08/21/2015

Tax Changes Made by Maine's 127th Legislature

The Maine Legislature ended its tumultuous session on July 16, 2015. After an advisory opinion by the Maine Supreme Court, we now know which bills actually became law.  As usual, a number of significant tax issues were addressed and Governor LePage continued to push for significant tax overhaul. His budget proposal would have significantly cut income taxes, increased sales and use taxes, and made significant changes to property taxes for businesses and nonprofits.

The Governor’s budget proposal was not adopted, although some of its elements were incorporated into the final budget.  More on the Governor’s proposal can be found here. The Governor also pushed for the complete elimination of the state income tax by 2020 through an amendment to the state constitution. The amendment was rejected by the Legislature as was the Governor’s bill to hold a statewide referendum on the elimination of the income tax. 

The most significant tax changes enacted this session were found in the biennial budget that was negotiated by Republican and Democratic leadership.  Those changes included a reduction in personal income tax rates, a phase-out of itemized and standard deductions for higher income taxpayers, the elimination of some income tax credits, an increase in various sales tax rates, and an increase in the estate tax exemption. 

Aside from the budget, just a few tax bills were passed.  Maine decoupled from federal bonus depreciation so that bonus depreciation is not allowed for Maine tax purposes. However, the capital investment credit was enacted that mimics bonus depreciation for property used in Maine.  An income tax credit for expenses paid for adult day care, hospice services, and respite care was also passed. 

On the property tax front, the Business Equipment Tax Reimbursement (BETR) program was fully funded for the first time in several years.  In the past two years, it had only been partially funded, at the 80% or 90% level.  A new law also provides that taxpayers will not receive a BETR reimbursement if they are delinquent in the payment of more than $10,000 in personal property taxes. 

The following is a summary of the most significant tax laws passed this session:

LD 1019, An Act Making Unified Appropriations and Allocations for the Expenditures of State Government, General Fund and Other Funds and Changing Certain Provisions of the Law Necessary to the Proper Operations of State Government for the Fiscal Years Ending June 30, 2015, June 30, 2016 and June 30, 2017 – Public Law chapter 267. 

Income Tax

  • The top marginal rate is reduced from 7.95% to 7.15%. The top rate kicks in at a higher income threshold, $37,501 in 2016 and $50,000 in 2017, versus $20,900 in 2015 for single taxpayers. 
  • Blunting the effect of the tax rate cut, the budget includes a phase-out of itemized and standard deductions for higher income taxpayers. The itemized deductions of a single taxpayer begin to phase out at $70,000 of income and are completely phased out for single taxpayers with $145,000 of income.
  • A number of tax credits were eliminated, including the jobs and investment tax credit and the high-technology investment tax credit. 
  • A number of changes were made to reduce the income tax burden on lower-income taxpayers including increasing the standard deduction, lowering income tax rates applicable to smaller income amounts, creating a refundable earned income tax credit and a refundable sales tax fairness credit, and exempting military pensions. 

Property Tax

  • The homestead exemption increases to $15,000 for 2016 and $20,000 for 2017 and beyond.

Sales Tax

  • The general sales tax rate had been scheduled to be reduced from 5.5% to 5%. The budget leaves the rate at 5.5%.
  • The sales tax on lodging will remain at 8% for the remainder of 2015, and increase to 9% next year. 
  • The meals tax will remain at 8% this year and for future years. 
  • The service provider tax applicable to telecommunications services and various other services will increase from 5% to 6%. The service provider tax is also expanded to apply to basic cable service and interstate and international telecommunication services sold to a business. 
  • Certain items, such as soft drinks, desserts, and potato chips are no longer exempt from sales tax.

Estate Tax

  • For decedents dying in 2016 or after, the exclusion amount will equal the federal exclusion ($5,430,000 in 2015), which is indexed for inflation.

LD 138, An Act To Update References to the United States Internal Revenue Code of 1986 Contained in the Maine Revised Statutes, Decouple Federal Bonus Depreciation Deductions and Create a Maine Capital Investment Credit, Public Law Chapter 1. 

This new law updated the references found in Title 36 to refer to the Code as amended through December 31, 2014. At the end of 2014, Congress passed a tax extenders bill that extended various tax relief provisions for individuals and businesses that had been due to expire. This law also decouples the state from federal bonus depreciation, but allows a tax credit that mimics bonus depreciation for property placed in service in the state (but not property placed in service in other states). 

LD 279, An Act Regarding Payment under the Business Equipment Tax Reimbursement Program, Public Law chapter 239. 

This law provides that a taxpayer will not receive a reimbursement of taxes under the BETR program if the taxpayer is delinquent in the payment of personal property taxes in the amount of $10,000 or more. 

LD 787, An Act To Provide Tax Credits for Adult Day Care and Respite and Hospice Care, Public Law chapter 340. 

This law creates a tax credit, similar to the child care tax credit, for expenses paid for a dependent’s adult day care, hospice services, and respite care. The credit is equal to 25% of the eligible expenses, which are capped at $3,000 for one dependent and $6,000 for two or more.