Maine Turns Down State Tax Tradeoff

Amidst the hubbub of primaries in 12 states last week, Maine voters rejected an overhaul in a move that may have broad implications for the rest of the nation. By an overwhelming 60%-40% margin, the public overturned a revamped tax program that was passed by the Democratic legislature last year and signed by the Democratic governor.

The plan called for reducing the income tax rate from 8.5% to 6.5% for all residents making less than $250,000. To make up for the loss in revenue, the bill would have expanded the sales tax to cover additional services, including entertainment, transportation, rentals and repairs. It would have also increased the tax on meals and lodging from 7% to 8.5%.

Proponents said the bill would save Maine residents $90 million in income taxes and that half the offsetting sales taxes would be paid by out-of-state visitors. The tourist industry lobbied hard against it. So did Republicans and conservative groups, insisting that it would lead to higher taxes for most residents, although government studies showed otherwise. Republicans backed the lower tax rate but opposed the additional sales taxes, saying any loss in revenue should be offset with spending cuts. The bill’s supporters said Maine has already cut its budget to the bone and can’t afford anything less than a revenue neutral bill.

The Maine action is important because many other states have or are also considered sales taxes for services, and the resounding voter rejection is sure to give them second thoughts.

Rhode Island, meanwhile, is taking an altogether different approach to tax reform. It has just enacted a law cutting its top income tax from 9.9% -- the sixth highest in the U.S. -- to 5.99%, the 25th highest. To keep the change deficit neutral, the legislature also reduced a number of tax credits, disallowed itemized deductions and cut the standard deduction and exemption amounts for anyone making more than $175,000. The end result is a flatter tax that Rhode Island hopes will attract new residents and business owners to the state. According to state administrators, 60% of residents will see a tax reduction averaging $226 apiece, 21 percent will see no change, and the top 19% of earners will see a tax increase averaging $654.

The state experiments are well worth watching as the federal government starts to think about major tax reform within the next few years as part of a deficit cutting plan to bring the national debt under control.