AUGUSTA — A bipartisan coalition of state lawmakers is preparing to reveal a dramatic tax overhaul proposal that aims to slash the state’s income tax rate in half along with a host of other sweeping changes, including raising sales and excise taxes and eliminating exemptions.
Unlike previous attempts at significant tax reform, the forthcoming bill may prove difficult to defeat, either by the Legislature or by the interest groups it is certain to rankle.
The coalition, known as the “gang of 11” at the State House, has been working behind the scenes for several months to craft the bill. The proposal will have its official debut Wednesday, but a draft outline obtained by MaineToday Media highlights a series of changes that would yield an estimated $700 million in revenue and have far-reaching implications for Maine taxpayers and businesses.
“This overhaul package does not nibble around the edges of reform,” the document reads. “It restructures dramatically the way we finance government.”
Sen. Dick Woodbury, a Yarmouth independent, is the policy architect for the proposal. He said Monday that the bill is designed to capture a more equal proportion of sales and use taxes from nonresidents in order to pay for tax relief for Mainers and stabilize the state’s finances.
Additionally, he said, slashing the income tax rate may entice those with seasonal homes to declare Maine as their primary residence, thus allowing the state to capture additional income tax revenue.
“I think there are a lot of pro-growth principles in this that I hope are transformative to Maine’s economy,” Woodbury said. “They’re designed to be transformative. This isn’t just tax reform for residents; it’s also supposed to be a real driver of our economy.”
Woodbury, who has a doctorate in economics from Harvard University, has proposed sweeping tax changes before. However, this time his bill has bipartisan backing that includes members of Republican and Democratic leadership and lawmakers whose political leanings range from the far right to the far left.
The “gang of 11” includes Sen. Seth Goodall, D-Richmond, the Senate majority leader; and Sen. Roger Katz, R-Augusta, the assistant Republican Senate leader. Goodall and Katz are considered moderates in their parties. Other members of the coalition include members from the influential budget-writing committee, Sen. Emily Cain, D-Orono, and Sen. Dennis Keschl, R-Belgrade, as well as the more conservative Rep. Amy Volk, R-Scarborough, and progressive Rep. Nate Libby, D-Lewiston.
“It’s a group that’s been meeting now for some time,” Katz said. “It’s truly bipartisan, and we’re excited about it.”
The broad political cross-section of the coalition and the release of the bill — less than 60 days before the scheduled end of the legislative session — may protect the proposal from anticipated opposition from influential groups that include the tobacco, restaurant and lodging industries.
The opposition probably will center on initiatives outlined in the draft document, which Woodbury confirmed on Monday originated with the coalition. Woodbury said some of the details had changed since the document was written March 26, but overall the finished concept — paying for income tax cuts with increases in consumption taxes — remained.
The draft includes a proposal to cut Maine’s income tax rate from its top rate of 8 percent and replacing its tiered system with a 4 percent flat tax. If enacted, Maine would become the eighth state with a single income tax rate, according to data compiled by the Tax Foundation. The 4 percent rate would be the third-lowest among the flat-tax states.
Nine other states don’t have state income taxes.
The draft proposal also calls for lowering the corporate income tax rate from 8.93 percent to 7.5 percent and eliminating the state’s estate tax. Woodbury said all of the tax cuts are designed to provide tax relief for Mainers, lure part-time residents to pick the state as their primary domicile and attract businesses.
The bill proposes paying for the cuts by increasing sales and excise taxes and eliminating a host of the current 87 exemptions. The only exemptions not targeted for elimination are those related to health care and education.
Maine’s sales tax is 5 percent. Forty-one other states have a higher sales tax, according to the Tax Foundation. The draft outline suggests raising the rate to 6 percent, a move that would tie Maine with three other states and the District of Columbia for the 37th-highest rate.
Other use-tax increases highlighted in the draft document include raising rates on cigarettes, lodging, meals, beer and auto rentals.
Previous attempts to raise those taxes have encountered fierce opposition from industry groups that say affected businesses will have to decrease prices to remain competitive with other states. The draft outline attempts to offset those fears by increasing funding for the state’s tourism budget by $3 million.
Nonetheless, the plan’s proponents are girding for the same opposition that met a 2009 tax reform proposal passed by the Democratic-controlled Legislature. Similarly, the 2009 bill would have paid for an income tax cut — to 6.95 percent — by raising sales and excise taxes.
The proposal was hailed by The Wall Street Journal as substantive tax reform. However, its lack of bipartisan support proved to be its demise. Republicans rallied with affected industry groups to repeal the law via a citizens’ veto in June 2009.
Proponents of the new bill hope the bipartisan buy-in will prevent a similar fate.
Volk, one of the Republican representatives who has signed on to the proposal, said she didn’t support the 2009 effort because it didn’t lower the income tax far enough and because there were too many carve-outs in the list of taxable exemptions.
She described the bill as “bold and comprehensive.” She said the state budget was in constant “crisis mode” and that she had begun to see the effects in her district.
“The only way out of that is economic growth,” she said. “The only way to economic growth, in my opinion, is a lower income tax. You can’t just lower the income tax without offsetting it in some way.”
Volk acknowledged that opposition was forthcoming.
“We’ve all pledged that we’re not going to allow it to be cannibalized and we’re all very proud that it’s a bipartisan effort,” Volk said. “… There’s something in here for everyone to hate, but there’s also something in here, especially for businesses, to like.”
Buzz about the bill has intensified recently as proponents seek additional buy-in from lawmakers and business groups, including the Maine State Chamber of Commerce.
The proposal was presented to the chamber’s 35-member board on Friday. Dana Connors, president of the chamber, said more details needed to emerge but that the bipartisan support and timing of the bill gave it “a certain amount of momentum.”
It’s unclear what position Gov. Paul LePage will take on the proposal. A top tax adviser to the governor could not be reached Monday.
LePage has discussed eliminating the income tax, and he has expressed a desire to make the state more attractive as a primary residence.
The proposal is also likely to trigger intriguing political subplots among Republican and Democratic leaders.
Goodall said it was the coalition’s goal to avoid divisive politics.
“The key is we’re trying to craft a proposal in a bipartisan fashion, setting aside politics and doing what is best for the state of Maine,” he said.
Woodbury agreed. “I think of myself as a reasonably good policy thinker, but I’m not a great political strategist,” he said.
Steve Mistler — 620-7016