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Tax Committee at odds with Mills administration on increases to income, estate taxes

A pair of bills recently voted out of the Committee on Taxation have the potential to raise taxes on Mainers. 

If passed, LDs 498 and 1524 would effectively raise the top marginal income tax rate along with the estate tax in Maine. While supporters believe the bills will target high-income earners and address income inequality, opponents are concerned they could hurt Maine industry and make the state less economically competitive.

Michael Allen, Associate Commissioner for Tax Policy in the Department of Administrative and Financial Services, testified in opposition to both measures on behalf of the Mills administration.

LD 498, An Act To Reauthorize a 3 Percent Tax on Income over $200,000 To Lift All Maine Workers out of Poverty

In 2016, Maine voters approved a ballot initiative that implemented a 3% surcharge on incomes earned over $200,000. Question 2 asked voters, “Do you want to establish a Fund to support kindergarten through 12th grade public education by adding a 3% surcharge on Maine taxable income above $200,000?” Though voters approved the question, in 2017, Republicans led by Governor Paul LePage negotiated a deal in the biennial budget that repealed the tax.

In exchange, Republicans agreed to allocate $1.15 million for the state’s preschool program, put a two-year moratorium on reductions to behavioral health services for MaineCare and earmarked $162 million for public education, or roughly half of the revenue Question 2 was supposed to raise.

On May 18, the Committee on Taxation voted to resurrect the 3% surcharge on taxable income over $200,000. LD 498, which also would raise Maine’s earned income tax credit to match the federal earned income tax credit, was voted out of committee on a party-line vote, with Democrats voting to approve the motion to pass the bill and Republicans opposing it. The committee voted as follows:

In Favor: 

Sen. Benjamin Chipman (District 27) 

Rep. Benjamin Collings (District 24) 

Rep. Maurine Terry (District 26) 

Rep, Lori Gramlich (District 13) 

Rep. Ann Matlack (District 92)

Rep. Melanie Sachs (District 48)

Rep. Joseph C. Perry (District 124)

Opposed:

Sen. Matthew Pouliot (District 15) 

Rep. Theodore Kryzak (District 20) 

Rep. Meldon Carmichael (District 137) 

Rep. Bruce A. Bickford (District 63)

Rep. Jeffery P. Hanley (District 87)

Maine currently has three tax brackets. The top bracket levies a 7.15% tax against incomes over $52,600 for single filers and incomes over $105,200 for filers who are married and filing jointly. If the 3% surcharge becomes law again, a new bracket would be created and those who fall into this group would have their income taxed at a rate greater than 10% in Maine. 

For some opponents of the bill, that’s cause for concern. Testifying against LD 498, Keith Fleming of the Maine Hospital Association expressed concern that taxing income at such a high rate could make it difficult to attract medical staff to the state. 

Fleming testified that while it’s difficult for hospitals to relocate to avoid high rates of taxation, it’s much easier for medical employees, whose skills are in high demand, to do so. 

“The ability of physician employees, who are in high demand nationally, to avoid the 10.15% tax rate is much easier. There are simply fewer barriers to relocating for employees.” said Fleming.

If instituted, the 3% surcharge means high income earners in Maine would be taxed at one of the highest rates in the nation. Currently, of the states in New England with graduated income taxes, Vermont’s top marginal tax rate is the highest, at 8.75%. Maine’s top rate is currently the second highest in New England. If the 3% surtax becomes law, Maine will have the highest marginal tax rate for high income earners in New England. If passed, only California and Hawaii’s top rate of 13.3% would be higher nationally. 

Curtis Picard of the Retail Association of Maine noted in his testimony opposing LD 498 that “many Maine small businesses use the individual income taxes to file for their business as S Corps. LD 498 is a small business tax coming at the worst possible time.”

LD 1524, An Act to Amend the Maine Exclusion Amount in the Estate Tax

Under current Maine law, $5,600,000 is excluded from the estate tax. If adopted by the legislature, LD 1524 would lower the exclusion amount to $2,000,000. The change would apply to anyone who dies on or after January 1, 2022. 

This change is aimed at commercial farming, aquaculture, fishing, and wood harvesting.

The bill creates an additional exclusion of $3,800,000 for farmland and depreciable machinery and equipment that’s transferred to a family member of the deceased. To qualify for the exclusion, land transferred would have to remain in the family for 5 years and continue to be operated for either farming, aquaculture, fishing or wood harvesting. 

Further, to qualify for the additional exclusion, all machinery and equipment transferred must remain in use for 5 years. Failure to meet these requirements would result in the owner being taxed on applicable property based on the market value at the time of the decedent’s death.

Starting in 2023, the bill would also apply a cost-of-living adjustment, determined by the Chained Consumer Price Index, to the amount of tax owed by the estate of anyone who died. All revenue raised from the bill would go into the General Fund.

LD 1524 was voted out of committee on May 26. The motion to accept the amendment was passed on a party-line vote, with Democrats voting in favor of the motion and Republicans opposing it. The committee voted as follows:

In Favor: 

Sen. Benjamin Chipman (District 27) 

Rep. Benjamin Collings (District 24) 

Rep. Maurine Terry (District 26) 

Rep. Lori Gramlich (District 13) 

Rep. Ann Matlack (District 92)

Rep. Melanie F. Sachs (District 48)

Opposed: 

Sen. Matthew Pouliot (District 15) 

Rep. Theodore Kryzak (District 20) 

Rep. Meldon Carmichael (District 137) 

Proponents of the bill argue lowering the estate tax exemption would more fairly distribute a tax burden that’s unfairly borne by lower-income earners, and would allow the state to invest more in municipalities.

Testifying in favor of the bill on behalf of the Maine Council on Aging, Jess Mearer said, “Reasonable and equitable estate taxes increase the fairness of our tax system and help provide the revenue to enable people to live in their communities and contribute to a true multi-generational society.”

Testifying for LD 1524 on behalf of the Maine Sierra Club, Becky Hill said, “the added revenue provided by this legislation would enable greater investment in our municipalities, families, schools, infrastructure and environment.”

But opponents of the bill have raised concerns about the impact this would have on Maine’s economy. Testifying against LD 1524, Linda Caprara of the Maine State Chamber of Commerce raised concerns about what the exemption would mean for individuals who don’t have the cash on hand. “If they can’t pay the taxes due up front they may be forced to deplete any working capital they have in the business or sell assets or property to pay the tax.” said Caprara.

Dana Doran of the Professional Contractors of Maine expressed similar concerns in his testimony. “Our membership does not have substantial savings, so when the estate of a small business owner is not able to pay an estate tax liability, the family must either sell the business or secure a loan to fund the payment. Removing assets from the estate is the only way to avoid this estate tax; doing so is not an option for many who have their assets tied up in current operations. Furthermore, the fees to hire an estate planning lawyer to remove assets from the estate often can run into tens of thousands of dollars,” Doran said

Patrick Strauch of the Maine Forest Products Council also expressed concern in his testimony against the bill, noting that lowering the tax exemption could result in the selling off of and development of the state’s logging lands. According to Strauch, inheritors are generally not aware of the size of the tax before it’s due. He added, “they don’t have the financial resources to pay the estate tax unless they sell the land, so despite their desire to keep it in family ownership, they must sell. The sale can precipitate large-scale harvesting. In developing areas, such as southern Maine, the next step is development.”

Twelve states and the District of Columbia have an estate tax and, if LD 1524 is passed, Maine’s estate tax exemption would become the third-lowest in the nation. Rhode Island’s exemption is $1.6 million and Oregon and Massachusetts have an exemption of $2 million. New Hampshire is the only New England state without an estate tax. Vermont’s exemption is $5 million and Connecticut’s is $7.1 million. 

The Future of LDs 498 and 1524

While both bills were approved by the Committee on Taxation, it is unclear if either measure could earn the support of the full legislature or Governor Mills if they are to reach her desk.

Mills pledged not to raise taxes during her gubernatorial campaign, and her opposition, particularly to LD 498, has put her at odds with progressives in her own party.