March 31, 2009
Tax reform or tax scam?

By Reps. Everett McLeod and Jeff Gifford

A tax reform plan steaming through the Legislature could drastically alter the way Maine extracts money from its citizens. Two years ago, a similar plan never made it out of the State House alive, after a withering attack from business groups. This time around, the goals are virtually the same, but the means of reaching them have been adjusted to make the plan seem more acceptable. Still, you can expect a lively political fight as this bill moves closer to a vote.

We’ll outline some of the plan’s specific provisions below; but in general it lowers income tax rates and makes up the difference with sales taxes on about 100 services, from auto repair and dry cleaning to boat moorings and bowling fees. This bill, LD 1088, is entitled “An Act o Modernize the Tax Laws and Provide over $75 Million to Residents of the State in Tax Relief.” It has support from leading Democrats, who have more than enough votes to pass it in the House. The Senate could be trickier.

The $75 million referred to in the bill title would supposedly come from hitting out-of-state tourists with higher meals and lodging taxes. These would jump from 7 percent to 8.5 percent. The tax on car rentals would shoot up to 15 percent from 10 percent. Naturally, those higher taxes would hit Mainers, too. But in theory we would come out $75 million ahead in a kind of beggar-thy-neighbor revenue strategy.

We have several problems with this plan. First, it is revenue neutral. That means the state will collect the same amount of money as before. For Republicans, tax reform means tax relief – an actual reduction made possible by applying strict growth limitations on state spending. What we need in Maine are more jobs and better jobs, and the states doing well economically are the ones that are lowering taxes to attract business investment. That’s the direction we should be moving instead of pursuing a “lift-and-shift” approach to reform.

Second, this far-reaching proposal would create accounting headaches for small businesses that have never had to collect sales taxes. Maine is already notorious for its hostility to the business community. We rank almost dead last in the country in terms of providing a positive business climate. This would heap one more burden on small businesses. It also would create a more severe competitive challenge for companies and service providers located near New Hampshire, which has no sales tax at all.

Third, it’s not wise to attempt tax reform during a period of financial turmoil. It would be like swimming under your boat to fix a propeller during a hurricane. With the state facing an $830 million shortfall in the next biennial budget, we should wait for a more stable economic environment before trying to transform our tax system.

Republicans support the overarching objective of lowering our income tax rates. We have worked on that goal for years. Under the Democrats’ plan, Maine would remove all income tax brackets and replace them with a flat rate of 6.5 percent.

So far, so good. But to make up the difference, sales taxes will be broadened to scores of services throughout the economy. According to Maine Revenue Services, the bottom line is that the state would lose about $160 million in income taxes and raise about $160 million with the expanded sales tax.

Let’s run through some of the services that would be taxed for the first time, starting with installation, repair and maintenance. The sales tax will apply to work done on cameras, firearms, musical instruments, lawn and garden equipment, computer hardware, office equipment, vehicles, appliances, furniture and clothing. Service and maintenance contracts would be taxed. The big one here is vehicles. In this time of economic hardship, Mainers are struggling to keep their cars on the road. It does not seem fair to hammer them with a new tax.

Now consider the category of amusement, entertainment and recreation. You would be paying a sales tax on movie tickets, amusement parks, water parks, racetracks, carnivals, sports activities, aquariums and even petting zoos. Golf greens fees and ski lift tickets would be taxed, along with skating rinks, pool halls and go-cart courses.

Do you like live music? Get ready to pay a tax on bands, orchestras and disc jockeys, along with such entertainers as ventriloquists, jugglers and clowns. (Just think, you can trim your tax liability by cutting back on your use of ventriloquists!) Admission to boat shows, garden shows and auto shows would be taxed. And let’s not forget a tax on scenic and sightseeing excursions, including rides on aircraft, balloons, watercraft, railroads, buses and blimps. And add whitewater rafting trips to the tax rolls.

Some of the most extensive new taxation would apply to personal property services – dry cleaning, car washing, meal preparation, house cleaning, warehousing and storage, interior decorating and pet services of all kinds. If your car breaks down, the towing is taxed. If you decide to move away to escape all this taxation, the moving services are taxed; so you get nailed one last time.

As the tax reform debate takes shape in the Legislature, the issue of trust will loom large. Mainers need to ask one question: If the sales tax revenue falls short of projections, can you trust the majority party to hold the income tax rate at 6.5 percent?

Rep. Everett McLeod (R-Lee) serves on the Legislature’s Inland Fisheries and Wildlife Committee. Rep. Jeff Gifford (R-Lincoln) serves on the Agriculture, Conservation and Forestry Committee.

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