Tax Issues

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This would  align the Maine tax code with the IRS.  Recent changes at the federal level were not  followed by Maine.  Meaning they did not "conform".   So for example someone in Shapleigh earning $45,000 annually with Social Security and other income would get a $6,000 reduction on their income.  So they would be taxed on $39,000.  However the State of Maine would still tax this  senior on a fixed income on the whole $45,000.  I do not think that is correct.  

It is not a lot of money to the State budget, but it is a lot of money to the budgets of Mainers who are qualifying for this tax break.  See how to pay for it below.

Conformity with the IRS for personal taxes would change these items:

• Tax on overtime 
• Tax on Tips
• Senior Exemption
• Standard Deduction

These alignments with the federal tax code are directed at middle-income taxpayers who are working or retired.  Most of these exemptions and credits begin to phase out at $75,000 annually.  Meaning once you make over $75,000, the help you get on taxes keeps going down until it goes away entirely.

This conformity will bring income to low and middle income Mainers right in our District 141.

There were also changes to Business taxes in the IRS changes.  I believe Maine should conform to them as well.  The business changes center around "bonus" depreciation, which is the same as regular depreciation, just faster.   

There are two Main changes:

• Allowing bonus depreciation in earlier years
• Depreciation conformity for R&D by small companies

A third change:

• Remove the State specific credit Maine Capital Investment Credit.  Great theory.

These three changes will make filing taxes in Maine much easier for businesses.

There has been some misinformation from folks that want to keep money in Augusta so here is a review.  

Quick definition of depreciation.  When you buy something for a business you can either expense it in the year you bought it, or over time.  Some big items have to be depreciated over time.

So easy example.  You buy a computer for your business for $300.  Computers  lose according to their "depreciation schedule" of 3 years.  Each of the next 3 years your business has a $100 computer expense.

Let's look at it at scale.

If a business in Newfield wants to invest  a million dollars in equipment, that should last (according to accounting) 10 years.  Each year the business would deduct $100,000.  (one tenth).

Bonus depreciation would allow the business to depreciate all the $1,000,000 in the first few years.  This is meant to encourage investment faster. by allowing them to claim depreciation expense faster (at the same rate as the IRS).  This pulls forward the depreciation from later years so the amount of depreciation is the same only the timing is different.  This means fewer taxes in earlier years BUT more taxes in later years.  it is only a way to increase short term cash flow to encourage investment not a 'tax break'

As a Financial advisor I see so many people who have done everything right.  They worked their whole lives, saved, paid off their house, and now in retirement we are planning on how to rent that paid off house back from the County or Municipality in the form of Property taxes.  in the.  Everybody talks about 'the Homestead Exemption", so let's look at that as a solution.

Quick explanation:

The Homestead Exemption is a State Law that allows Mainers to get a credit to reduce the valuation of their home.  So if the home is valued at $225,000, and the Homestead Exemption is $25,000, then the valuation of your home for taxation purposes is $200,000.  Here is the problem.

The State is making a Law restricting how much in taxes that the Cities, Towns, and Counties are collecting.  The agreement was that the State would back-fill or make up the difference.  

Lets assume an example of a 1% property tax rate.   (1% of $225,000 is $2,250)

If the City and County would have gotten to tax the full valuation, they would have collected $2,250.  

With the Homestead Exemption, they only collect $2,000 (1% of $100,000).  The State is supposed to make up for that and sent the City $225, but the Legislature has not funded that good idea.

We need to fund the Homestead exemption from the State to the Towns, and not just talk about it. If not we are just robbing Peter to pay Paul, and in District 141 Newfield, Shapleigh, and Springvale are Peter.

This is not a me thing.  This is essentially a $29 million unfunded mandate that was pushed down to Cities and Towns years ago and not yet paid for.

Similar to the Homestead exemption, Maine has a credit for businesses that are domiciled in Maine called the Maine Business Equipment Tax Exemption.  Just like the Homestead exemption this gives a credit to reduce the valuation that is taxable.  Just like the Homestead exemption MBETE is unfunded, and if we do not fund it at a State level we just robbing ourselves.  

Again, this is not my idea.  This is essentially a $66 million unfunded mandate pushed on to Cities and Towns by the Legislature years ago that has never been paid for.

Not all States are the same.  

• 12 States do not have a business property tax
• 15 States have a different rate for Businesses versus Personal property.
• Maine and some other States do it differently.  We segregate not by the type of property, (business versus Personal), but on whether the Property belongs to a person or a business that is domiciled in Maine. 

 I actually like the overall approach of favoring Maine residents and home grown businesses.  The idea is that you protect all of the Maine primary homes, and Maine businesses, and then raise the property tax rate so that out of State businesses, and out of State homeowners pay a higher rate.

If we as a State are going to have this taxation scheme,  we need to:

• Fully fund both the Homestead Exemption, and MBETE
• Proactively educate and enroll homeowners in the Homestead program
• Proactively educate and enroll Maine businesses in the MBETE program

Once properly implemented these changes could help Towns like Shapleigh properly tax out of town owners of their prime real estate.  This will also help Cities like Sanford who could properly tax National chains.

Maine tax brackets Right now put a larger portion of the tax burden on working poor and middle-income tax payers.  

Some comparisons:

Right now Maine starts taxing your income from the first $1 after the Standard deduction at a rate of 5.8%.  California does get to that rate until you are earning $40,000 over the standard deduction.

The Maine rate jumps to 7.15% at around $65,000-S/ $130,000 MFJ, 

Maine then keeps that same rate until the politically expedient, yet ineffective income of $1,000,000, when it jumps up 2%.

I propose adding a new bracket of 8% at $160,000 - S/$320,000 - MFJ.  

• (This income 10x the poverty line)

Use that money in a revenue neutral way to lower rates on incomes under $45,000-S/$90,000-MFJ 

• (This is an income 3x poverty line)

New Commitments:

1.  Conforming to IRS Personal Tax changes

• $21.5 million annually (This money stays with working Mainers)

2.  Conforming to IRS business depreciation rules

• Maybe $10 million annually over a decade 
• This is primarily a cash flow issue because less taxes are paid up front and more later so the difference is the cost of waiting for revenue, not the loss of revenue itself

Unfunded Mandates:

3.  Fully fund both the Homestead Exemption, and MBETE

• Additional $29 million to fund the program fully (this money is paid to Cities and Towns)
• $2 million ? Administration to educate and enroll homeowners in the Homestead program

4.  Fully fund the Maine Business Equipment Tax Exemption MBETE 

• Additional $66 million to fully fund the MBETE program. (Also should be going to Cities and Towns)
• $2 million ?  Administration to educate and enroll business owners in MBETE program

5.  Tax Brackets

• "Revenue Neutral" means that these changes should come close to paying for itself as we are just shifting the burden up the income range.

The total is $126 million.

Only $31 million of new commitments

$95 million in unfunded Mandates that cities and towns are paying for.