Gov. Mills Vetoes Bill Restructuring State Income Tax Brackets, Imposing 8.45% Tax on Highest Earners

This past Friday, Gov. Janet Mills (D) vetoed a bill that would have restructured Maine’s income tax brackets, creating a new top tax rate of 8.45 percent for the state’s highest earners.

This bill — LD 1231, An Act to Bring Fairness in Income Taxes to Maine Families by Adjusting the Tax Brackets — was originally introduced in 2023 by Rep. Meldon H. Carmichael (R-Greenbush) as a concept draft with the stated intention of “chang[ing] the income brackets” while “retain[ing] the same tax rates.”

The version of the bill advanced by Democrat members of the Taxation Committee — and ultimately approved by lawmakers in both chambers — proposed adding an 8.45 percent income tax bracket for individuals making more than $500,000, heads of household making more than $750,000, and those filing married joint returns for more than $1 million.

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Currently, Maine’s highest earners are taxed at a rate of 7.15 percent, meaning that LD 1231 would have raised the state’s top tax rate 1.3 percent had it been signed into law.

Aside from the addition of this new 8.45 percent bracket, the changes recommended by both the Democrat and Republican versions of this legislation were identical.

The existing income tax structure consists of three brackets, each with different monetary thresholds based on filing status.

The lowest tax bracket — with a rate of 5.8 percent — currently encompasses individuals making less than $21,050, heads of household making below $31,550, and those filing married joint returns with an income less than $42,100.

Under the proposed bill, these caps would have been raised to $41,600, $62,400, and $83,200 respectively.

A tax rate of 6.75 percent is currently assessed against individuals making between $21,050 and $50,000, heads of household reporting between $31,550 and $75,000, and those filing married joint returns with an income between $42,100 and $100,000.

Under LD 1231, these ranges would have been shifted to $41,600 and $85,000, $62,400 and $127,500, and $83,200 and $170,000 respectively.

LD 1231 also would have created additional intermediary tax brackets with rates of 7.15 percent, 7.55 percent, and then back to 7.15 percent.

During the February 28, 2024 work session for this bill, it was explained that this more complex structure was pursued in effort to prevent those in higher tax brackets from “tak[ing] advantage” of the lower-income taxpayers below them by benefiting from these more advantageous rates.

In other words, the 7.55 percent boost for those making between $144,500 and $205,000 was not designed as a targeted tax increase, but rather as a means by which to counterbalance the cost savings that these taxpayers otherwise would have received from having portions of their income taxed more lightly.

The effects of this would then have carried forward for taxpayers in the remaining brackets, as this structure would have essentially reset how the first $205,000 worth of their income would be taxed.

Click Here for More Information on LD 1231

In her veto letter, Gov. Mills criticized the bill for failing to “deliver meaningful tax relief” to low-income Mainers while simultaneously disrupting the stability of the state’s tax revenue.

“While well-intentioned, the income tax shift in LD 1231 does not deliver meaningful tax relief,” Mills wrote. “Low-income taxpayers would receive very little or no actual benefit from the proposal due to the State’s many available deductions and exemptions as well as the size of the existing 5.8 percent tax bracket.”

“Maine’s highest income tax rate of 7.15 percent is the 10th highest state income tax rate in the country,” Mills said, “and there are concerns that increasing that top rate even further would create challenges for state budgeting, because it would increase the State’s reliance on a small number of taxpayers (less than 1 percent) whose income is disproportionately composed of highly volatile sources such as capital gains and business income.”

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“At a time when we are already keeping a close eye on Maine’s budget because of increased spending and flattening revenues, there is concern from our budgeting officials that relying on more volatile forms of revenue may inadvertently jeopardize the State of Maine’s fiscal standing,” said the governor.

Mills also took issue with the process by which this bill was advanced, arguing that it did not provide an adequate opportunity for members of the public to provide input.

“This bill would make a substantial change to the structure of Maine’s income tax, but it moved through the Legislature in a manner that deprived the public of a meaningful opportunity to be heard,” Mills said. “The bill was printed as a concept draft and no actual legislative language was available at the public hearing.”

“The tax rate increases included in the enacted bill were not presented during the public hearing; they were first unveiled and discussed at the work session afterward, which denied the public and stakeholders, small businesses, for instance, the opportunity to weigh in and shape the discussion,” Mills wrote.

“Fundamental changes to the State’s income tax structure such as the one proposed in this bill should be made only following a transparent and deliberative process,” Mills said.

The governor underscored at the close of her veto letter that while she supports taking steps to reduce Mainers’ tax burden, she does not believe that this legislation took the right approach to doing so.

“Over the past several years, we have substantially reduced, if not outright eliminated, the tax burden for low-income Mainers,” she wrote. “While I am always open to conversations about how we can continue to reduce the tax burden for Maine people, I do not believe this bill effectively achieves its aim.”

“I believe it was arrived at through a flawed process and that it may have unintended consequences that could jeopardize the stability of the state budget,” Mills concluded.

Click Here to Read the Full Text of Gov. Mills’ Veto Letter