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QUESTION 1

Plan lowers income tax, but sales tax expands

Voters to decide on tax overhaul

By Ethan Wilensky-Lanford ewlanford@mainetoday.com
Staff Writer

AUGUSTA -- A suite of long-debated reforms to Maine's tax code will be approved or rejected by voters on June 8.

Billed as revenue-neutral, the reforms endorsed by the Legislature last year are estimated to reduce the overall tax burden on Mainers, while raising additional revenues from expanding the sales tax and visitors.

Reform has four key planks:

* It changes the state's top income tax rate from 8.5 percent to a flat 6.5 percent on income up to $250,000; income above $250,000 would be taxed at the slightly higher rate of 6.85 percent;

* It changes how state income tax filers claim exemptions and deductions by instituting new tax credits. The credits include a reform of the state's earned income tax credit, and credits for Mainers who don't earn enough to pay state taxes. (See related story.);

* It expands the state's 5 percent sales tax to more than 100 new goods and services on which it is currently not collected; (See related story.)

* It increases the meals and lodging tax from 7 percent to 8.5 percent;

Maine Revenue Service has said tax reform would lower income taxes or provide a refundable credit for 95.6 percent of Maine filers. The agency has also analyzed tax returns and buying habits to estimate poorer Mainers would be more likely to receive overall tax cuts than the highest earners.

Lawmakers who support reform, like Rep. Thom Watson, D-Bath, said a broader sales tax basket that includes services like labor on auto repairs provides a steadier revenue stream in a down economy.

Maine's sales tax code was written decades ago when the economy relied largely on manufacturing and trade. Now services dominate. Before the recession, Watson said, tax on building supplies and auto sales made up 36 percent of the state's total sales tax revenue.

A 2008 survey by the Federation of Tax Administrators found Maine holding one of the narrowest sales tax bases in the country, taxing 25 categories. The national median is 55, and the high -- Hawaii -- taxes 160 categories.

Reform supporters and certain economists have also argued that tourists and tourism should be subject to increased taxation. Maine Revenue Service estimates tourists would pay $25 million in new sales tax in 2011 if reform is implemented, largely from the increased the meals and lodging tax.

"I don't think anyone when they're considering a destination location considers the meals and lodging tax," said House Majority Leader John Piotti, D-Unity, who pointed out Vermont and New Hampshire each have combined meals and lodging taxes of 9 percent.

Opponents of reform note Maine residents would also pay the increased meals and lodging tax, at an estimated cost of $53 million.

Sen. David Trahan, R-Waldoboro, led the campaign to freeze implementation of tax reform and put it the June 8 ballot.

"The tourism industry is small businesses, shop keepers, waitresses, people with faces, families, and bills to pay," he said at the recent Republican state convention.

Recreation and amusements, such as miniature golf, would be taxed for the first time under reform. Yet Trahan and other opponents, like Curtis Picard of the Maine Merchants Association, note skiing and golf were removed from increased taxation and say this is hypocritical.

"How can you justify taxing auto repairs, when you leave out the ski industry and the golf industry?" Picard said.

Piotti said Gov. John Baldacci excluded them to promote exercise and avoid saddling resorts with a tax increase in addition to the meals and lodging hike.

The revenue lost from their exclusion, he added, was offset by adding that 6.85 percent tax bracket on income over $250,000.

Question 1 on the June 8 ballot reads: "Do you want to reject the new law that lowers Maine's income tax and replaces that revenue by making changes to the sales tax?"

A "Yes" vote favors repeal. A "no" vote would allow it to go forward.

Ethan Wilensky-Lanford -- 620-7016

ewlanford@mainetoday.com