AUGUSTA – Lawmakers have completed the first session of the 120th Maine Legislature, but they did not address a federal tax change that will start to reduce state revenues significantly before the two-year state budget cycle is completed.

The phased-out repeal of the federal estate tax will mean the loss of millions of dollars to the state.

“We are estimating the loss in fiscal year 2002 will be $9.4 million,” said Tony Neves, executive director of Maine Revenue Services. “That goes up to $18.8 million in 2003 and to $29.5 million in 2004. It is a significant revenue loss to the state.”

Maine, like most states, ties its estate and inheritance tax to the federal levy. The state inheritance tax is a complicated formula that has a credit against federal tax liability, said Neves, so the state will be faced with some tough decisions.

“Maine could conform, which means a loss of revenue that must be made up from other sources somehow,” he said, “or we could change the credit language, but that only works until the tax is totally repealed and the issue would then be, do we adopt our own tax or come up with a lot of money, all at once, to pay for conformity.”

The federal law reduces estate tax rates and raises the amount of an estate exempt from taxation over several years. Currently, estates of less than $675,000 are not subject to estate taxes. Next year that goes to $1 million, and it increases to $3.5 million in 2009.

“This is a serious loss of revenue that we will have to face when we come back in session,” said Sen. Kenneth Gagnon, D-Waterville. Gagnon is co-chair of the Taxation Committee. “This is another example of the impact of this federal tax cut. It really is an unfunded mandate.”

The National Governors’ Association says it is more than an unfunded mandate – the NGA argues it is a tax shift. The NGA calculates the way Congress designed the repeal of the federal estate tax will result in the feds keeping hundreds of millions of dollars that otherwise would have gone to the states. The reason is the states that “piggyback” on the federal law lose that ability in 2005, but Congress has stretched the full repeal out until 2011.

“If Congress does not change the repeal language, we will have to deal with the revenue loss to the state,” Gagnon said. “I am not sure people realize the states are paying for part of this huge federal tax cut.”

But some lawmakers agree with the phase-out of the estate tax. Rep. Randall Bumps, R-China, said lawmakers should go along with the federal tax cuts, even with the negative impact on state revenues.

“Maine taxpayers should get the same benefit as other taxpayers across the country,” he said. “I think it should be a high priority of the Legislature to fund conformity in January and I plan to fight for conformity.”

Bumps, a member of the Taxation Committee, said he will remind fellow lawmakers that the minority supplemental budget crafted by House Republicans included $10 million to pay for conforming state taxes to the federal changes. That budget was defeated.

Rep. Bernard McGowan, D-Pittsfield, also a member of the Taxation Committee, agrees the committee will have to deal with the issue. But he fears some will want to postpone considering any real solution.

“They don’t want to deal with anything unless they are forced to,” he said. “If they can put it off until later for somebody else to solve, they will do it.”

McGowan said conforming state tax law to federal law should be a priority, but it should be considered as part of an overhaul of the state tax structure. He said the panel should consider the conformity issue as part of tax reform deliberations planned for this summer.

“We are going to have to deal with this eventually, so I hope we don’t put it off,” said Sen. Kenneth Lemont, R-Kittery. “I would hope we can conform to the federal change, but it will be a major challenge to find the money.”

Lemont said the committee might face other challenges if state revenues continue to falter. He said increased spending on new and expanded programs by the Legislature could come back to haunt lawmakers if revenues slide and the price tag for tax conformity increases.

“If we create our own tax, that will cost money to enforce,” he said, “and we get into another whole set of problems.”

Neves acknowledged setting up a new state tax would be expensive. He said it will require additional staff and resources to both administer and enforce a state inheritance tax.

“That is the beauty of the current system,” he said. “The federal government does the enforcing and the administration, and we get the tax revenue.”

An estimated 98 percent of all estates in Maine currently are exempt from any inheritance taxes because they total less than $675,000.