Showdown in Augusta: Tax Changes in Maine’s Proposed Budget
Stan Rose, Managing Director, Tax Practice
Maine’s two-year budget proposal has been the subject of plenty of ink and pixels in recent days, as Maine’s governor and legislators wrestle their way toward a very contentious completion of the lawmaking process. The proposed budget holds many tax changes, and the purpose of this article is to provide a list of those changes.
Before we delve into those changes, please note that the budget has not yet become law. However, its passage appears likely, after following a rather unusual path: Earlier this month, Maine’s House of Representatives and Senate approved the budget. Then, Governor LePage followed through with previous threats by exercising 64 line-item vetoes within the proposed budget. Both the House and the Senate quickly overrode the vetoes, which required a simple majority vote. The bill now goes back to the governor, who has indicated that he will veto the bill in its entirety. Overriding a bill veto (as opposed to a line-item veto) will require a 2/3 majority of both the House and the Senate. Both chambers easily had that level of support when the bill was drafted, so it seems very likely that everything that happens between now and then is a formality, and that the bill will become law.
If it does become law, here is a short overview of some of the tax law changes we will see:
- The state’s individual income tax rates will change from 0%, 6.5% and 7.95% to 5.8%, 6.75% and 7.15%.
- The standard deduction is increased significantly, from $6,200; $9,100 and $12,400 for Single/Married Filing Separately, Head of Household or Married Filing Jointly to $11,600; $17,400 and $23,200; respectively.
- The Earned Income Credit currently equals 5% of the federal amount and is nonrefundable (meaning that it can reduce tax to zero, but cannot in and of itself produce a refund, or “negative tax”). The new Earned Income Credit will be fully refundable, allowing someone with no tax or withholdings to receive cash if qualifying for this credit. The 5% level remains unchanged.
- Standard deductions and itemized deductions will be subject to a phase-out for individuals whose adjusted gross income exceeds $140,000 for Joint Filers; $105,000 for Heads of Household; and $70,000 for Single or Married Filing Separately taxpayers.
- All military retirement plan benefits will become completely tax-free.
- Your author feels like some sort of “Whiplash Watchdog” for sharing this next one: The exception for charitable contributions from the overall cap of $27,500 on Maine’s itemized deductions has been revoked. Some history may be in order: In 2013, Maine imposed an overall limit on itemized deductions allowable on a Maine individual tax return, capping them at $27,500 regardless of the amount reported on a taxpayer’s federal return. In 2014, L.D. 1664 was passed, removing charitable contributions from this cap, effective in full for 2017 and in part for 2016. However, with the current budget proposal, the pendulum reverts back to the 2013 position described above, such that deductible itemized deductions, including charitable contributions, cannot exceed $27,500.
- A “sales tax fairness credit” of between $125 and $225 (depending on number of exemptions claimed) is provided for individuals of modest incomes.
- Several credits are eliminated, including those related to jobs and investment, employer-assisted day care, employer-provided long-term care benefits, high-technology investment, dependent health benefits, quality child care investment and commercial production of biofuel.
- Beginning in 2016, the value of a decedent’s estate that will escape Maine’s estate tax will increase to match the comparable federal amount (Maine’s threshold currently is much lower, triggering state-level tax for smaller estates).
- Finally, the proposed budget elaborates on Maine’s existing list of foods and drinks that do not qualify as grocery staples and therefore do not enjoy the related exemption from sales tax that the “grocery staples” designation provides. Most such items subject to sales tax consist of snacks, drinks, and prepared food. Some confusion in the wording led many to speculate that peanut butter would now be taxed, but disaster was averted when Maine Revenue Services issued an alert clarifying that peanut butter remains exempt.
There are many more proposed changes included in the budget, and it can be read in its entirety here. If you would like to discuss further, please call your BNN tax advisor at 1.800.244.7444.
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.