Stimulus fuels debate on state tax conformity

AUGUSTA – Gov. Angus S. King is saying the state should go along with federal changes in income taxes adopted last year as well as those passed last week – sort of. At issue is whether the state can afford to pass on to consumers all of the additional tax breaks during the same time frame as the federal government.

For example, the stimulus package President Bush signed into law last weekend contains a provision that allows businesses to accelerate the rate at which they can write off certain investments. The so-called “30 percent bonus depreciation” allows a business to take more depreciation than usual on equipment or property in the first year the asset is acquired.

“We are not sure we can afford conformity in the second year for the depreciation change,” Tony Neves, executive director of Maine Revenue Services, told the Legislature’s Taxation Committee. “So we are proposing full conformity in the first year and if there is enough revenue, the same in the second.”

He said it will cost $6.5 million to pay for the faster depreciation this budget year, and an estimated $20.7 million next year. He said the administration is committed to “find” funds for the first year, but money for the second year will depend on any surplus money available over the remainder of the two-year budget that would go into the tax conformity fund.

“If there is not enough money to pay for this [change] in what we are calling the tax conformity reserve, then we are proposing an alternative that will still allow faster depreciation, but over a longer period than one year,” Neves said.

Another battle that arose at the public hearing over tax conformity Thursday concerned phasing out the state inheritance tax.

Currently, estates of less than $675,000 are not subject to the inheritance tax. Next year the exemption would go to $1 million, and it increases to $3.5 million in 2009. While 98 percent of all estates in Maine presently are valued at less than $675,000, the state’s estimated tax loss by adopting the federal changes is just over $9 million in fiscal year 2003.

“I really can’t support that,” said Rep. Bonnie Green, D-Monmouth, co-chairwoman of the Taxation Committee and sponsor of the measure for the King administration. “It would benefit just two hundred families and I can’t see cutting some very important programs for Mainers for people that own five homes.”

Many Republicans in the Legislature want to fully conform to all the tax reductions passed by Congress, including the estate tax phaseout, with no changes or delays.

“Our caucus is very strong for tax conformity,” Rep. Joseph Bruno, the House GOP leader from Raymond, said in an interview. “It always has been.”

Representatives of Maine’s business community, financial advisers, lawyers and accountants lined up to urge lawmakers to approve all of the tax changes with no delays. Nearly all of the testimony focused on the estate tax and the recently passed depreciation measure.

“It will be very disruptive if [businesses and individuals] have to depreciate differently than the rest of the country,” said Peter Chandler of Baker, Newman & Noyes, a Portland-based accounting firm. “That would discourage investment.”

Don White, president of Prentiss & Carlisle, a Bangor-based timber management firm, said figuring depreciation on equipment and assets already is complicated and if the state does not follow the federal lead, it will become even more so.

“We have got 340 items of fixed assets with three types of depreciation,” he said. “Don’t give us another one to deal with.”

Representatives of other companies and business organizations echoed that theme, although there was recognition that spreading the “depreciation bonus” over a longer period of time would be better than not conforming at all to that tax change.

There also was support from several people at the public hearing for the state to adopt the federal plan to phase out the inheritance tax. David Clough, executive director of the Maine branch of the National Federation of Independent Businesses, said there is strong support for that provision among the many small-business owners in the state. Jim McGregor, executive director of the Maine Merchants Association, agreed.

“There has been a long tradition in Maine of family owned businesses,” he said. “This would help that continue.”

Of the dozens of specific tax measures addressed by the legislation, the only ones apparently facing opposition are the inheritance tax and the “bonus depreciation,” which affect relatively few taxpayers.

The provisions conforming to pension law and individual retirement accounts have broad support, and they affect hundreds of thousands of taxpayers. There is no opposition to those provisions, which will cost a little more than $3 million in lost revenue this budget cycle.

Provisions to allow more contributions for education savings accounts and tax breaks for education expenses also have broad backing among lawmakers. Those items have a price tag of about $5 million.

The Taxation Committee plans to meet Tuesday to consider the legislation and its proposed amendments.