Maine State Budget – Tax Impact and Commentary

Merrill Barter and Stan Rose Managing Directors, Tax Practice
July 6, 2017

Anyone following news in Maine the last few days and weeks was aware of the struggle in Augusta to come up with a 2017-2018 budget.  The process was started in January with the release of the governor’s proposed budget, and culminated a few days after the end of the state’s June 30 fiscal year end.  The drama included protests, claims of lawmakers’ cars being vandalized, and the governor promising not only to veto versions that contained tax increases, but to deliberately wait the full 10 days he is allowed to consider a bill, thereby allowing the government to shut down during that period (because the previous budget expired at the end of June).  At around 1:00 AM on Independence Day, negotiations were finalized and the budget was signed.  Below is a short overview and commentary, primarily covering the tax implications of the budget legislation, known formally as L.D. 390.

3% tax increase is eliminated

Few items in the budget created more disagreement than this one.  Last November, a majority of Maine voters approved a ballot question that created a 3% surcharge on the portion of a Maine individual’s taxable income that exceeds $200,000.  Proponents favored the progressive nature of the tax, as well as its use funding a requirement in existing Maine law that a specific portion of education costs be borne by the state, rather than municipalities.  Detractors, meanwhile, often referred to it as a “success tax,” and observed that it caused Maine to have the 2nd highest individual tax rate in the country behind California.  For a wide range of incomes, it actually would be the highest rate in the nation, because California’s top rates take effect at much higher income levels.

This additional 3% tax was to first be reported on 2017 tax returns that are due 4/15/18, but L.D. 390 eliminated this tax. 

Lodging tax remains unchanged

Maine imposes a lodging tax, which has increased from 7% to 8%, and then to 9% between 2012 and 2016.  Earlier versions of the budget proposed an increase to 10.5%.  Governor LePage previously had suggested an increase to 10%, but only if a corresponding drop in other taxes was provided.  (In tandem, this would push more of the state’s tax burden onto nonresidents, while reducing taxes for residents.)  When presented with a tentative budget that included a larger increase in the lodging tax but no offsetting reduction in other taxes, the governor insisted he would veto the bill.

The finalized version of the budget leaves the lodging tax unchanged at 9%.

BETR/BETE

Two state-sponsored business equipment tax relief programs exist in Maine:  The BETE program, which provides exemptions from local business equipment tax, and the BETR program, which provides reimbursement (and is no longer applicable to new equipment).  The next-to-last version of the budget would have rolled these two programs into one, but that proposal did not survive into the final version.

Homestead exemption

Under current law, local residential property taxes exempt the first $15,000 in value, increased to $20,000 as of April of this year.  State funding for municipalities’ lost property taxes related to the increased exemption was to increase as of that date as well.  L.D. 390 delays the increased state reimbursement until property tax years beginning in April of 2018.

Commentary

The balance of the 800-page L.D. 390 legislation primarily addresses the uses of the state’s tax dollars, rather than the taxes themselves.  A comparison of different versions of the bills, and noting what survived and what fell to the cutting room floor reveals predictable difficulties that democrats and republicans would have in accepting earlier versions of the bill.  The changes (and agreement to forgo proposed changes) related to tax rates clearly ended up closer to republican liking.  However, an assertion that democrats blinked first and LePage “won” is hard to support with a deeper look at the bill’s progression – especially regarding education. 

Democrats won significant education funding in the bill, and removed earlier proposals that would have (1) provided students with a choice to attend school outside of their own districts without approval of their local districts, (2) established an education savings account for disabled students, to be funded by a reduction to Department of Education funding, and (3) forced the University of Maine and Community College system to gauge and report the cost of providing remedial English and math training, resulting in an indirect transfer of those costs to the colleges by the school administrative districts where those students attended high school. 

Some compromise was shown with respect to welfare benefits, as earlier versions of the bill contained reductions based on lifetime limits, asset levels, and loss (voluntary and involuntary) of jobs.  The welfare reductions that survived apply to a narrower group of recipients, including certain felons convicted of violent crimes, and certain lottery and gambling winners.

Some internal cost-cutting measures were implemented in the bill.  Specifically, it requires widespread review of vacant positions across governmental departments, and authorizes position eliminations that will total $3,000,000 in the next fiscal year.  This, too, was subject to some compromise, as the previous version of the bill called for a $3,500,000 reduction.

Finally, L.D. 390 confirms that state employees will be paid back pay and holiday pay for the brief period in which the state government was partially shut down.  This applies to both emergency and non-emergency personnel.

Once it was finalized, the budget contains very few changes to taxes, at least in terms of how those taxes are assessed.  As is common with most budgets, most of the language addresses how tax dollars will be spent.  With decisions to forgo the widely publicized 3% surcharge and the increased lodging tax, the revenue side of the equation is more a story of what did not come to pass, rather than what did. 

Please contact Merrill Barter (BNN’s State and Local Tax Practice leader) or your BNN tax advisor at 1-800-244-7444 with any questions regarding these initiatives.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.