On Wednesday, Gov. Janet Mills (D) released her proposed supplemental budget for the State of Maine.
As part of this proposal, the governor had the opportunity to recommend updates to the state’s tax code, including whether or not to adopt some or all of recent changes made to the federal tax code.
Last year, as part of the One Big Beautiful Bill Act (OBBBA), lawmakers in Washington DC approved a number of changes to the federal tax code, reduced taxes on tips and overtime.
Under the proposed supplemental budget, however, Gov. Mills has only directly endorsed conforming with a small handful of these amendments, leaving it up to the Legislature to decide the best path forward for the remaining changes.
According to the governor’s estimates, it would cost the state roughly $400 million to incorporate all of the federal government’s changes into Maine’s tax code immediately.
In a statement shared Wednesday, Mills explains that this reduction in revenue would create a “major budget shortfall not only in the current biennium but in the next biennium as well.”
Mills has recommended gradually increasing Maine’s standard deduction to match that of the federal government, moving halfway there in 2026 and fully meeting it in 2027. It is estimated that this change will result in a revenue reduction of about $27.5 million over the biennium.
OBBBA effectively made permanent the increased federal standard deduction first introduced by the 2017 Tax Cuts and Jobs Act (TCJA) while also slightly increasing the amounts for 2025.
Although Maine conformed directly to the federal standard deduction for many years, the state moved to create its own in 2016 that was roughly double that of the federal government.
With the TCJA, the federal standard deduction was increased to a similar level. In light of this, Maine again linked its standard deduction to that of the federal government allowing for a greater degree of consistency between state and federal returns.
Given that the expanded federal exemption was initially set to be phased out at the start of this year, however, Maine moved in 2023 to enshrine its own higher standard deduction effective January 1, 2026.
As a result of this the Maine standard deduction for tax year 2026 is set to increase to $15,300 for individuals, $22,950 for heads of household, and $30,600 for married couples. Under OBBBA, the federal standard deduction beginning in tax year 2025 was increased to $15,750, $23,625, and $31,500, respectively.
Mills’ proposed supplemental budget also includes recommendations to phase in two other categories of tax code amendments advanced by the federal government recently: changes to research and development taxes, as well as a new charitable giving deductions for those who do not itemize.
Under Mills’ proposal, however, neither of these updates would be made in full immediately, instead phasing them in over time.
That said, the governor has recommended making the changes to research and development taxes applicable to small businesses right away. For large businesses, the changes would be spread out over the course of five years.
“My Administration, working closely with the Legislature, has approved more than $1 billion in tax relief, including relief for folks with children, folks with student loans, seniors, and others – and I strongly encourage all Maine people to take full advantage of those tax breaks,” said Mills in a statement.
“The proposals in the supplemental budget are intended to advance tax relief for Maine people and serve as a place to start the conversation about conformity with the Legislature,” she continued. “I look forward to hearing from lawmakers about their priorities and working with them in the coming weeks to maximize tax relief within our means to benefit Maine people.”
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This past fall, the governor indicated in a letter to State Tax Assessor Jerome Gerard, obtained by WMTW, that she would not be moving to immediately enact all of the changes made in the OBBBA for the 2025 tax season without further action from the Legislature.
The governor indicated at the time, however, that this was “not the end of the discussion of conformity” with the new federal income tax code, as further guidance would follow “in due course.”
“Further guidance on whether and to what extent to conform with these adjustments as well as the federal law changes for 2026 and future years — and even, potentially, whether to retroactively conform to some less urgent but more costly items in 2025 — will follow in due course, when we have more revenue and economic data to work with and when the Legislature is in a position to address Maine’s overall response,” explained Mills.
“This determination relates only to provisions of the federal act that affect taxpayers as they file their 2025 tax returns,” she said, “and is necessitated only by the urgent needs of tax administration for the 2025 tax year.”
Legislative Republicans have responded to this, criticizing the Mills Administration for “limiting the relief” Mainers would receive for the 2025 tax year.
“It’s never enough for Maine Democrats,” Senate Republican Leader Trey Stewart (R-Aroostook) wrote in a statement last week. “Instead of taking this opportunity to provide much-needed relief to Maine citizens, our Governor has chosen to continue with her unsustainable tax-and-spend mentality.”
“Democrats’ angry obsession with opposing anything President Trump touches is going to continue to hurt Maine people,” Sen. Stewart said. “They continue to choose benefits for people who don’t work over tax relief for people that do.”
“Legislative Republicans will not support any budget bill that doesn’t provide broad-based tax relief,” wrote Stewart.
Under a new law approved without challenge earlier this year, the governor has the authority to delay implementation of some or all changes to federal tax law until the State Legislature has the opportunity to act on them, as has previously been pointed out by the Portland Press Herald.
LD 221, signed by Mills on June 17, lays out a process for dealing with changes to federal income tax law when the Legislature has not yet had the chance to conform or adjust Maine’s laws in response.
The governor’s decisions under this law, however, do not represent a final policy determination for the state, but rather are “contingent” upon future legislation enacted by lawmakers in response to the federal government’s amendments.
“I look forward to working with the Legislature in the coming weeks to enact a balanced budget that supports Maine people and protects the fiscal health of our state,” said Mills in a statement shared Wednesday that accompanied her proposed supplemental budget.
