AUGUSTA — Lawmakers in both chambers voted in favor of a bill that reduces Maine income taxes for low- and middle-wage workers, increases taxes on wealthier residents and modestly increases state revenues.

The bill passed the House, 88-57, on Tuesday and cleared the Senate, 22-12, on Wednesday. The bill still faces a final vote in the Senate before going to Gov. Janet Mills for a signature or veto. The House took its final vote on the measure Thursday evening, approving it without a roll call.

Only those who make more than $500,000 would see their income tax increase under the proposal.

Rep. Joe Perry, D-Bangor, who co-chairs the Tax Committee, said in an interview Wednesday that a single person earning below $144,000 and married couples earning up to $289,000 would see their income taxes drop, while singles earning over $500,000 and married couples earning over $1 million would pay a higher rate. Those in between would see little or no change.

An analysis by the newspaper shows a single filer would have to make $502,200 to see taxes go up. That person would pay $1 more than they currently do.

If approved, the bill is projected to increase state revenue $570,000 next year.

Rep. Micky Carmichael, R-Greenbush, who sponsored the bill, said during Tuesday’s floor debate that blue-collar workers like farmers, carpenters, welders, electricians and mechanics needed help to keep up with inflation, which has outpaced increases in their earnings – at a time when the state continues to record surpluses in revenue, driven partly but not wholly by income taxes.

“Madam Speaker, the state of the state is strong,” he said, referring to a line in Mills’ annual state address, “but the state of hardworking Maine families is not.”

Perry said he was pleasantly surprised by the bipartisan support in the House and credited Carmichael for his work on the issue.

“When you serve on the Tax Committee, you really are used to things falling apart at the end,” Perry said. “It gets contentious. I’m just so pleased that the sponsor worked so hard on this and was able to get this through the House and Senate. I think we’re taking a step forward to help working people in this state.”

Although he voted in committee for a Republican-backed version that would have cut taxes for all earners, provided $56.8 million in income tax relief next year and omitted the highest bracket, Carmichael supported the Democrats’ version, which came out of committee in a 7-6, party-line vote.

Perry said Carmichael’s bill did not originally include a higher tax bracket for wealthier residents. He said that move was needed to pay for what could amount to hundreds of dollars in income tax relief to working residents.

Even by creating higher tax brackets for higher earners, Maine’s top rate is still below Massachusetts and Vermont but above Rhode Island and Connecticut.

State income tax is separate from federal income tax, which has seven different tax brackets and rates ranging from 10% for single earners making up to $11,600 to 37% for those earning more than $609,350.

Carmichael was one of eight House Republicans who joined Democrats to support the bill, though no one spoke against it Tuesday. Republicans in the Senate were united in opposition. Because the bill was carried over and drafted in committee, there wasn’t a public hearing on the proposal that passed.

It’s not clear whether Gov. Mills supports the bill or not. Her office did not respond Thursday when asked about her stance.

CLOSER LOOK AT THE CHANGES

Maine right now has three tax brackets.

For single people, the 2023 tax rate is 5.8% for income up to $24,500. From there, things get a little complicated. Those who make between $24,500 and $58,050 pay $1,421 plus 6.75% on income above $24,500. Those who make more than $58,050 pay $3,686 plus 7.15% on all income above $58,050.

The proposed bill would expand the upper limits of those existing tax brackets next year, lowering taxes for low- and middle-income earners, while adding higher tax brackets and rates for wealthier families.

The lowest tax bracket would now include a single person earning up $41,600, the middle bracket would be between $41,600 and $85,000, and the third bracket would be between $85,000 and $144,500.

But the bill also adds three new tax brackets:

• Individuals making between $144,500 and $205,000 would pay $9,597 plus 7.55% on income over $144,500.

• Individuals making between $205,000 and $500,00 would pay $14,165 plus 7.15% on income over $205,000.

• Individuals making $500,000 or more would pay $35,258 plus 8.45% on income over $500,000.

There are approximately 2,900 resident taxpayers who will see a tax increase in tax year 2025 because of the new 8.45% bracket, said Sharon Huntley, a spokesperson for Maine Revenue Services.

Perry said the new 7.55% tax rate is designed to phase out the benefits for income between $144,500 and $205,000, before returning to the current tax rate of 7.15% for people earning between $205,000 and $500,000. The higher tax rate for people earning more than $500,000 would offset the tax decreases.

“It’s actually brilliant,” Perry said.

Here are a couple examples of how taxes could shift under the proposal. These do not take into account any deductions.

• A single person making $75,000 now pays $3,686, plus 7.15% of the excess over $58,050, or $4,897.93. Under the new plan, the tax payment would be $2,413, plus 6.75% of anything more than $41,600, which totals $4,667.50. That’s a savings of $230.43.

• A single person making $300,000 now pays $3,686 plus the top rate of 7.15% on anything over $58,050 which is $20,985.43. The new structure requires $14,165 plus 7.15% on anything over $205,000, which totals $20,958 – or $27 less.

• A single person making $1 million now pays $3,686 plus 7.15% on anything over $58,050, a total of $71,035. The new plan would require a payment of $35,258 plus 8.45% of the excess over $500,000, or $77,508. So the millionaire would pay $6,473 more.

The top rate would be closer to what it was before 2013, when then Gov. Paul LePage and a Republican majority in the Legislature successfully lowered the top income tax rate from 8.5% to 7.15%. LePage and others wanted to reduce the income tax further, and even eliminate it altogether, but there was never enough support because it would have required an increase in sales taxes to make up for the lost revenues.

COMPARING MAINE TO OTHER STATES 

As the state has continued to rack up surpluses, fueled by federal pandemic assistance, inflation, rising incomes and consumer spending, Republicans have generally been calling for income tax reductions.

Income taxes accounted for nearly $2.6 billion of state revenue in fiscal 2022 – up from $1.5 billion a decade ago.

Jeff Maine, a University of Maine Law School professor and tax law expert, said he wasn’t aware of the latest bill but reviewed it at the Press Herald’s request.

“This clearly is a move to make the income tax more progressive – the idea that someone’s rate should rise with their income,” he said. “It might be designed to offset the regressivity of our sales tax, since lower-income households pay a greater share of their incomes on sales tax.”

Maine said the key counterargument to taxing wealthier individuals and households at a higher rate is that it might discourage them from investing or donating some of their wealth or it might spur them to leave for a state with a less progressive tax structure.

According to the Tax Foundation, a national nonpartisan but right-leaning think tank, 43 states levy individual income taxes. Of those, 12 have a flat rate and 29, including Maine, have a graduated-rate system ranging from two brackets to as many as 12. New Hampshire taxes dividend and interest income, while Washington only taxes capital gains income.

Vermont’s income tax structure is the most similar to Maine. Single filers there earning $45,400 or less pay 3.35%, those earning between $45,400 and $110,050 pay 6.6%, those who earn up to $229,550 pay 7.7% and those making more than that pay the top rate of 8.75%.

Manish Bhatt, a senior policy analyst for the Tax Foundation, said the proposal in Maine is a departure from what other states are doing.

“The trend recently has been states compressing tax brackets and reducing rates and even considering a flat rate,” he said, offering examples like Georgia, Iowa and Kentucky – all Republican-led.

Bhatt said he understands the push to provide relief for low-income earners, but said policymakers need to consider the tradeoffs, too.

“Tax competition (among states) is real,” he said.

Copy the Story Link