AUGUSTA – The Maine House narrowly passed a bill Thursday that would lower the state income tax to 4 percent over time.

Republicans said the bill will spark jobs and send tax money back to Mainers. Democrats said it will create a permanent fiscal crisis.

The measure, L.D. 849, passed the House 74-71. It faces additional House and Senate votes.

It was rejected by the House last week, but a Senate amendment to lower the percentage of money taken from the rainy day fund from 40 percent to 20 percent won enough votes for House passage.

The bill requires the state to take 20 percent of the money that now goes into the rainy day fund and put it into a separate account to pay to lower the income tax.

Over time, the goal is to lower the top marginal income tax rate to 4 percent.

Maine is second only to Vermont among New England states when it comes to the highest top income-tax rate, according to the Federation of Tax Administrators.

Neighboring New Hampshire has no income or sales tax.

Last year, Maine lawmakers voted to reduce the top rate from 8.5 percent to 7.95 percent, effective January 2013. Sen. Jonathan Courtney, R-Springvale, sponsored the bill to further lower the rate.

During House debate, Taxation Committee Chairman Rep. Gary Knight, R-Livermore Falls, said a lower income tax will help attract new business to Maine and encourage retirees to say in the state.

“When we have a tax rate bordering 8 percent, it’s too high,” he said.

But Rep. Bob Duchesne, D-Hudson, said there’s no long-term plan to cover the permanent loss of revenue caused by lowering the income tax. Once the rate is lowered to 4 percent, it will mean the loss of $600 million a year in state revenues.

“The whole point of this bill is to trigger future budget crises,” he said.

Rep. Wayne Parry, R-Arundel, said the taxpayers deserve to get some of their money back when the state has a surplus.

“We’re taking 20 percent of extra money,” Parry said. “One side of the aisle wants to give a little bit back, while the other side of the aisle wants to spend every penny.”

Rep. Kathleen Chase, R-Wells, said the bill fully funds a program for low-income property taxpayers – known as the circuit-breaker program – and uses money only after all other state bills are paid.

“It’s after all the bills have been paid, that’s when this cascade comes in, not before,” she said.

Democrats fought hard against the bill, saying while it begins to lower taxes when there’s extra money, the lower rate stays in place even when there are no extra funds to pay for it.

Rep. Seth Berry, D-Bowdoinham, compared it to buying a car when you have enough money for the first payment, but no income to afford all future payments.

“The fact is the payment made toward reduction in income taxes is only in the first year,” he said. “All future years are left unfunded.”

Duchesne said the change made to the bill in the Senate, which lowers from 40 percent to 20 percent the amount of money put into the fund, doesn’t make enough difference to win his support.

“Now we’re just haggling,” he said. “The other body is now asking that we do it for 20 percent. I say we hold out until they throw in a toaster oven.”

Parry said the top tax rate kicks in at less than $20,000, so it won’t be only the rich who benefit from a reduced top rate.

“I think the people of Maine may be a little bit upset we’re only giving them 20 percent of their money,” he said.

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