TAX REFORM CHALLENGES

While it is welcome news that Gov. John Baldacci wants to lower the state’s income taxes, many more details are needed before this becomes realistic. One of the biggest problems is that with the state already predicted to face a large shortfall in its next budget cycle, revenue reductions will only worsen the budget gap.

In the abstract, tax reductions and tax reform are great ideas. In reality, structuring a plan that eases the burden is difficult because limited state revenues mean that to reduce one tax others must be raised. Opposition to tax increases, even ones that pale in comparison to accompanying tax decreases, has doomed past efforts at reform.

Last year, the Taxation Committee put together a much-needed comprehensive reform of the state’s tax system. The cornerstone of the plan was a 25 percent reduction in the state’s income tax rate. Dropping the income tax rate from 8.5 percent to 6 percent was projected to save middle-class filers about $200 a year. Small businesses would have saved nearly $100 million a year, improving the state’s chances of attracting new companies.

Because there was little appetite for cutting programs and services to make up for this future loss of revenue, the committee proposed broadening the state’s sales tax as well as increasing the state’s meal-lodging and real estate transfer taxes, while simplifying tax forms. Maine has one of the narrowest sales tax bases, hitting only two dozen of the more than 160 services taxed nationally.

This is where the plan, which was supported 11-3 by the Taxation Committee, fell apart. Each small tax increase had a constituency and together their voices drowned out the call for tax reform.

This was unfortunate, but it will happen again if the governor does not begin his current tax reduction effort by selling whatever plan he comes up with to the public, business community (and its lobbyists) and lawmakers.

The governor suggested this week that an income tax reduction could be offset by reductions in government spending through consolidation and efficiency. This is hard to believe, especially given the continuing opposition to school administration consolidation and the pared savings expected from streamlining jail and prison operations.

Faced with a budget shortfall expected to range from $400 million to $600 million over the coming two years, reductions in programs and services will be required. Further cuts to support a tax cut will be difficult to sell.

This leaves the governor in the same position he was in last summer: calling for tax relief without a workable plan to do it.