06/28/2013

Maine Budget Contains Significant Tax Changes

Averting a potential government shutdown, the Legislature voted to override Governor LePage’s veto of the biennial budget. The budget contains many changes to the tax laws, some temporary and some permanent. The most significant aspect of the budget—from a tax perspective—may be what is missing. Many legislators had hoped to repeal the significant tax cuts enacted by the previous Legislature (including the reduction in individual tax rates), but those tax cuts remain in place for the time being. The following is a summary of the key tax aspects of the budget:

Income Tax

  • Last session the Capital Investment Credit was enacted to mimic federal bonus depreciation with respect to property placed in service and substantially used in Maine during 2011 and 2012. That credit has been extended for 2013, but will be equal to 9 percent, rather than 10 percent, of the bonus depreciation available for federal income tax purposes.
  • The Legislature has limited the amount of itemized deductions allowed to $27,500. The limitation amount has been indexed for inflation on a going forward basis.
  • Maine income tax law largely piggybacks on the Internal Revenue Code. Continuing a ritual, the Legislature updated the definition of “Internal Revenue Code” for purposes of the tax laws to the Code as in effect on January 2, 2013, as opposed to December 31, 2011. The American Taxpayer Relief Act of 2012 was signed into law by President Obama on January 2, 2013. Therefore, Maine’s tax laws now incorporate the “tax extenders” included in that Act.
  • Although Congress extended federal bonus depreciation through 2014 in the American Taxpayer Relief Act of 2012, the budget decouples Maine from bonus depreciation for 2014 and beyond.

Sales Tax

  • The general sales tax rate temporarily increases from 5 percent to 5.5 percent during the period October 1, 2013, to June 30, 2015.
  • The sales tax rate on lodging and prepared meals temporarily increases from 7 percent to 8 percent during the period October 1, 2013, to June 30, 2015.
  • The sales tax is extended to sales of “products transferred electronically” which are digital products, the sale of which in non-digital form would be subject tax. Thus, retail sales of books, music, and other products that have a tangible counterpart are now subject to tax.
  • The sales tax exemption for newspapers and other periodicals issued at intervals of less than 3 months is repealed.
  • The sales tax exemption for aircraft and aircraft parts is extended.

Property Tax

  • The Business Equipment Tax Reimbursement program (“BETR”) has been funded at 90 percent for 2013 and 80 percent for 2014. A task force is also established to review options for transitioning property from BETR to the Business Equipment Tax Exemption program (“BETE”).
  • The budget reduces revenue sharing to towns by $75 million. Although the cut is less than the originally proposed $200 million cut, property tax rates may increase as a result.
  • If a taxpayer’s property exceeds 2 percent of the value of a municipality’s overall property, the taxpayer is now required to provide information to the assessor, including income and expense information, to allow the assessor to determine the value of its property, including property exempt under BETE. This requirement will not begin until 2014, and there will be an effort in the next legislative session to amend it.
  • A “Property Tax Fairness Credit” is enacted to replace the Circuit Breaker Program. Maine residents with incomes under $40,000 may be eligible for the credit.

Review, Repeal, and Reduction of Tax Expenditures

  • A task force has been created to review and prioritize the state’s tax expenditures. The task force must recommend the repeal or reduction of tax expenditures to achieve a savings of $40,000,000. This could affect any number of tax exemptions and tax credits, including manufacturing-related tax exemptions, exemptions enjoyed by various types of non-profit organizations, schools and others, as well as various economic development incentives such as the Pine Tree Zone program.

Please contact any member of Pierce Atwood’s State and Local Tax Group if you have any questions about this legislation or other state and local tax issues.