Committee Tax Reform Plan not “Revenue Neutral”

Read the full report | The tax reform plan proposed by the Taxation Committee that is winding its way through the Maine Legislature is “revenue neutral” in Augusta, but it would raise Mainers’ taxes by almost $40 million.

This is not due to a technical error by revenue estimators in Augusta – the revenue estimates are probably as reliable as they can be, and that the plan would not alter the amount of taxes collected. But the revenue neutrality is limited to Maine. The plan inadvertently raises the federal income taxes of Maine residents by reducing deductions.

Every state tax code interacts with the federal individual income tax code. Some states make every effort to maximize the benefits of that interaction, but the Taxation Committee in Augusta is evidently thinking about other things. As a result, the interaction of the new tax reform plan with the federal code will create a significant federal tax increase on Mainers.

The Taxation Committee plan will lower the state individual income tax and property tax, but it will raise the corporate income tax and sales tax to make sure Augusta doesn’t lose any revenue. The downside of such a change is that the individual income and property taxes are deductible on Mainers’ federal income tax returns, but the corporate income tax and sales tax are not.

The end result is that many Mainers will lose a significant portion of their federal tax deductions. Table 1 shows the income distribution of Mainers who itemize their deductions for federal tax purposes.