01/14/2015

Maine Governor Proposes Major State Tax Restructuring

Maine Governor Paul LePage has proposed a major restructuring of Maine’s tax system as part of his FY 2016-2017 budget submission.

Generally, the governor’s proposal decreases the state’s reliance on income tax revenue and increases its reliance on consumption-based sales and use tax revenue.  The sales tax increase comes in the form of both increased rates and taxation of new services provided to consumers.  The proposal will also likely result in increased property taxes, and also would allow municipalities to tax larger nonprofit entities for the first time.  Maine estate taxes would be phased out. 

The following is a brief summary of the proposals contained in Governor LePage’s tax reform initiative contained in his budget proposal.  The full text of the bill can be found here.

Income Tax

  • Beginning with the 2016 tax year, the top individual income tax rate would be lowered gradually from the current 7.95% to 5.75% for 2019. 
  • The ability to claim itemized deductions (e.g., charitable contributions, mortgage interest) would be eliminated for the 2016 tax year and beyond.  For 2015, deductions would be limited to $27,500 (other than medical expenses). 
  • Various tax credits would be eliminated, including the high-tech credit, the jobs and investment credit, the biofuel production credit, and various credits for employer-provided services (e.g., day care). 
  • Beginning with the 2017 tax year, the top corporate income tax rate would be lowered gradually from the current 8.93% to 7.5% for 2021. 

Estate Tax

  • The estate tax exemption would be increased from $2 million to $5.5 million for individuals dying in 2016.  The estate tax would be eliminated for decedents dying in 2017 or after. 

Sales and Use Tax

  • Tax rates on various items would change. The general sales and use tax rate would increase to 6.5%; lodging taxes would remain at 8%; the tax on prepared foods would drop to 6.5%; the service provider tax would be at 6%; and the tax on short-term auto rentals would decrease to 8%.
  • The tax base would be increased dramatically, applying to:  
    • Domestic and household services (e.g., landscaping, cleaning)
    • Installation, repair, and maintenance services (all property other than motor vehicles and aircraft)
    • Personal services (e.g., hair care, event planning)
    • Personal property services (e.g., dry cleaning, pet services)
    • Professional services (e.g., legal, accounting, architectural)
    • Additional prepared foods (e.g., candy, soft drinks, snacks)
    • Recreation and amusement services (e.g., movies, golf, skiing)
  • An important exemption would be created for sales to businesses of professional services, personal property services, and installation, repair and maintenance services. 
  • The service provider tax would be expanded to apply to cable, satellite, and radio services, and personal interstate and international telecommunications services.

Property Tax

  • Business equipment eligible for the Business Equipment Tax Reimbursement program (BETR) would be transitioned to the Business Equipment Tax Exemption program (BETE) over a four-year period, with BETR fully eliminated in 2019.  There is no exception for property enrolled in a TIF, as had been the case with the most recent BETR conversion proposal. 
  • BETR would be funded at a 90% level up until its elimination.  (It had been scheduled to return to 100% funding.)
  • Municipal revenue sharing would be funded for the fiscal year beginning July 1, but would be eliminated the following year.  This lack of revenue shared with municipalities would have to be offset by increased local property taxes, reduced spending, or a combination of both.  Higher property taxes would have a major negative impact on capital intensive businesses.
  • The exemption for nonprofit entities, other than churches, would be limited to the first $500,000 of value and 50% of the excess above $500,000. 
  • The telecommunications tax (paid to the state) would be repealed, and municipalities would be given authority to collect local property tax on that property. 
  • New retail property would cease to be eligible for BETE or BETR.  Currently existing retail property would be eligible for BETE only through 2025. 
  • The tree growth and open space property tax programs would require additional compliance measures at both the individual and municipality level. 

Obviously, there are many parts of this proposal that will be controversial.  The budget and tax reform proposal is now before the Appropriations Committee, which will hold a series of public hearings and work sessions.  The budget bill will likely undergo many changes before final enactment.

If you have questions about how Governor LePage’s proposal would impact you or your business, please contact a member of our Maine State and Local Tax Team:
 

Jonathan A. Block
Kris Eimicke