Federal cuts could raise local havoc Maine tax ripple effects feared

AUGUSTA – The push by some in Congress to make retroactive President Bush’s proposed $1.6 trillion in tax cuts has state lawmakers worried. In some areas, Maine’s current income tax laws piggyback on federal provisions, and any cuts made by Congress could increase the red ink already facing state lawmakers.

“Clearly, this could have a ripple effect and cause the state some serious problems,” said Senate President Michael Michaud, D-East Millinocket. “We already have a structural budget gap and we are having difficulty closing it.”

The gap, estimated at over $200 million, is the difference between expected state revenues and the cost of providing state services at current levels. Lawmakers just approved an emergency spending bill last week to shift state resources between accounts to pay the state’s bills through the end of June. And the size of the projected gap could increase. The State Revenue Forecasting Commission meets later this month to assess a dip in sales tax revenues, among other potential revenue problems.

“This has the potential to be really serious,” Michaud said.

Senate Republican leader Mary Small of Bath agreed that the timing of the tax cuts could pose additional budget problems to the state. But, she supports the Bush plan in its broad outline.

“This is one senator you will not see criticizing a tax cut,” she said, “Now, there may be some timing issues, but Maine people need this tax cut, and I think you will find there is broad support among Republicans in the Legislature and, I think, among all lawmakers, to go along with these cuts.”

Sen. Peter Mills, R-Cornville, the only Republican senator on the budget writing appropriations committee, said Congress’ enacting retroactive tax cuts could mean a special session for the Legislature later this year where lawmakers would face many unpleasant choices.

“I don’t see any new state taxes to make up for less revenue,” he said, “That means cuts in programs and we are finding that very difficult to do in the current budget.”

Michaud said a special session to rewrite the state budget is not something anyone in state government wants to deal with. During his 14 years in the House, he said, actions by Congress have caused serious state budget problems a couple of times.

U.S. Sen. Olympia Snowe will be consulting with state officials about any potential impact federal tax law changes will have on the state. The Republican senator is a member of the powerful Senate Finance Committee, which will play a crucial role in reviewing Bush’s tax plan.

A spokesman said Gov. Angus King plans to meet later this month with the congressional delegation in Washington, where the potential impact of federal tax cut legislation will be on the agenda.

U.S. Rep. John Baldacci served on the state Legislature’s Taxation Committee before his election to Congress in 1994. The Democrat said that while he supports passage of a “moderate” tax cut this year, he would have concerns with making portions of it retroactive because of the potential impact on state budgets.

“All across this country, states are finding themselves in a deficit situation,” said U.S. Rep. Tom Allen, a Democrat. “And it has happened in just a matter of weeks, not months. If this tax cut is made retroactive, clearly there will be a negative impact on state revenues.”

Allen said that while he does support a significant tax cut, he rejects the idea pushed by some lawmakers that making the cut retroactive to the first of the year will help the slumping economy.

“I just don’t buy that,” he said. And Allen said he doubts there will be swift action on the president’s plan, even with the Republicans in control of both branches of Congress. He expects it will take months to hammer out the details of such a massive tax cut and debt reduction program.

And those details, said Tony Neves, executive director of Maine Revenue Services, are crucial to state policy-makers struggling with balancing the state budget.

“We have to wait to see what it is Congress actually passes before we can determine the actual dollar cost to the state,” Neves said. “It all depends on what the Legislature and the governor decide to do about conformity. They can go along with the federal changes, partly go along with a change, or not adopt a change at all.”

Some estimates can be made, he said. For example, the proposed two-year state budget expects about $35 million from taxes on estates. Elimination of the federal tax would cost the state that amount, unless the state decided to levy its own inheritance tax.

“The governor and Legislature have to decide whether to conform with any of these federal changes,” Neves said. “Nothing is automatic.”

He said the state in the past has tried to keep state policy in line with federal changes because it makes it easier on the taxpayer, and makes it easier for the state to enforce tax laws. Neves said that in the 1980s the state did not fully go along with a federal tax change that allowed for the accelerated depreciation of some equipment used by businesses.

“Taxpayers were forced to keep two sets of books, at least until we caught up with the federal change,” he said. “It was not a good situation.”

Maine revenues could also be affected by other tax changes proposed by President Bush or that may be added by Congress. Elimination of the marriage penalty is one. Married couples filing jointly often pay more in taxes than if they filed their taxes separately. That potential change that could cost millions of dollars in lost state revenue, depending on its scope and structure.

President Bush has also proposed doubling the child care credit.

Neves said Maine also has a child care credit that is based on the federal amount. And, like other state tax law based on federal provisions, Maine will have to determine if it can afford the additional cost to match the increased federal benefit.