Governor’s Tax Plan Based On Incorrect Facts And Myths, Is A Net Tax Increase In 2016 And Will Have A Net Adverse Impact On Maine’s Economy Governor Paul LePage's two-year budget includes a tax plan to reduce income and estate taxes and inorease sales taxes. His plan is similar to the Democratic plan from 2009 (which he and 61 percent of voters rejected). Both plans are poorly designed tax policy based on incorrect facts or myths Proponents of the governor's plan continue to grossly overstate the impact of income tax and understate the impact of property taxes and consumption taxes. The governor has said his plan is different, because the earlier plans were just tax shifts, while his plan has an (unsubstantiated) net tax reduction of $267 million by year 2019. However, within the proposed two-year budget that ‘ends on June 30, 2017, there is a net tax increase. The Governor's $6.6 billion budget is $200 million greater than the current budget. All of the proposed sales tax increases are included in the two-year budget proposal, but many of the future tax cuts would be phased in later and the vast majority of those cuts benefit only the wealthy and corporations. This is the same budget trick used by the governor with his earlier tax cut (really a tax shift). The result was a revenue shortfall in 2013 and 2014, which was filled with the “temporary” sales tax increase, cutting the property tax circuit breaker rebate Program from $58 million to $21 million and cuts to municipal revenue sharing, The governor's “Biennial Budget Briefing” includes statements on the need to “modernize” our tax structure. The document repeats some of the 2009 plan’s inaccurate information on sales taxes, including a misleading 2007 list of services taxed by states. Proponents of the governor's plan apparently believe that consumption taxes are “modem” and income taxes are a thing of the past and that Mainers pay too much income tax. Both assumptions are not true. In 2007, the U.S. Census Bureau reported that Maine’s total state and local taxes ranked 7th highest. However, most of that high ranking was caused by property taxes. Property tax collections ranked as 6th highest out of the 50 states and D.C., based on its percentage of income. This compared to income taxes that ranked 17th highest and consumption taxes that ranked 21st highest. The proponents of the governor's plan incorrectly assume that the shift from income taxes to sales taxes will benefit residents because sales taxes are “exported” to non residents. Actually, more income taxes are “exported” than sales taxes. Maine Revenue Services estimates that about 12 Percent of sales taxes and 6 percent of income taxes are paid by non residents. This net 6 percent benefit to Mainers is offset by federal income tax increases to Mainers. Maine income taxes are deductible on Mainer’s federalincome tax returns, but sales taxes are not deductible. Maine Revenue Services in their 2009 study estimated that the impact of the federal income tax savings was equal to about 14 percent of the Maine income tax paid by all Mainers. The net result is that if Maine income taxes are reduced and replaced with sales taxes, the net total taxes paid by all Mainers will increase not decrease. The total federal income tax increase will be about $80 million on the $547 million Maine income tax reduction in the fiscal year 2017 budget. The governor's plan continues the myth that Maine’s consumption taxes are comparatively low and that most states tax services. Both are untrue. Consumption taxes also include gas and tobacco taxes. For the year ended June 30, 2015, Maine's total budgeted consumption taxes is $1.68 billion, while the total budgeted individual and corporate income tax combined is less at $1.65 billion. With regard to taxing services, the vast majority of states did not in 2007 or today, tax most of the services that would be taxed in the governor's plan. For example as of 2013, only three states taxed professional services. Proponents argue that sales taxes are discretionary, while income taxes are not. Actually, both income taxes and sales taxes are equally non discretionary for lower income taxpayers. The vast majority of their purchases are on life necessaries. For wealthy taxpayers, income tax payments are just as. discretionary as sales tax payments, because they can and do choose to have significant income from non taxable, tax sheltered and tax deferred investments. The governor's plan includes elimination of the estate tax based on two false premises: “to preserve Maine family businesses” and to stop wealthy retirees from moving out of state. IRS data on estates for the year 2011 show that family businesses represented only 12 percent of estate assets. The other 88 percent was made up of stocks, bonds, real estate and other assets. IRS data on state to state migration for the years 2009 and 2010 show no significant migration to the states without an estate tax. The largest migration was to Florida and the average income of those taxpayers was only $39,500. The governor also ignores the fact that 25 percent of estate tax is on non residents and many of the beneficiaries to the Maine estates are also non residents. The governor also incorrectly assumes that reducing income taxes will stop retirees from moving to low tax states like Florida. Under current tax law, a married couple over age 65 both with social security benefits can have incomes over $100,000 and would pay only $2,000 in Maine income taxes. This same couple is likely to pay about $5,000 in property taxes. Most retirees in Maine pay significantly more property taxes than income taxes, so cutting income taxes to keep retirees in Maine is a very ineffective tax policy. With regard to Maine income taxes, most over-estimate what they pay and many assume that most taxpayers pay taxes at the top rate of 7.95 percent. Maine Revenue Services estimated for the year 2009 that the average incometax paid by all Mainers was about 3 percent of their income. Even the top 1 percent, with incomes over $323,000, paid Maine income taxes (after federal tax benefit) of only 4.1 percent of their incomes. The governor's tax plan cuts the top individual income tax rate and in part pays for it by not allowing itemized deductions. This is a deceptive approach to make taxpayers think the tax cut is more than it actually is. The plan will create winners and losers. The losers will be many middle income taxpayers, who itemize and some very generous high income Mainers who make large charitable donations. The biggest myth supporting an income tax cut is that lower income taxes will draw companies to Maine and create thousands of good paying jobs. First, the tax cut is not significant, and second, income taxes are not a major factor in a company's decision to locate in a state. Much more important factors include location, a skilled workforce, overalll labor costs, energy costs and property and sales and use taxes. The vast majority of Maine's corporate income taxes are paid by large out of state corporations, whose revenues in Maine are less than 10 percent of their total revenues. The vast majority of businesses in Maine operate under legal structures that have income taxed at the individual owner level. Cutting the corporate income taxes for multi-national corporations like Wal-mart is illogical. In addition to overstating the favorable impact of income tax cuts, many ignore the unfavorable impact of increasing sales taxes. Maine Revenue Services estimates that more than $400 million in sales-taxable purchases are made by Mainers each year on-line or in New Hampshire rather than in Maine retail stores, in part in an attempt to avoid sales tax. Sales tax increases will have additional adverse impacts on Maine retail businesses. In addition, the 30 percent increase in the sales tax rate will add about $90 million in additional use tax costs to Maine businesses. The adverse impact from the sales and use tax changes will more than offset any small favorable impact of the income tax cuts. There are ways to improve Maine’s tax structure, but most of the governor's proposals are based on politics, myths and basic lack of understanding of tax laws. Real tax reform must be based on factual sound tax policy and proper cost benefit analysis. Analysis by Albert A. DiMillo Jr. of South Portland who is a retired corporate tax director and CPA with more than 30 years of tax experience. In 2009 and 2010 he volunteered over 300 hours working with republicans to educate Mainers about the Poorly designed tax plan that 61 percent of voters rejected in 2010. He believes this plan is even worse for the state of Maine and its residents. He can be contacted at aadimillo@yahoo.comATTACHED ARE THREE EXAMPLES OF MAINE TAXPAYERS AND THE NET TAX IMPACT BEFORE THE IMPACT OF REVENUE SHARING FOR YEAR 2016: EXAMPLE A: A RETIRED COUPLE BOTH OVER AGE 65 WITH $50,000 OF INCOME. RESULT: NET TAX INCREASE OF $107 EXAMPLE B: MARRIED COUPLE WITH NO CHILDREN UNDER AGE 65 AND INCOME OF $70,000. RESULT: NET TAX INCREASE OF $64 EXAMPLE C: MARRIED COUPLE WITH ONE CHILD UNDER AGE 65 AND INCOME OF $125,000. RESULT: NET TAX CUT OF $96 NOTE: THERE ARE SIGNIFICANT ADDITIONAL INCOME TAX CUTS FOR YEARS AFTER 2016 AS THE TOP INCOME TAX RATE IS REDUCED FROM 6.95% TO 5.75%. BUT NONE OF THESE. TAXPAYERS WOULD GET ANY ADDITIONAL INCOME TAX CUTS BECAUSE THESE CUTS ONLY APPLY TO HIGH INCOME. TAXPAYERS. Analysis by Albert A. DiMillo Jr. of South Portland who is a retired corporate tax director and CPA with more than 30 years of tax experience, In 2009 and 2010 he volunteered over 300 hours working with republicans to educate Mainers about the poorly designed tax plan that 61 percent of voters rejected in 2010. He believes this plan is even worse for the state of Maine and its residents, He can be contacted at aadimillo@yahoo.comEXAMPLE A ‘TAX CALCULATION FOR A MARRIED COUPLE WITH NO KIDS BOTH OVER AGE 65 & NO ITENIZED DEDUCTIONS PROPERTY FAV PROPERTY ASSESSED VALUE WITH 10K HOMESTEAD PROPERTY ASSESSED VALUE WITH 20K HOMESTEAD SOCIAL SECURITY INCOME PENSION & OTHER INCOME INcome EXEMETIONS STD DEDUCTION (A) ‘SOCIAL SECURITY INCOME EXCLUSION ‘TAXABLE INCOME MAINE TAX BEFORE CREDITS -2015 LAW TAXFAIRNESS CREDIT PROPERTY TAX FAIRNESS CREDIT INET MAINE INCOME TAX IMPACT OF {0k INCREASE IN HOMESTEAD EXEMPTION. PROPERTY TAK FAIRNESS CREDIT (eTrc) NET SAVINGS IN FEDERAL DEDUCTIBLE TAXES SALES TAX INCREASE WESTaROOK PROPERTY TAK 200,000 123.000 3288 0 120.000 3.086 GOVERNOR'S ‘BUDGET (CURRENT LAW PROPOSED TAX 2018, 2016 27,000 27.000 2000 50,000, (2x4050) a) (2.100) (e.100) a) (15,400) (15,400) (27,000) (27.000) TAX CHANGE INCREASE. (DECREASE) ° ° 0 o ° « ° ary NET TAX INCREASE BEFORE IMPACT OF LOSS OF REVENUE SHARING IN ADDITION TO THE TAX INCREASE ABOVE UNDER THE OLD GIRGUIT BREAKER PROGRAM ELIMINATED IN 2013 THIS TAXPAYER WOULD HAVE RECEIVED A MUCH LARGER PROPERTY TAX REFUND AS FOLLOWS: TOTAL INCOME ABOVE ‘TOTAL PROPERTY TAX (4,750 LBMT) (4,000 LMT) 4% OF INCOME BASE 6% OF BASE ExOESS CIRCUIT BREAKER REFUND AT 50% TAX FAIRNESS CREDIT AT 100% crRcur BREAKER New PIC 288 (A)- PROJECTED EXEMPTION FOR 20%6 WILL INCREASE FROM 4,000 TO 4.050, (Al)- THE STANDARD DEDUCTION FOR 2018 iS 121600 AND VWOULD BE 12,850 FOR 2016 BASED ON 21% INFLATION ADJUSTMENT THE ADDITIONAL STD DED FOR OVER AGE 6§ IS AN ADDITIONAL 2,550 OR TOTAL OF 15,400, CURRENT LAW PFC 6,200u THON FOR A MARRIED NO KIDS UNDER ACE PRopeRTy Fay 230000 PROPERTY ASSESSED VALUE WITH 10K HOMESTEAD 270000 CcunRENT LAW Income 7000 EXEMPTIONS 2x4050) 2109 MIEMZen DEDUCTIONS MORTGAGE INTEREST (210,000 AT 50%) 1080 PROPERTY TAKES. (270.000 AT 820 PER 1,000) (e400) (CHARITABLE CONTRIBUTIONS (280) [AUTOEXCISE TAX 630) ‘TOTAL ITEMIZE DEDUCTIONS /STD DEDUCTION (A) (10300) TABLE INCOME ‘5600 MAINE TAX BEFORE CREDITS 2015 LAW a 2200 INFLATION ADJUSTMENT FOR BRACKETS - 2016 9) @) ‘TAX FAIRNESS CREDIT PROPERTY TAX FAIRNESS CREDIT IMPACT OF LOSS OF HOMESTEAD PROPERTY TAX FAIRNESS CREDIT rF0) [NET SAVINGS IN FEDERAL DEDUCTIBLE TAKES ‘SALES TAX INCREASE [NET TAX INCREASE (DECREASE BEFORE IMPACT OF TEMIZED DEDUCTIONS MAINE COME TAX PACT OF PROPERTY TAX CHANGES FEDERAL INCONE TAK IMPACT IMPACT OF ITEMIZED DEDUCTION CHANGES NET TAX INCREASE BEFORE IMPACT OF LOSS OF REVENUE SHARING. EXAMPLE B PORTLAND PROPERTY TAX 5400 Governors BUDGET” TAXCHANGE PROPOSED TAX. "INCREASE 216 (DECREASE) 70000 (2.100) (12850) 1.705 ° ° (609) 200 200 aos) “®) |WADDITION TO THE TAX INCREASE ABOVE UNDER THE OLD C:RCUFT BREAKER PROGRAM ELAANATED [2013 THIS TAXPAYER WOULD HAVE RECEIVED A MUCH LARGER PROPERTY TAX REFUND AS FOLLOWS: TOTAL INCOME ABOVE TOTAL PROPERTY TAX (4750 LMT) (4,000 LAAT) {9 OF INCOME BASE (OF BASE excess CIRCUIT BREAKER REFUND AT SOX ‘TAX FAIRNESS CREDIT AT 100% orcur BREAKER 4700 Pree os (A) -PROJECTED EXEMPTION FOR 2016 WIL INCREASE FROM 4.00070 4050, (At) -THE STANDARD DEDUCTION FOR 201515 12.600 AND WOULD BE 12.850 FOR 2016 BASED ON 2.1% NFLATION ADJUSTMENT {2)- ADJUSTED TAK BRACKETS BY 2% NFLATION ADJUSTMENT © Tro)EXAMPLE C ‘TAXCALCULATION FOR A MARRIED COUPLE WITH 1 CHILD UNDER AGE 65 - PORTLAND Governor's BUDGET TAX CHANGE CURRENT LAW PROPOSED TAX INCREASE 2018 2018 (DECREASE) INCOME 125,000 125,000 EXEWPTIONS 0 (12,180) (12.150) ITEMIZED DEDUCTIONS MORTGAGE INTEREST (250,000 AT 5.0%) (12,500) PROPERTY TAXES (320,000 AT $20 PER 1,000) (6.400) CHARITABLE CONTRIBUTIONS. (1,500) ‘AUTO EXCISE TAK (00) ‘TOTAL ITEMIZE DEDUCTIONS / STD DEDUCTION (20,700) (42.860) 1) “TAXABLE INCOME 100.000 MAINE TAX. BEFORE CREDITS -2015 LAW. 6040 4535 INFLATION ADJUSTMENT FOR BRACKETS 2016 (92) 25) PROPERTY TAX FAIRNESS CREDIT © Tro) NET MAINE INCOME TAX sow 538 (1979) IMPACT OF LOSS OF HOMESTEAD o 200 200 NET SAVINGS IN FEDERAL DEDUCTIBLE TAXES 79) SALES TAX INCREASE 00 [NET TAX INCREASE (DECREASE) BEFORE IMPACT OF ITEMIZED DEDUCTIONS em) MAINE INCOME TAX IMPACT OF PROPERTY TAX CHANGES. os) FEDERAL INCOME TAX IMPACT IMPACT OF ITEMIZED DEDUCTION CHANGES NET TAK (DECEASE) INCREASE BEFORE IMPACT OF REVENUE SHARING LOSS (26)