Opinion: A recent history of Maine’s swiftly evolving tax code

For most of the 1990s and 2000s, Maine’s tax code remained relatively stable. Corporate and income tax rates were unchanged and except for modifications to how the state calculates what portion of corporate profits are taxable, things largely stayed the same.

In 2004, Maine voters required the state to pick up 55% of K-12 education costs so that education funding would be less reliant on property taxes. Maine was then hit by the Taxpayer Bill of Rights (TABOR) initiatives sweeping the nation, as voters were asked to consider proposals in 2006 and 2009 that would have limited state spending and gradually eliminated the income tax. While the 2004 education initiative succeeded and the TABOR initiatives failed, the issue of taxes moved closer to the center of the policy debate.

In 2009, then-Gov. John Baldacci championed an income tax cut with a significant expansion of the sales tax base. The expansion included taxes on some services such as amusement parks, sporting events, and a range of maintenance and service transactions, including auto repair and dry cleaning. The proposal also increased the meals and lodging tax and replaced the state’s graduated income tax structure with a flat 6.5% rate and a 0.35 percentage point surcharge on income over $250,000. However, a resulting ballot initiative overturned the entire package, reverting to the prior tax structure.

After Gov. Paul LePage took office in 2011, he used his budget proposals to advance his main priority: elimination of the income tax, a stream that represented 48% of revenues at the time. In response, the legislature cut income tax rates and increased reliance on sales taxes in the budgets passed under the LePage administration.

While LePage was ultimately unsuccessful in repealing the income tax during his tenure as governor, Maine went from having a largely stable tax code that had undergone few changes to one that rapidly evolved. Despite some revenue raising efforts, such as expanding the sales tax to more goods and services, the tax changes under LePage were net losses to the state’s revenue system and resulted in income tax collecting $895 million less per year in 2022 dollars. Some of these tax changes helped increase after-tax incomes for households with low income, but a staggering 46% of this tax cut benefits the wealthiest 20% of households making more than $115,000 a year.

In addition to these changes, in the middle of LePage’s tenure, he led a charge against the 2016 voter approved ballot measure to enact a 3 percent surcharge on household income over $200,000. This surcharge would raise $219 million for education (using 2022 dollars and incomes) but LePage immediately proposed eliminating the surcharge and the legislature ultimately followed through in the budget that passed in 2017, returning Maine’s top rate to 7.15%. This tax cut is on top of the other $895 million cut out of the income tax. Elimination of the education surcharge represents an average tax cut of $23,400 to Maine’s top 1% today.

LePage also consistently pursued policies that would shift the cost of services onto towns and property taxpayers. He repeatedly attempted to eliminate the homestead property tax exemption for households with people under the age of 65, gutted the state’s “circuit breaker” program that lowered property tax bills for households with low incomes, and failed to fully fund revenue sharing and education costs to support local services and school districts, driving up property taxes.

Under the Mills administration, the governor and legislature continue to consider and pass changes to the tax code that erode the income tax, but the proposals have been narrower in scope than the sweeping changes LePage attempted to push through. And rather than focusing on cutting tax rates for the wealthiest households and corporations, Mills has worked to improve programs that reduce taxes for households and young professionals with low income and has limited her broad payment programs to one-time expenses that don’t compromise revenues in future years.

Since Mills took office, the state’s Earned Income Tax Credit, a benefit for nearly 100,000 working Mainers with low income, has increased five-fold and multiple expansions of the state property tax fairness credit have attempted to alleviate high rent and property tax costs for households with low incomes. To strengthen the tax code, the governor and legislature have also passed bills that limit loopholes for corporations taking the Maine Capital Investment Credit and Foreign Derived Intangible Income deduction. Furthermore, Mills and the legislature have worked to streamline and expand the state’s student loan repayment income tax credit that will reimburse Mainers for costs paid toward student loans up to $2,500 a year.

Alongside these changes, however, the legislature included a provision in the most recent budget to increase the amount of untaxed pension income from $10,000 to $35,000 over the course of four years. This adjustment comes at a great cost to state revenues, amounting to $85 million per year once fully phased in, two-thirds of which will benefit the wealthiest 20% of Mainers.

In addition to improving the property tax fairness credit, Mills has fully funded the state’s share of education costs and revenue sharing for towns to help stabilize property taxes while also increasing the exemption amount of the homestead exemption program from $20,000 to $25,000 and phasing in full funding for the program at the state level instead of requiring towns pick up half the cost.

We pay for things that benefit all of us — like schools, roads, parks, public safety, and clean water — with the resources raised through taxes. As Maine continues to revise methods of collecting essential revenue, the Maine Center for Economic Policy urges elected leaders to weigh the choice between tax cuts that compromise resources and making sure all workers, families, and communities have the tools and opportunities they need.

This post was originally published on the Maine Center for Economic Policy blog.

Photo: Ervins Strauhmanis, Creative Commons via Flickr

About Sarah Austin

Avatar photoSarah is a policy analyst for the Maine Center for Economic Policy. She holds a master’s of public affairs from the University of Wisconsin-Madison’s La Follette School of Public Affairs and a bachelor’s of science in environmental policy from Maine’s Unity College. Prior to MECEP, she worked at the State Innovation Exchange at the Center on Wisconsin Strategy and on issue campaigns in Maine and across the country on issues ranging from tax reform to non-discrimination.

Sign up for Beacon newsletters

Our newsletter, sent each evening, curates the day's most important stories from newsrooms around Maine.