD 353
increased 2010 income taxes by $10.5 million, with about $9.8 of that payable by Maine
residents. LD 353 also increased property taxes by about $9.0 million on Maine residents
by eliminating 20% of the property tax circuit breaker program. LD 353 also increased
property taxes by about $14 million by reducing the homestead exemption from $13,000
to $10,000 in year 2010. The combined impact of the 2009 legislature’s tax changes (LD
1495 and LD 353) is a net tax cut of $ 13.4 million not $57.1 million.

With regard to exporting taxes to non-residents, LD 1495 includes an unconstitutional

provision, which increases income taxes on non residents that will be overturned if this
law is not repealed. The MRS reported that the average effective income tax on all
Maine residents and non residents in 2007 was 3.2%. Under LD 1495, part-year
residents and non-residents overall effective income tax will increase from the 3.2% to
6.5%, because non residents will not get the “household credit” under LD 1495 that
reduces the flat 6.5% tax rate for residents only. The MRS estimates that over $21
million in increased income taxes will be collected from non residents under LD 1495. If
LD 1495 become law, and is found to be unconstitutional, Maine will lose more than $21
million in tax revenue.

4). Reduces taxes among all income groups fairly, and increases the progressivity of
the tax code.

This statement is the false on all points. As noted above, the claimed tax cut for Mainers
of $57.1 million is actually only $13.4 million in year 2010, when you include the impact
of the tax increases passed as part of LD 353. Based on the MRS report for year 2010, a
group of 4,545 taxpayers with income in excess of $316,958 will have a net tax cut of
$27.6 million, while the other 99.3% of Mainers will have a $14.2 million net tax
increase.

Even if you don’t include the impact of the tax increases under LD 353, the MRS report
for year 2013, clearly shows that the new law makes the tax code much less progressive.
The MRS report for 2013, estimates that a group of 4,638 taxpayers with income over
$350,810 will get a net income and sales tax cut of $34.8 million. The other 99.3% of
Mainers will have a net income and sales tax increase of $3.5 million. Not only are the
tax reductions among income groups very unfair, it also significantly increases taxes on
the elderly with large medical expenses and middleclass taxpayers with large itemized
deductions for interest, property taxes and charitable contributions. Most taxpayer would
agree that this law is far from “fair”.

5). Broadens the sales tax base to reduce volatility in the state budget, and modestly
increases taxes on items that are heavily paid by tourists like meals and lodging.

There is no evidence that increasing the sales tax base will reduce volatility in the state
budget, this is only an unproven opinion. Even if this opinion was true, then why wasn’t
the sales tax on services expanded to include more services and why was golf and skiing
excluded from the sales tax expansion? The Proponents of LD 1495 have deceptively
stated that Maine’s “meals and lodging taxes” are much lower than other states including
vacation destination locations and that raising these taxes will allow the state to export
the tax increase to out of state residents. The truth is that while these statements are
somewhat true for lodging taxes, they are not true for the meals tax. The MRS estimates
that 68% of Maine’s meals taxes are paid by Maine residents. In addition, Maine’s meals
tax at 7% is not low as compared to other states. Massachusetts just raised their meals
tax from 5% to 6.25% and Connecticut’s tax is only 6%. Orlando Florida’s sales tax on
meals is 6.5% (this is the combined state and local sales tax rate). All of these states have
the same meals tax rate as their general sales tax. While some states have a small
differential between their general sales tax and their meals tax, Maine at 7% already has a
40% additional tax differential and an increase to 8.5% or a 70% differential would put
Maine in the small minority of states. The MRS estimates that lodging taxes exported to
non residents will be about $6.5 million a year. However, almost all of this revenue
pickup on non residents will be offset by a yearly $4.5 million state payment to a tourism
fund.

Albert A. DiMillo, Jr.

64 Colchester Drive
South Portland, Maine 04106
(207) 899-0165
aadimillo@yahoo.com