AUGUSTA – The rhetoric in the hallways of the State House is that the pending supplemental state budget fully conforms to federal tax changes.

The reality is it does not.

“It was simply a matter of money,” Tony Neves, executive director of Maine Revenue Services, said Friday in an interview. “We cannot afford to fully conform to every change right now.”

In nearly all cases, Maine’s tax laws will match federal changes. For example, provisions conforming to pension law and individual retirement accounts affect hundreds of thousands of taxpayers, and changes such as those are fully funded.

In some significant tax policies, however, conformity is delayed or made conditional or does not happen. Neves worked with lawmakers to craft the actual provisions in the budget. He said one major item, the so-called “30 percent bonus depreciation” that allows a business to take more depreciation than usual on equipment or property in the first year the asset is acquired is funded for 2001. Funding for 2002, though, is conditional, depending on yet-to-be-realized state surplus funds and possible additional cash that would become available if Congress changes the Medicaid reimbursement formula.

“I think the money will be there,” Neves said. “But no, the money is not assured.”

If the more than $15 million to fully pay for the tax change is not available, a smaller amount of depreciation will be allowed based on the amount of surplus funds that are realized.”This isn’t making tax policy,” Peter Chandler, a partner with Baker, Newman & Noyes, a Portland-based accounting firm, said Friday. “It is simply budget making.”

His advice to clients will be to wait until next fall to decide on whether to make use of the tax provision to invest in new equipment or other facilities. He said businesses need a reasonable amount of certainty in tax policy, and Maine lawmakers have been anything but certain.

“The whole thrust of the federal legislation is to provide a stimulus to the economy,” he said. “That should be what the state does as well, if that’s the policy they want to follow.”

David Clough, executive director of the Maine branch of the National Federation of Independent Businesses, agreed with Chandler. He said Friday that many small businesses, which are most businesses in Maine, will have some reluctance to move forward on new projects.

“The conditional funding of bonus depreciation will complicate tax compliance for small business and partially negate the economic stimulus package,” he said. “And the elimination of [net operating loss] carry-back is unfortunate.”

Clough said many companies and sole proprietorships generate cash for new investments in equipment and property by using the carry-back provision. That allows a company or individual to apply current losses to past profitable years and get a tax refund.

“That is a major source of capital for many businesses,” Chandler said. “Maine not only did not conform, it eliminated the carry-back entirely.”

Maine allows a two-year carry-back. The new federal law has a five-year provision. Beginning with returns filed for 2002, Maine will allow losses to be carried forward only. “While businesses may have benefited from this,” Neves said, “it raised havoc with revenue projections. Businesses will still be able to fully use any losses to offset profits, but only prospectively.”

Another major federal tax change the state has not fully agreed to is the phaseout of the estate tax.

It starts to be phased out this year, but Maine has delayed that until 2003. And the reality is the new Legislature in office then will be faced with a projected revenue shortfall at least as large as the $160 million gap this supplemental budget addresses.

“We conform to the federal law starting in 2003,” Neves said, “but yes, the new Legislature can change that. They could undo all the other tax conformity measures as well, but I don’t think they will.”

And that concerns business owners and those who advise them.

“Don’t die in 2002 is the message,” Chandler said, “and hope the next Legislature does not change it again.” The phaseout of the estate tax is not popular with Democrats, who control both branches of the Legislature. And few Mainers are affected. Currently, estates of less than $675,000 are not subject to the inheritance tax. Next year, the exemption would go to $1 million. But 98 percent of all estates in Maine are valued at less than $675,000, and one estimate has the new law benefiting only about 200 families.

“But this is an optional tax,” Chandler said. “These people have the resources to just move to another state, and if they do, the state will lose that wealth.”

Chris Hall, vice president of the Maine State Chamber of Commerce, said it is an issue lawmakers will have to address. He expects the phaseout will start next year, because many lawmakers who may not like the policy realize the implications if the wealthiest Mainers change their residency.