The “Welcome Back Tax” Created by an Unconstitutional Tax Reform Law

Read the full report | A key objective of the LD 1495 tax reforms was to “export” more Maine taxes to non-residents and visiting tourists. The law expands sales taxes, reduces state income tax rates, and replaces income tax deductions and exemptions with a new “household tax credit” – which applies to full-time residents only. This not only violates three protections in the U.S. Constitution, it also creates a new tax liability for new residents and Maine natives who want to move back to Maine, a “Welcome Back Tax.” Middle class families, whether new residents or people returning home, can pay more than $2,200 in extra income taxes their first year in Maine. In total, the “Welcome Back Tax” affects 55,000 families a year.

There are many aspects of the newly enacted tax-shift legislation, LD 1495, that are being discussed and debated from a purely public policy perspective. A more fundamental consideration, however, that must be addressed even before a discussion of whether the changes are good policy or bad policy, is whether the changes are even constitutional. A legal analysis of the so called “household credit” created by LD 1495 raises serious doubts about its constitutionality.

Essentially, the new tax law eliminates the deductions and personal exemptions that taxpayers typically use to reduce their taxable income. Instead, the law creates what it calls a “household credit”. The law limits the availability of this new credit to established residents only. For example, commuters who travel from out-of-state to work in Maine are not eligible for the household credit. Similarly, new residents relocating to Maine and former residents returning to Maine cannot use the household credit for the first year they become Maine residents.

The effect of replacing the deductions and personal exemptions with the household credit is that commuters and new or returning residents will pay higher taxes than established residents who have the same amount of income. For example, under the new law, a married couple with two children and an adjusted gross income of $45,000 would pay $725 as Maine residents, as shown in Table 1. If, on the other hand, the taxpayer was an out-of-state commuter, or a young person returning to live and work and raise a family in Maine, then that taxpayer would be ineligible for the household credit. His or her tax liability would be $2,925. By excluding out-of-state commuters and new or returning residents from the household credit, the new law creates a “Welcome Back Tax” for these taxpayers. In this example, the “Welcome Back Tax” equals $2,200.

As it turns out, if this new household credit were challenged in a court of law, there are three separate constitutional provisions that the court could rely on to strike down the law as unconstitutional