Bill may reduce Maine revenues Stimulus package poses budget threat

AUGUSTA – An economic stimulus bill passed by Congress this week could help thousands of out-of-work Mainers get extra unemployment benefits. But by accelerating certain business write-offs, the measure could cost Maine as much as $30 million in revenue this budget cycle.

“We don’t have a firm estimate on what this will cost,” Tony Neves, executive director of Maine Revenue Services, told the Legislature’s Appropriations Committee on Friday. “Basically, all the states were caught with their drawers down on this one.”

Neves said Maine, like most states, “piggybacks” its state income tax on the federal income tax, meaning Maine determines its income tax based on Mainers’ federal returns.

The state could decide to continue taxing businesses the same way that it has for depreciation on equipment and buildings, but that will mean the firms will have to keep separate records for state and federal tax purposes.

State lawmakers are considering a measure proposed by Gov. Angus King to adopt the tax cuts Congress passed last year. Maine would lose about $17.5 million in state tax revenue if it conforms to the federal tax cuts.

Neves said while the stimulus package will cost the state revenues to accommodate the business depreciation tax break, it also will help raise some revenues through the extension of unemployment insurance benefits for an additional 13 weeks. The Maine Department of Labor estimates 11,000 Mainers will be immediately eligible for benefits, with another 12,000 projected to qualify over the next year.

“That’s all taxed,” he said, “so we will have a little new revenue from this, but not much.”

Sen. Jill Goldthwait, the Bar Harbor independent, was clearly exasperated by the additional budget problem posed by the stimulus measure. Lawmakers are trying to craft a bill that reduces state spending to close a $160 million revenue shortfall. She called the legislation a “Stephen King” bill.

“This makes a remarkable change in what we are doing,” she said. “It has a big impact.”

Rep. Tom Winsor, R-Norway, said he was pleased with the measure and called it good news, despite its impact on state budget deliberations.

“I hope we conform and taxes are lowered,” he said. “That will help stimulate the economy.”

The taxation committee will hold a public hearing next Thursday on King’s proposal to conform Maine’s tax code to the changes Congress adopted last year. That proposal already was facing strong opposition before the additional federal tax cuts were passed.

“There are a number of us that are not ready to go along with the estate tax phaseout in the current federal law,” said Sen. Kenneth Gagnon, D-Waterville, co-chairman of the Legislature’s Taxation Committee. “This will help so few people and we frankly need this money for other needs.”

Included in the tax cuts Congress passed last June was a provision to phase out over the next 10 years the federal estate tax on inherited property. Maine would lose nearly $9 million in this two-year budget cycle if lawmakers agree to phase out the state’s estate tax as well.

Many Republicans – who refer to the estate tax as the “death” tax – want the phaseout. In fact, conforming state tax law to all federal reductions is a major goal of GOP lawmakers this session.

“Our caucus is very strong on cutting taxes,” said Rep. Joseph Bruno, R-Raymond, House GOP floor leader. “Maine is the number one taxed state in the country.”

Sen. Karl Turner, R-Cumberland, said Republican senators have also made the issue of tax conformity a caucus issue. He said the lawmakers were not aware of the cuts in the stimulus package during past discussions of state budget goals.

“But, our caucus has philosophically supported tax cuts and I think they will continue to do so,” he said.

House Speaker Michael Saxl, D-Portland, said he not only opposes the estate tax conformity proposal, he will strongly oppose having the state go along with the new round of business tax cuts passed by Congress.

“No way, no how,” he said. “We just can’t afford this.”

Saxl said he is very upset at Congress for ignoring the state budget problems across the country. He denounced the package as “irresponsible.”

All four members of Maine’s congressional delegation voted for the legislation. The two Democrats, Reps. John Baldacci and Tom Allen, said they opposed the increased tax write-offs, but voted for the legislation on Thursday hoping for changes in the Senate. When the senators voted on the package Friday, however, they made no changes.

Maine’s Republican Sens. Olympia Snowe and Susan Collins praised the legislation. Both said they will urge swift passage of a separate bill that will increase the match rates for Medicaid to help the states with their budget difficulties.

And Collins defended the business tax cuts as important to assuring the economy does recover.

“I think the bonus depreciation will help stimulate business investment, and that is something Maine really needs right now,” she said. “That will boost the economy and that will increase state revenues, in the long run anyway.”

Tony Sprague, the governor’s spokesman, said King will wait for a detailed analysis of the new tax cuts before deciding what he will recommend to the Legislature.